Country Report Mexico October 2008

Outlook for 2009-10

• The president, Felipe Calderon, will face a much more difficult environment in 2009-10. With the focus shifting to the mid-term congressional elections in July 2009, near-term momentum on his legislative agenda will be slow.
• A high level of violence stemming from organised crime represents a serious challenge to Mexico's deficient security forces. Mr Calderon's authority will be partly dependent on his ability to achieve improvements in this area.
• A determined stance on containing public debt and controlling inflation will remain a cornerstone of the policy framework, but a less favourable external backdrop will curb public investment and impede counter-cyclical policies.
• Mexico's GDP growth will slow sharply, to 1.9% this year and 0.9% in 2009 (previously 2.3% and 1.6%). We currently forecast a rebound to 3% in 2010.
• We now estimate year-end inflation of 7.1% in 2008 and 5% in 2009 (previously 6.2% and 4.4%); currency depreciation will not be fully neutralised by falling commodity prices; our forecast for 2010 is 3.6%.
• We now expect a much weaker peso in the short term, ending 2008 at Ps12.45:US$1 and 2009 at Ps13.14:US$1, still assuming the depreciation will be contained by several structural factors, including ample reserves coverage.

Monthly review

• Two grenades thrown into crowds during Mexico's independence celebrations on September 15th2008 have further highlighted the escalating problem of violent crime and its links with the illicit drugs industry.
• In spite of differences over the organisational structure of the state oil company, Pemex, congressmen from the three main parties have agreed to reach a compromise on the hydrocarbons reform bill.
• The macroeconomic assumptions underpinning the 2009 federal budget presented to Congress on September 8th have rapidly become outdated owing to the global credit turmoil. A new plan is expected in mid-October.
• Banxico (the Central Bank) decided to keep its reference interest rate unchanged at 8.25%, as weaker economic activity and lower commodity prices improve the outlook for inflation.
• Private consumption has weakened since the second quarter amid weaker employment growth, lower consumer confidence and lower real incomes.
• Following an upward trend in January-August, consumer price inflation abated in the first half of September to 5.43% owing to easing food prices.
• Following a further 0.8% monthly decline in August, oil production for the first eight months of 2008 was 9.2% lower than the same period of 2007.