Country Report Mexico April 2009

Summary

A sharp deterioration of the economy is set to result in a poor performance by the government at mid-term elections in July, weakening Mr Calderon's mandate in the second half of his six-year term.
The government is capitalising on low public indebtedness to ratchet up anti-crisis programmes, but credit conditions for small and medium-sized firms look set to remain strained.
The government will increase debt to maintain the fiscal stimulus in spite of signs of sharp falls in revenue. The NFPS deficit will widen to 5.3% of GDP, from near-balance in 2008.
We now expect the economy to contract by 4.4% in 2009 (previously 2.6%). Recovery in 2010 (growth of 1.2%; previously 1.4%) will be limited by still weak external factors, slowing the recovery of employment and investment.
Despite a small recovery in recent weeks, falling export revenue and heightened risk aversion will push the peso down further, to Ps16.2:US$1 at end-2009 and Ps16.7US$1 at end-2010, a real depreciation of over one-fifth.
With the decline in export earnings set to outweigh even sharp import spending compression, and dollar GDP set to fall steeply this year, the current-account deficit will rise from 1.4% of GDP in 2008 to 3.5% in 2009 and 4.3% in 2010.

Recent opinion polls have suggested that the contest between the ruling PAN and the opposition PRI for the July mid-term elections has returned to a closer race. However, we continue to expect the PRI to emerge much stronger.
A series of high-level visits from US officials and pledges of further assistance under the Merida Initiative have again reflected a growing concern about the problem of violent crime close to the border.
A trucking dispute with the US resulted in the imposition of tariffs on US imports, raising the spectre of economic nationalism.
On March 20th Banxico lowered its reference interest rate by 75 basis points to 6.75%. The decision far exceeded expectations and reflected concerns over growth.
Demand-side GDP data from the fourth quarter indicated that a slump in private consumption was the main factor behind the 1.7% contraction in overall growth. Leading indicators point to a much sharper decline in 2009.
The current-account deficit widened sharply in the fourth quarter, on the back of plummeting oil and manufactures export earnings.