Country Report Mexico

Outlook for 2008-09

• Eighteen months into his six-year term the president, Felipe Calderon, has just a small window of opportunity to advance a controversial energy reform before attention focuses on the 2009 mid-term election.
• A high level of violence stemming from organised crime represents a serious challenge to Mexico's deficient security forces. Mr Calderon's authority will be partly dependent on his ability to achieve improvements in this area.
• Rising oil revenue will facilitate a countercyclical increase in expenditure in 2008 without jeopardising the fiscal balance. However, energy reform to raise oil output will be needed to contain contingent liabilities in the longer term.
• With the US in recession in the first half of 2008 under the Economist Intelligence Unit's central forecast, we expect GDP growth in Mexico to slow to 2.3% in 2008, before recovering gradually to 2.5% in 2009.
• We now expect inflation to end 2008 at 4.7%, significantly higher than the 4% target ceiling. Our projection of a decline to 4% at end-2009 is vulnerable to a risk of wider contamination from food and producer price pressures.
• The trade deficit will widen further in 2008-09, despite historically high oil prices, as a contraction in US import volumes hits export earnings.

Monthly review

• In early May, Mexico suffered a spate of drug-related killings that threatens to undermine public confidence in Mr Calderon’s leadership.
• On May 22nd the US Senate approved an amendment that will provide US$350m in funding for Mexican law enforcement, equipment and training.
• The discussions on hydrocarbons reform began on May 13th. In spite of the negotiations, it is hard to see how a renewed showdown between the government and supporters of Manuel Lopez Obrador can be avoided.
• The public-sector surplus fell by 5% in real year on year terms during the first quarter of 2008. Both revenue and expenditure rose compared with a year earlier, but spending growth was more rapid.
• The Banco de Mexico (Banxico, the Central Bank) kept its reference interest rate on hold at 7.5% for the seventh consecutive month at its May 16th meeting.
• In the first quarter of 2008 real GDP growth slowed to 2.6%, from 4.2% in the fourth quarter of 2007. Growth in nearly every sector decelerated.
• Consumer price inflation jumped to 4.55% in April, reflecting both rising food prices and still-firm domestic demand, which pushed core inflation to 4.56%.

SOURCE: Country Report