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Mexico Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

We remain optimistic toward Mexico's long-term growth outlook onthe back of a booming manufacturing sector, an increasingly strongprivate consumer and favourable demographics.Energy sector and other structural reforms will bolster sentimenttowards Mexican assets and contribute to stronger real GDP growthin the coming years.Major Forecast ChangesWe have revised down our 2016 real GDP growth estimate from 2.8%to 2.6% as greater-than-anticipated fiscal and monetary tighteninglook poised to weigh on growth through the remainder of the year.We have revised our policy rate forecast after a surprise 50 basispoint (bps) hike in February and a further 50bps hike in June. Wenow expect the policy rate will end the year at 4.75%. As we nolonger expect any interest rate hikes on the part of the US FederalReserve, Mexico will be wary of opening too wide a gap betweenthe countries' benchmark rates.

Table Of Contents

Mexico Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Growth To Modestly Accelerate, Despite External Headwinds..8
Economic headwinds are on the rise in Mexico following an uptick in global risk aversion, which will likely weigh on investor sentiment
in the coming quarters. Nevertheless, links to a strengthening US consumer sector will pave the way for a modest increase in real GDP
growth in the coming quarters.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS.9
TABLE: PRIVATE CONSUMPTION FORECASTS.9
TABLE: GOVERNMENT CONSUMPTION FORECASTS..9
Fiscal Policy And Public Debt Outlook 10
The Mexican government will rein in spending following a sharp decline in revenues, such that the budget deficit will narrow in 2016
from 2015 levels. Policymakers will retain a conservative fiscal posture over the coming quarters, given concerns over the impact
volatile markets will have on the Mexican economy.
TABLE: FIXED INVESTMENT FORECASTS. 10
TABLE: NET EXPORTS FORECASTS.. 10
Structural Fiscal Position. 12
TABLE: MAIN SOURCES OF FEDERAL REVENUE and EXPENDITURE. 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS.. 13
Balance Of Payments.. 14
Deficit Will Narrow After 2016 Amid Stronger US Demand.14
Mexico's current account deficit will widen only modestly in 2016, and begin to narrow thereafter, as lower average energy prices are
offset by stronger US demand for Mexican manufactured goods. Although we expect the peso to strengthen from current levels, the
currency will average significantly weaker in 2016 and 2017 than last year, bolstering export competitiveness and reducing import
demand.
Outlook On External Position. 16
TABLE: TOP 5 GOODS EXPORTS IN 2015.. 16
TABLE: TOP 5 GOODS IMPORTS IN 2015 .. 16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.. 17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS 17
Monetary Policy.. 18
Aggressive Hike Underscores Peso's Centrality To Monetary Policy.18
The Banco de Mexico's decision to enact a second 50bps hike this year will help to partially offset the depreciatory headwinds facing
the Mexican peso amid an uptick in global risk aversion. Policymakers have demonstrated that currency stability is a top concern for
determining the appropriate interest rate trajectory, and as such we expect that further hikes are on the cards in the coming quarters.
Monetary Policy Framework 19
TABLE: MONETARY POLICY FORECASTS. 19
Currency Forecast. 21
MXN: Banxico Will Offset Rising External Headwinds..21
The Mexican peso will face significant headwinds amid rising uncertainty in global markets. Nevertheless, the hawkish monetary policy
by the country's central bank will preclude further declines in the currency, while strong fundamentals will attract investment in the
closing months of the year.
TABLE: BMI CURRENCY FORECAST.. 21
Chapter 2: 10-Year Forecast. 23
The Mexico Economy To 2025.. 23
Stronger Growth Ahead Following The Passage Of Key Reforms.23
Mexico's booming manufacturing sector, increasingly strong private consumer and favourable demographics suggest that the country
is well placed to see solid economic expansion in coming years, such that we forecast robust 4.0% average real GDP growth over
the coming decade. We expect Mexico's oil sector to become an increasingly important driver of growth following energy sector
liberalisation in December 2013.
TABLE: LONG-TERM MACROECONOMIC FORECASTS. 23
Chapter 3: Political Outlook. 27
SWOT Analysis 27
BMI Political Risk Index. 27
Domestic Politics.. 28
Local Elections Signal An Uphill Climb For The PRI..28
The poor showing by the ruling party during Mexico's local elections is a reflection of growing discontent with the government's handling
of soaring crime, as well as a perception that corruption in the party is widespread. This suggests an uphill battle for the government in
the 2018 general elections.
TABLE: POLITICAL OVERVIEW . 28
Long-Term Political Outlook.. 29
Security And Corruption To Remain Key Risks.29
The next decade looks set to be challenging for Mexico owing to a weak security situation, high levels of income inequality and endemic
corruption. That said, our core view remains that the country will end the decade in a better position than where it is starting, with
potential for some economic reform and a modest improvement in the country's security situation which will strengthen Mexico's political
risk profile.
Chapter 4: Operational Risk. 33
SWOT Analysis 33
Operational Risk Index.. 33
Operational Risk 34
TABLE: OPERATIONAL RISK 34
TABLE: LATIN AMERICA - MARKET SIZE AND UTILITIES RISK. 36
Labour Costs 39
TABLE: REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE 40
Chapter 5:BMI Global Macro Outlook. 43
Global Macro Outlook. 43
Brexit Risk Casts A Long Shadow..43
TABLE: GLOBAL ASSUMPTIONS.. 43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %.. 45
MACROECONOMIC FORECAST. 47
TABLE: MACROECONOMIC DATA and FORECASTS. 47

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