M E X I C O : G R O W T H , I N F L A T I O N , U S D / M X N , A N D S E C U R I T Y I S S U E S Gabriel Casillas, Ph.D. AC Mexico Economic Research June 16, 2011 (52-55) 5540-9558 C O N F I D E N T I A L gabriel.casillas@jpmorgan.com J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero A N D P R I V A T E S T R I C T L Y
Agenda Strong growth, despite a soft patch in global manufacturing in 2Q11 1 Japanese disaster will moderate activity, but such a disruption is likely to be temporary Benign inflation will prevail in 2011 8 I S S U E S The peso strengthening cycle might be over 11 S E C U R I T Y Escalation of drug-related violence is about to reach an inflection point 13 A N D U S D / M X N , I N F L A T I O N , G R O W T H , M E X I C O : 1 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1
Strong growth, despite a soft patch in global manufacturing in 2Q11 We believe there are five reasons to still be positive on Mexico’s economic activity forecasts Mexico’s growth in 2011: %oya 2010 1Q11 2Q11 3Q11 4Q11 2011 GDP AS 5.5 4.6 3.2 5.3 5.1 4.5 1. A reinvigorated auto sector Agriculture 5.7 1.2 1.3 1.3 1.4 1.3 2 Q 1 1 Industrial 6.1 5.2 1.3 4.5 4.8 4.0 2. Ascending domestic demand Manufacturing 9.9 7.4 1.6 6.9 6.3 5.5 I N Other 1.2 2.3 0.9 1.3 2.7 1.8 3. A positive outlook for banking credit; and M A N U F A C T U R I N G Services 5.0 4.4 4.1 4.6 4.7 4.5 Imports 22.1 7.5 4.7 6.1 8.5 6.7 4. Major infrastructure projects to begin construction GDP AD 5.5 5.1 4.0 4.6 4.3 4.5 As a result, we are forecasting Mexico’s GDP to grow Consumption 4.7 4.6 4.5 4.2 4.0 4.3 GFI 2.3 3.5 5.2 5.4 5.2 4.8 4.5% in 2011, and 3.8% in 2012 Exports 24.3 8.7 6.9 9.1 8.6 8.3 G L O B A L Source: J.P. Morgan. We identify four key risks to our optimistic growth call: 1. A longer-than-expected transitory soft patch in manufacturing I N caused by the Japanese earthquake/tsunami and its aftermath P A T C H 2. The possibility of less vigorous growth in the US S O F T 3. High and persistent global energy prices A 4. Potential escalation of drug-related violence D E S P I T E G R O W T H , S T R O N G 2 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1
1. A reinvigorated automotive industry has been the main driver of manufacturing activity Auto production disruptions due to Japanese disaster suggest manufacturing is likely to moderate during Wages in the manufacturing sector 2Q11. However, such downturn is likely to be US$ temporary and the drag it is causing is likely to fade Mexico China 2.5 away as we move toward the second half of the year 2 Q 1 1 2.3 to go back to 1Q11’s levels 2.1 17.4% 1.9 I N 1.7 M A N U F A C T U R I N G Several automakers across the world have reallocated 1.5 237% part of their production to Mexico to benefit from a 1.3 1.1 depreciated real exchange rate, a narrow wage 0.9 differential between Mexico and other Asian countries, 0.7 0.5 particularly China, still-high transport costs, and the 2002 2003 2004 2005 2006 2007 2008 2009 2010 country’s strategic geographic location G L O B A L Source: Ministry of Finance Participation of Mexican manufacturing exports in US imports vs. oil prices Mexican peso multilateral real exchange rate I N P A T C H Index, Jan 2003=100 15 Mexico's share in US manufacturing imports (%) 110 145 WTI, US$ per barrel (RHS) 14.0 S O F T 14 90 135 13.012.9 125 12.9 A 13 70 115 12.3 D E S P I T E 12.2 4.3% 11.912.1 11.9 Long-term 11.7 105 12 50 11.6 11.3 11.1 95 11 30 10.4 G R O W T H , 85 75 10 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1997 1999 2001 2003 2005 2007 2009 S T R O N G Source: J.P. Morgan with data from Banxico Source: US Census Bureau (up to October 2010), and Bloomberg 3 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1
2. Stronger domestic demand GDP – Contribution by aggregate demand component 1 %oya 2 Q 1 1 10 14.9 7.7 I N 5.3 14.7 4.6 M A N U F A C T U R I N G 4.5 4.6 3.7 3 5 2.8 3.5 1.7 2.3 2.9 14.5 0 14.3 -0.8 G L O B A L 14.1 Net exports -5 -2 I N GFI 13.9 P A T C H Public spending -5.5 -7.2 -10 Private consumption 13.7 S O F T Formal employment (RHS) -9.6 A -15 13.5 D E S P I T E Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Source: J.P. Morgan with data from INEGI G R O W T H , 1. GFI includes the incidence of the change in inventories S T R O N G 4 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1
While Mexico’s economic rebound was initially externally-driven, now domestic demand is supporting the recovery The external demand rebound has improved employment conditions, and domestic demand is now back on track Three-phase crisis in 2009 unraveled a three-phase recovery in 2010 2 Q 1 1 We first observed an important rebound of external demand, particularly boosting Mexico's manufacturing activity I N (phase I) M A N U F A C T U R I N G This led to a significant improvement in job market conditions (phase II) Now, with a two-to-three quarter lag, domestic demand is starting to pick up (phase III) Contributions of internal and external demand to aggregate demand G L O B A L %oya 12.9 Internal External 9.2 7.9 I N 7.0 7.2 P A T C H 5.7 5.9 3.5 S O F T -1.7 5.9 3.7 3.6 3.1 A 1.7 D E S P I T E -3.4 G R O W T H , 4Q09 1Q10 2Q10 3Q10 4Q10 Source: J.P.Morgan with data from INEGI S T R O N G 5 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1
3. A positive outlook for banking credit Mexico’s credit system could be a key driver for domestic consumption Total commercial bank credit to the private sector Credit card cycle represents less than 15% of GDP Mexico observed a credit card boom back in years %oya in real terms % of total credit 80 20 2003-06, in which non-performing loans increased Credit card Delinquency rate (RHS) 18 60 2 Q 1 1 significantly, making banks to rethink their credit-giving 16 40 14 policies, and this was exacerbated during the global I N 12 20 financial crisis 10 M A N U F A C T U R I N G 0 8 Nevertheless, commercial banks have now "cleaned 6 -20 up" their credit balances, credit card interest rates 4 -40 2 have moderated, and employment conditions have -60 0 improved significantly Jan-00 Oct-03 Jul-07 Apr-11 As a result, we believe that it is highly likely that all G L O B A L Source: J.P.Morgan with data from Banxico these will probably lead to an ascending trend in the country's domestic credit cycle Credit cards’ cost and formal employment I N P A T C H %oya in real terms % of total credit Banking credit to the private sector 45 6 S O F T %oya 4 40 40 2 30 A 35 D E S P I T E 20 0 Total 30 10 -2 Credit card interest rate Consumer credit 0 25 Housing credit -4 Formal employment (RHS) -10 G R O W T H , Credit to firms 20 -6 -20 Jan-04 Jun-06 Nov-08 Apr-11 -30 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 S T R O N G Source: J.P.Morgan with data from Banxico Source: J.P.Morgan with data from Banxico 6 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1
4. Infrastructure projects to start its construction phase Several projects that had been in a feasibility study Government-sponsored infrastructure projects 1 phase over the past two years are now ready start construction Investment, US$ mn Furthermore, several projects suffered important 2 Q 1 1 Project description Total Government Private delays because of the global financial crisis. Total 25,786 15,206 10,580 I N However, the state-owned development bank M A N U F A C T U R I N G Crude oil and gas 13,778 13,778 - - Banobras modified its lending framework in 2010 to Gas pipelines 660 660 - - provide guarantees in addition to funding, and is now working with the National Infrastructure Fund to also Refining 10,740 10,740 - - provide direct, non-refundable funds to projects with a Crude oil production 2,378 2,378 - - high social return. Tourism 9,653 764 8,889 G L O B A L According to data from Banobras, there are about Transportation and telecom 1,550 139 1,411 US$ 26 billion -out of a total of US$ 51.2 billion of Roads and highways 1,270 139 1,131 I N specific projects-, that are estimated to be invested P A T C H Seaports and airports 280 - - 280 between year-end 2010 and 2012 (with specific starting dates). Electricity generation 777 514 263 S O F T Water 28 11 17 As it is shown in table, these US$ 26 billion are distributed between crude oil and gas (53.4%), A Source: J.P. Morgan with data from Banobras (State-owned development bank) tourism (37.4%), transportation and telecom (6%), D E S P I T E 1. Includes ongoing works and the ones projected to start in year 2011. electricity generation (3%), and water projects (0.1%). These investments have a major government G R O W T H , spending component (US$ 15.2 or about 60%). However, given the way these projects are planned, these could foster another US$ 10.6 billion of private S T R O N G sector investments as well. 7 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1
Recommend
More recommend
