Country Report Mexico June 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 election 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 election, 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.
• A worse than expected first-quarter result and the swine flu outbreak have prompted substantial downgrades to our forecasts, to a recession of 7.1% (previously 4.4%) this year, and a rebound of only 2.8% next year.
• Currency weakness and inefficiencies in product markets will prevent a rapid decline in inflation but we continue to expect that a sharp weakening in demand will allow it to fall to 3.6% by end-2010.
• We expect the peso to lose another 10% against the dollar in the remainder of 2009, to result in a year-end rate of Ps14.71:US$1. Further weakening will result in a year-end rate of Ps16:US$1 in 2010.
• The current-account deficit is expected to widen sharply, from 1.4% in 2008 to 3.5% in 2009 and 4.4% of GDP in 2010.

Monthly review

• Although Mr Calderon attracted widespread approval for his handling of the swine flu emergency, the opposition PRI has maintained a lead over the ruling PAN in polls of voter intentions for the July 5th congressional election.
• In response to the swine flu outbreak, the authorities implemented a state of emergency, closing schools, restaurants, museums, libraries and cinemas across the country for almost two weeks.
• During the first quarter of 2009 real GDP declined by 8.6% year on year, as the US recession drove especially deep declines in manufacturing output and trade activities.
• Hotel occupancy rates declined sharply during the first week of May, with the drop-off in visitor numbers reaching two-thirds in the leading resorts.
• In April total export earnings declined by 35.6% year on year, the biggest drop since March 1986. Oil exports contracted by 59.6%, as a result of both lower production and lower prices.

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