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Mexico Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 57 pages

Core Views

An upset victory by Republican nominee Donald Trump in the US Presidential election in November would have an immediate negative impact on investor sentiment towards Mexico, and be a net negative for GDP growth. Despite strong consumer spending levels, tightening credit conditions and low confidence levels will begin to weigh on the performance of the services sector, prompting us to lower our economic growth forecasts for the coming years, particularly given recent weakness in manufacturing and the energy sector. Mexico’s historically large current account gap will leave the external accounts reliant on short-term portfolio investment and susceptible to renewed bouts of investor risk aversion and financial market volatility. Mexico’s central bank will resume a more gradual tightening cycle in 2017 after taking decisive steps to shore up the Mexican peso in 2016 with three 50 basis point overnight rate hikes to 4.75%. Major Forecast Changes We have revised down our 2016 real GDP growth estimate from 2.6% to 2.2%, and have lowered our 2017 real GDP growth forecast from 3.0% to 2.6% on account of a weaker growth outlook for the US. We have revised up our average Mexican peso forecast for 2017 to MXN18.00/USD from MXN18.25/USD, and for 2018 to MXN17.10/ USD from MXN18.07/USD, as recovering oil prices and reduced political uncertainty after the US presidential election will place upside pressure on the exchange rate.

Table Of Contents

Mexico Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
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 Outlook Deteriorating
Amid Weaker US Manufacturing..............................................................................................................................................8
Mexican economic growth will decelerate in 2016 on account of weaker US manufacturing activity and the continuing slump in mining
sector output. Despite strong consumer spending levels, tightening credit conditions and low confidence levels will begin to weigh on the
performance of the services sector, prompting us to lower our economic growth forecasts for the coming years.
TABLE: REAL GDP GROWTH FORECASTS............................................................................................................................................................8
GDP By Expenditure Outlook.................................................................................................................................. 10
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................11
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................11
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................11
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................12
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................12
Fiscal And Public Debt Outlook.............................................................................................................................. 12
New Finance Minister Will Push Austerity Agenda Forward.....................................................................................................12
The appointment of Jose Antonio Meade as finance minister on September 7, following Luis Videgaray's resignation, will support market
confidence in Mexico's fiscal credentials.
Structural Fiscal Position........................................................................................................................................ 13
TABLE: MAIN SOURCES OF FEDERAL REVENUE and EXPENDITURE................................................................................................................14
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................14
External Trade And Investment Outlook................................................................................................................ 16
Trade Deterioration Will Keep Exposure To 'Hot Money' Flows Elevated...............................................................................16
Mexico's deteriorating export performance, due to a disappointing recovery in the US manufacturing sector, will keep the current
account deficit at elevated levels through 2017,
Outlook On External Position.................................................................................................................................. 18
TABLE: TOP 5 GOODS EXPORTS.........................................................................................................................................................................18
TABLE: TOP 5 GOODS IMPORTS .........................................................................................................................................................................18
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................19
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................19
Monetary Policy ....................................................................................................................................................... 20
Banxico Decisiveness Will Give Way To More Gradual Tightening In 2017............................................................................20
Mexico's central bank will resume a more gradual tightening cycle in 2017 after taking decisive steps to shore up the Mexican peso in
2016 with three 50bps overnight rate hikes to 4.75%.
Monetary Policy Framework.................................................................................................................................... 21
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................22
Currency Forecast.................................................................................................................................................... 23
MXN: Oil Recovery Will Support Appreciation Post-US Election.............................................................................................23
In the face of continued uncertainty in the near term, aggressive action by the Banco de Mexico in September will limit additional
downside for the peso.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................23
TABLE: PESO FORECAST AND RELATED INDICATORS....................................................................................................................................24
US Election Implications......................................................................................................................................... 25
The Next President: Implications For Latin America.................................................................................................................25
The outcome of November's US presidential election will greatly impact the economic trajectories of Central America and Mexico, given
their high reliance on trade and remittances, and the candidates' opposing views on immigration. Moreover, diplomatic relations could
be adversely impacted in the event of a victory for Republican Party nominee Donald Trump, with the ongoing rapprochement with Cuba
likely to be rolled back.
TABLE: CENTRAL AMERICA - PRIVATE FINAL CONSUMPTION CONTRIBUTIONS TO REAL GDP GROWTH, PP....................................... 26
Chapter 2: 10-Year Forecast................................................................................................................... 29
The Mexico Economy To 2025................................................................................................................................ 29
Stronger Growth Ahead Following
The Passage Of Key Reforms.................................................................................................................................................29
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 3.6 % average real GDP growth over the coming
decade.
TABLE: LONG-TERM MACROECONOMIC FORECASTS ....................................................................................................................................29
Chapter 3: Political Outlook................................................................................................................... 33
SWOT Analysis......................................................................................................................................................... 33
BMI Political Risk Index........................................................................................................................................... 33
Domestic Politics..................................................................................................................................................... 34
Security And Corruption Will Dominate Policy Agenda............................................................................................................34
Mexico's government will struggle to maintain its reform momentum over the coming years as political opposition become more intense
in the run-up to the next general election in 2018.
TABLE: POLITICAL OVERVIEW ............................................................................................................................................................................34
Foreign Policy........................................................................................................................................................... 37
Trump Administration Would Be Negative, But Not Disastrous, For Economy......................................................................37
An upset victory by Republican nominee Donald Trump in the US Presidential election scheduled for this November would have an
immediate negative impact on investor sentiment towards Mexico, and be a net negative for GDP growth.
Long-Term Political Outlook................................................................................................................................... 38
Security And Corruption To Remain Key Risks.........................................................................................................................38
The next decade looks set to be challenging for Mexico owing to a weak security situation, high levels of income inequality and endemic
corruption.
Chapter 4: Operational Risk................................................................................................................... 41
SWOT Analysis......................................................................................................................................................... 41
Operational Risk Index............................................................................................................................................ 41
Operational Risk ...................................................................................................................................................... 42
TABLE: OPERATIONAL RISK.................................................................................................................................................................................42
Business Crime ....................................................................................................................................................... 43
TABLE: MAIN ACTIVE CRIMINAL GROUPS IN MEXICO.......................................................................................................................................43
TABLE: BUSINESS RESPONSE TO RISK IN MEXICO..........................................................................................................................................44
Government Intervention ........................................................................................................................................ 47
TABLE: BUSINESS TAXES.....................................................................................................................................................................................48
TABLE: PERSONAL INCOME TAX.........................................................................................................................................................................49
Chapter 5: BMI Global Macro Outlook................................................................................................... 53
Global Macro Outlook.............................................................................................................................................. 53
Broad Recovery But Three Notes Of Caution.............................................................................................................................53
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................53
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................54
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................55
TABLE: MACROECONOMIC DATA and FORECASTS.............................................................................................................................................. 57

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