Country Report Mexico July 2009

Outlook for 2009-10

• The worst recession in living memory will contribute to an expected poor performance for the government at the mid-term elections on July 5th. A strengthened opposition PRI will remain an unreliable ally for the ruling PAN.
• The severity of the downturn could encourage greater commitment by Congress to advancing reform following the mid-term elections, but in the remainder of 2009-10 the economic downturn will be the prime focus.
• In spite of a low public debt burden, scope for fiscal stimulus will be constrained by weaknesses in the oil-dependent public finances, especially next year, when hedging facilities will have expired.
• Our projection of a real GDP contraction of 7.1% this year assumes the recession bottoms out in the second quarter; with a rebound of only 2.8% in 2010 reflecting prolonged weakness of US import demand.
• We continue to expect that a sharp weakening in demand will allow inflation to fall to 3.6% by end-2010, but currency weakness and inefficiencies in product markets will prevent it falling further, despite the deep recession.
• We expect the peso to weaken in the remainder of the outlook period, resulting in an end-2009 rate of Ps14.66:US$1 and Ps15.93:US$1 at end-2010.
• An upward adjustment to our oil price forecast will result in a lower current-account deficit than previously expected. We forecast a deficit of 2.7% of GDP in 2009 and 3.4% in 2010 (from 3.5% and 4.4%).

Monthly review

• Ahead of mid-term elections on July 5th, polls have indicated that the PRI will overtake the PAN to become the largest party in the lower house, but will not gain a clear majority.
• A well-orchestrated Internet campaign has been promoting blank balloting. However, it does not appear that it will materially influence the result.
• The Banco de Mexico (Banxico, the central bank) has announced a 50-basis-point cut in the reference interest rate, to 4.75%.
• Greater exchange-rate stability has prompted Banxico to announce a scaling-back in its intervention into currency markets.
• The publication of supply-side GDP data from the first quarter has revealed that a 9.1% slump in private consumption was the main factor in the sharp fall in total output.
• The current-account deficit fell to US$1.1bn in January-March, compared with US$2.6bn a year earlier, reflecting a fall in the income deficit on the back of lower profit repatriation by foreign firms operating in Mexico.

Source: Country Report

This report covers the following industry codes:
SIC Code: 37
NAICS Code: 336