Country Report Mexico November 2009

Outlook for 2010-11

• Mr Calderon will struggle to avoid becoming a "lame duck" president after his party lost substantial ground to the opposition PRI in the July 2009 mid-term legislative election, further curbing prospects for needed structural reform.
• The piecemeal pace of reform will preclude fundamental improvements that would cushion the impact of a renewed bout of instability, potentially in 2011 amid a projected fallback in US growth, on which Mexico heavily depends.
• Assuming a progressive strengthening in the remainder of the year, real GDP will fall by 7.1% in 2009, Mexico's worst performance since the 1930s, and we anticipate that real GDP will regain 2008 levels only towards the end of 2011.
• The central bank is likely to commence a period of moderate tightening in 2010, in an attempt to prevent an uptick in inflation arising from a rise in VAT and a recovery in domestic demand.
• A poor reform outlook will sustain pressure on an already weak peso, but under revised oil price projections, we now expect it to end 2010 at Ps14.54:US$1 and 2011 at Ps14.40:US$1.
• We expect the current-account deficit to widen from an estimated 1.2% of GDP in 2009 to 2.6% of GDP in 2010 and 3.1% of GDP in 2011.

Monthly review

• The liquidation on October 11th of the chronically loss-making Luz y Fuerza del Centro (LyFC), a state power company, was also a move to curb financing sources of the leftist PRD, which is close to the company's powerful union.
• Notwithstanding a temporary boost to the government's approval ratings in Mexico City following the liquidation of LyFC, the PAN has lost ground to the PRI in local elections held in the states of Tabasco and Coahuila.
• The lower house has voted to water down several measures enshrined in the 2010 budget package, including the rejection of a proposed 2% sales tax. The projected deficit has been raised to compensate for the shortfall in revenue.
• The executive has submitted several measures aimed at increasing private investment in infrastructure in a bid to jump-start road and other projects.
• Banxico has kept the reference interest rate on hold at 4.5% but stated that future policy decisions would have to reflect the impact of the fiscal package on inflation, implying a period of tightening is under consideration.
• The latest economic indicators suggest that domestic conditions are stabilising rather than improving.

Source: Country Report