Country Report Mexico February 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 the mandate of the president, Felipe Calderon, in the second half of his six-year term.
The government is capitalising on a strong financial position to ratchet up anti-crisis programmes, but without additional measures credit conditions for small and medium-sized firms look set to remain strained.
A successful hedging operation in late 2008 will shield fiscal revenue in 2009, but the full brunt of lower oil prices will hit in 2010. The public finances will move into a significant deficit, although low debt levels provide scope for this.
We now expect the economy to contract by 1.8% in 2009 (previously 1.4%). The pace of recovery in 2010 (growth of 1.4%) will be limited by still weak external factors, slowing the recovery of employment and investment.
Weak oil prices and US demand, and heightened risk aversion will maintain downward pressure on the peso. We project year-end rates of Ps15.51:US$1 in 2009 and Ps16.03:US$1 in 2010, a real depreciation of over one-fifth.
The decline in oil prices will be a major driver of a more than doubling of the current-account deficit from 1.9% of GDP to 4.1% of GDP in 2009. In 2009 the shortfall will be partly financed by hedging put in place in 2008.

The main opposition parties have sought to capitalise on the downturn to attack the government in advance of congressional elections in July.
Security issues dominated a meeting between Mr Calderon and the then US president-elect, Barack Obama, in Washington in January. New legislation aims to improve intelligence-gathering but skirts key issues of police reform.
Market interest rates eased following Banxico's January rate cut, but financing strains remain evident, particularly for small and medium-sized firms. Overall bank credit to the private sector fell in December, the first decline since 2005.
Real GDP shrank by 1% year on year in the fourth quarter of 2008, the first contraction since January-March 2002. It brought 2008 growth to 1.5%.
There was a dramatic deterioration in the labour market in November and December, with formal jobs losses of 386,000.
Average crude oil production fell 1% in the fourth quarter to 2,728m b/d. For 2008 as a whole, crude oil production averaged 2,799m b/d, a decline of 9.2%.
In December 2008 manufacturing export sales fell by 11.5% year on year, as exports to the US in the auto sector shrank by 13.9%. Exports of other industries and all those to non-US countries also posted declines.

Source: Country Report

This report covers the following industry codes:
SIC Code: 70
NAICS Code: 72