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Mexico Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 45 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.The passage of energy sector reform will bolster sentiment towardsMexican assets and contribute to stronger real GDP growth in thecoming years.Major Forecast ChangesWe have revised down our 2016 real GDP growth estimate from3.1% to 2.8% as weak oil exports weigh on trade dynamics andthe impact of rates hikes coupled with elevated inflation eat intoconsumer spending.We have revised down our 2016 forecast for the Mexican peso, fromMXN16.20/USD to MXN17.70/USD. Increased global risk aversiongiven tighter global liquidity conditions and rising market fears of adisorderly slowdown in China will weigh on the peso. Coupled witha sharper than expected drop in oil prices – which will cool exportgrowth and undermine investor sentiment toward the oil producingeconomy – this underpins our view that the peso will be vulnerableto sharp sell-offs in the months ahead.

Table Of Contents

Mexico Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Oil Production Drop Will Temper Growth Rebound8
Mexican real GDP growth will accelerate modestly in 2016 The country will benefit from strong fixed investment and labour market
dynamics, but deteriorating hydrocarbon sector activity will undermine exports
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS10
TABLE: PRIVATE CONSUMPTION FORECASTS10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
Fiscal And Public Debt Outlook 11
Structural Reforms Will Narrow Deficit11
Mexico will narrow its fiscal deficit in 2016 on the back of government cuts to spending Over a multiyear horizon, Mexico's fiscal deficits
will continue to shrink, benefiting from government efforts to widen the tax base and strengthen the fiscal responsibility law
TABLE: NET EXPORTS FORECASTS11
Structural Fiscal Position 12
TABLE: MAIN SOURCES OF FEDERAL REVENUE and EXPENDITURE12
External Trade And Investment Outlook 14
FDI Will Provide External Account Stability14
Weak oil prices and production will widen Mexico's current account deficit in 2016, and the country's heavy reliance on portfolio flows
to finance this shortfall will keep its external account position vulnerable to sudden outflows of capital However, over a multiyear time
horizon, a narrowing current account shortfall and significant direct investment into the energy and manufacturing sectors will ensure
greater balance of payments stability
Outlook On External Position 15
TABLE: TOP FIVE GOODS EXPORTS IN 201415
TABLE: TOP FIVE GOODS IMPORTS IN 201415
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE16
Monetary Policy 17
Tightening Will Continue In 201617
The Banco de Mexico will continue hiking its benchmark policy rate in 2016 in an effort to maintain its interest rate differential with the
US Despite relatively subdued inflation and growth, the bank will remain focused on buffering the peso against the risk of capital flight
as the US Federal Reserve gradually increases the fed funds rate
Monetary Policy Framework 18
Currency Forecast 20
MXN: Bearish Market Sentiment Will Weigh On Peso20
Increased market risk-off sentiment in the face of tightening global liquidity and market fears over a disorderly Chinese slowdown
will maintain downward pressure on the Mexican peso in the months ahead The currency will strengthen modestly over a multiyear
timeframe, though Mexico's reliance on short-term capital flows will ensure the peso remains vulnerable to sharp sell-offs
TABLE: BMI CURRENCY FORECAST20
Chapter 2: 10-Year Forecast 23
The Mexican Economy To 2025 23
Stronger Growth Ahead Following The Passage Of Key Reforms23
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 the coming years, such that we forecast robust 41% 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 FORECASTS23
Chapter 3: Political Outlook 27
SWOT Analysis 27
BMI Political Risk Index 27
Domestic Politics 28
Investor-Friendly Legislation Will Be Undeterred By Social Unrest28
The Mexican government will continue to advance legislation that strengthens trade ties and streamlines the regulatory environment
in an effort to improve the country's business environment However, persistent widespread social unrest will undermine some of the
government's efforts
TABLE: POLITICAL OVERVIEW 28
Long-Term Political Outlook 30
Security And Corruption To Remain Key Risks30
The next decade looks set to be challenging for Mexico owing to a weak security situation, high levels of income inequality an d
endemic corruption That said, our core view remains that the c ountry will end the decade in a better position than where it i s 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 RISK34
Trade Procedures And Governance 35
TABLE: EXPORT AND IMPORT DOCUMENTS35
TABLE: TRADE PROCEDURES BREAKDOWN35
TABLE: LATIN AMERICA - TRADE PROCEDURES AND GOVERNANCE36
Vulnerability To Crime 37
Chapter 5: BMI Global Macro Outlook 41
Global Macro Outlook 41
Unfinished Business In 201641
TABLE: GLOBAL ASSUMPTIONS41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %42
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %43
TABLE: MEXICO - MACROECONOMIC DATA and FORECASTS45

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