November, 2013
G L O B A L C I T I E S I N I T I A T I V E : T H E M E X I C A N E C O N O M Y
Gabriel Lozano, Ph.D. Chief Mexico Economist(52-55) 5540-9558 [email protected]
J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero
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Introduction: The Mexican Economy
Past, present and future of the Mexican Economy
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Economic and social trends 3
Where are we now? 9
Where are we going? 16
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Past, present and future of the Mexican economy
Where do we come from?
Mexico has experienced a significant transformation since the mid 1990s, when it suffered the Tequila Crisis on the back of an ill-conceived financial liberalization.
By the same token, Mexico entered the NAFTA in 1994, one of the biggest structural changes in the past twenty years.
Since then, Mexico has advanced gradually in the process of institutional changes, transparency and accountability.
Where are we now?
Mexico is a medium-sized free-market economy, committed to rely in the market forces to gain credibility and to provide certainty to investors.
While still in the early phase of a democratic process, there seems to be enough political willingness to push the multi-partisan agreement known as “Pact for Mexico”.
Where are we going?
Mexico is facing many challenges, but the sound macroeconomic framework, and the democratic process that started in the late 1990s should pave the way for the achievement of structural reforms.
If Mexico continues with the implementation of the structural reforms, potential output could jump towards 4.5% in the medium term.
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Agenda
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Economic and social trends 3
Introduction: The Mexican Economy 1
Where are we now? 9
Where are we going? 16
E C
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Source: J.P.Morgan with data from INEGI
GDP breakdown – demand side GDP breakdown – demand side GDP breakdown – supply side GDP breakdown – supply side
The Mexican Economy: A quick look into a US$ 1 trillion economy
Private consump-
tion64%
Public consump-
tion11%
GFI-public6%
GFI-private14%
Inventories3% Net exports
1%
Taxes 3%
Agriculture4%
IP ex-manufac-turing17%
Non-transport manufacturing
14%
Transport equipment
3%
Services58%
Financial services2%
Source: J.P.Morgan with data from INEGI
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Economic activity in the last twenty yearsEconomic activity in the last twenty years Mexico has been stuck in low gear in the last two cyclesMexico has been stuck in low gear in the last two cycles
Economic activity in perspective
Source: INEGI and J.P. Morgan.Source: INEGI.
1994 1997 2000 2003 2006 2009 2012-25
-15
-5
5
15
25
% 3m/3msaar
t t t t t+1 t+1 t+1 t+1 t+2 t+2 t+2 t+2 t+3 t+3 t+3 t+3 t+4 t+4 t+4 t+490
95
100
105
110
115
120
125
130
1995-99 2003-07 2009-13
Index (100= Trough); t = first year of expansion
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Population in Latin AmericaPopulation in Latin America Urban population in MexicoUrban population in Mexico
Mexico has approximately 116 million people, making it the country with the 11th-
largest population in the world; almost 80% live in urban areas
Source: INEGI.Source: INEGI and CELADE.
Arg
en
tina
Bra
zil
Ch
ile
Co
lom
bia
Ecu
ad
or
Gu
ate
...
Mé
xico
Pe
rú
Ve
ne
z...
-
50
100
150
200
250
20302013 (rate of growth: 1.1%)
Million
1930
1940
1950
1960
1970
1990 20
0
2005
2010
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of total
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Inequality in Mexico remains very highInequality in Mexico remains very high Income distribution per deciles Income distribution per deciles
While Mexico has become a major emerging market, pending tasks remain
in place
Source: INEGI.Source: CIA World Factbook.
Co
lom
bia
Pa
rag
ua
y
Ch
ile
Bra
zil
Me
xico
Ch
ina
Pe
ru
Arg
en
tina
Uru
gu
ay
US
A
Ru
ssia
Tu
rke
y
Ve
ne
zue
la
Jap
an
Ind
ia
UK
Fra
nce
Ca
na
da
Sp
ain
Italy
Au
stra
lia
Ge
rma
ny
0
10
20
30
40
50
60
70
Gini index
Latin America
World
I II III IV V VI
VII
VIII IX X
0%
10%
20%
30%
40%
% of total
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Private consumption in MexicoPrivate consumption in Mexico GDP per capita: Selected economiesGDP per capita: Selected economies
Consumption remains the main contributor to growth, but GDP per capita needs to
improve further
Source: INEGI.
Uni
ted
St..
.
Sw
itzer
...
Can
ada
Uni
ted
...
Japa
n
Spa
in
Gre
ece
Chi
le
Uru
guay
Pan
ama
Mex
ico
Ven
ezue
la
Bra
zil
Col
ombi
a
Per
u
Chi
na
Indo
nesi
a
Indi
a
0
15,000
30,000
45,000
60,000
USD, PPP
1994 1996 1998 2000 2002 2004 2006 2008 2010 201260.0
62.0
64.0
66.0
68.0
70.0
72.0
% of GDP
Source: CIA World Factbook.
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Where are we now? 9
Introduction: The Mexican Economy 1
Economic and social trends 3
Where are we going? 16
W H
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
-6
-4
-2
0
2
4
6
8
10
12
Consumer confidence Consumer credit Employment (RHS) Retail sales (RHS) *
Consumer confidence, credit, retail sales and formal employmentConsumer confidence, credit, retail sales and formal employment
Source: J.P.Morgan with data from IMSS, INEGI and Banco de México. *Retail sales: 3mma
After years of low but steady growth, the Great Recession took its toll on the
domestic economy
%oya, real terms (both axes)
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However, it managed to recover swiftly on the back of a competitive manufacturing
sector
Source: J.P. Morgan and Bloomberg. Data as of November 8, 2013.
02 03 04 05 06 07 08 09 10 11 120.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
Mexico China
US$
237%
Wages in the manufacturing sectorWages in the manufacturing sector Peso weakness vis a vis other emerging market currenciesPeso weakness vis a vis other emerging market currencies
Source: Ministry of Finance. *Estimates for China.
0160
70
80
90
100
110
120
130
140
150
Index 2001=100
México
India
Russia
Brazil
China
Appreciation
Depreciation
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?The manufacturing sector gained relevance with NAFTA, the destination of more than
80% of the exports
Source: Banco de Mexico.
Main exports from MexicoMain exports from Mexico Main export destinationsMain export destinations
Source: Banco de Mexico.
Category US$ mn % of Total
Electric machinery and other industrial machinery 140,577 37.9%
Transport equipments, road vehicles 66,023 17.8%
Mining 54,154 14.6%
Iron, steel and manufactures of those metals 17,062 4.6%
Others 94,435 25.5%
Total exports 372,251 100%
United States79%
Europe6%
South America5%
Canada3%
Asia4.5%
Central America2%
Other1%
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?Imports however are somewhat less concentrated, with a heavy reliance on Asia and
the NAFTA area
Source: J.P. Morgan and Bloomberg. Data as of October, 2013.
Main imports to MexicoMain imports to Mexico Main import countriesMain import countries
Source: Banco de Mexico.
US50%
Asia31%
Europe11%
South America3%
Canada2.7%
Other1%
Central America1%
Category US$ mn % Total
Electric machinery and other industries machinery 144,593 39.0%
Chemicals and related products 28,919 7.8%
Transport equipments, road vehicles 31,143 8.4%
Iron, steel and manufactures of those metals 30,772 8.3%
Others 135,109 36.4%
Total imports 370,537 100%
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Foreign direct investment has relied heavily on manufacturing for the last 20 years
Source: Ministry of the Economy.
Evolution of FDI to MexicoEvolution of FDI to Mexico FDI breakdown by sectorFDI breakdown by sector
Source: Banco de Mexico.
Manufacturing 45%
Other28%
Financial services19%
Mining & construction7%
Energy 1%
00 01 02 03 04 05 06 07 08 09 10 11 120
5
10
15
20
25
30
35
US$ billion
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?While Mexico has become more competitive, it cannot rely only on a weaker
currency and wage-convergence with its competitors
Labor productivity in Mexico vis a vis other OECD countriesLabor productivity in Mexico vis a vis other OECD countries
Source: OECD.Source: Banxico.
Year-to-date trade balance: Back to realityYear-to-date trade balance: Back to reality
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec-10
-8
-6
-4
-2
0
2
4
1998-08 2010 2011
2012 2013
US$ billion
Me
xico
Ch
ile
Ru
ssia
Ko
rea
Jap
an
OE
CD
ave
rag
e
Ca
na
da
Sp
ain
Sw
ed
en
Ge
rma
ny
US
A
No
rwa
y
0
20
40
60
80
100
120
140
160
GDP per hour worked as % of USA In-dex USA = 100
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Where are we going?
Strong macro framework but reforms are needed
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Introduction: The Mexican Economy 1
Economic and social trends 3
Where are we now? 9
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Source: IFE.
The Pact for Mexico and democracy in Mexico: A new opportunity for fresh accords
Lower chamber of CongressLower chamber of Congress
In December of 2012, the new government signed a
multi-partisan agreement that encompassed 95 accords
focused at improving competitiveness and productivity in
Mexico.
This “Pact for Mexico” aimed at pushing core structural
reforms in 2013:
Education Reform
Telecommunication Reform
Fiscal Reform
Energy Reform
The Labor Reform was approved in the previous
administration.
The new government has made it clear that the main
objective of the structural reforms is to extend
productivity and improve competitiveness throughout the
country.
Upper chamber of CongressUpper chamber of Congress
Source: IFE.
PRI-PVEM48%
PAN23%
PRD-PT-MC27%
Nueva Alianza2%
PRI-PVEM48%
PAN30%
PRD-PT-MC22%
Nueva Alianza1%
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Impact on growthImpact on growth
Structural Reforms: Impact on potential growth
While the government expects potential output to jump
towards 5.3% by the end of the current presidential
term (2018), we believe the impact will be more
gradual.
Potential output should reach 4.5% by the end
of the “sexenio”.
We estimate current potential output between 3.0%
and 3.5%, and expect the most significant impact
coming from the energy reform.
The benefits from the implementation of reforms will be
larger in the long-term due to the positive externalities
and the regional spillovers:
Infrastructure gains
Reduced costs for both producers and
consumers
Positive and long-term growth in total factor
productivity
Bill Impact on GDP
Labor reform 0.1% - 0.3%
Telecom reform 0.1% - 0.3%
Financial reform 0.2% - 0.4%
Energy reform 0.4% - 0.7%
Total impact 0.8% - 1.7%
Potential Output 3.30%
with reforms 4.1% - 5.0%Source: J.P. Morgan forecasts.
3.3%
4.5%
Labor Telecomm EnergyFinancial
Current Po-tential Output
Expected
Contribution to potential growthContribution to potential growth
Source: J.P. Morgan forecasts.
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Event Date
Local Elections (14 States) July 7, 2013
Extraordinary Sessions July - August
Ordinary Session (kick- off of 2nd legislature) September 1, 2013
Budget 2014 (deadline) September 8, 2013
Income Bill (deadline for approval by Lower House) October 20, 2013
Income Bill (deadline for approval by Upper House) October 31, 2013
Expenditure Bill (deadline for approval by Lower House) November 15, 2013
End of first ordinary session (2nd legislature) December 15, 2013
Key political events and congress deadlines to monitorKey political events and congress deadlines to monitor
Source: IFE, J.P. Morgan.
Appendix: Political calendar and chamber composition
Lower Upper
PRD 104 22
PAN 114 38
PRI 213 54
PANAL 10 1
PVEM 28 7
PT 15 5
MC 16 1
Total 500 128
Constitutional Reform 334 86
PAN & PRI & PVEM 355 99
71% 77%
Source: IFE, J.P. Morgan.
Congress composition: votes for constitutional reformsCongress composition: votes for constitutional reforms
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