Country Report Mexico October 2009

Outlook for 2010-11

• Mr Calderon will continue to be restricted to only incremental advance on his structural reform agenda after his party lost substantial ground to the opposition PRI in the July 2009 mid-term legislative election.
• The piecemeal pace of reform will preclude fundamental improvements that are needed to strengthen the domestic economy, leaving it exposed in the face of a projected fallback in US GDP growth in 2011.
• A decline in revenue will result in the Ministry of Finance running a relatively wide deficit in 2009 (4% of GDP) but we expect that spending rationalisation will start to rein in the fiscal deficit from 2010.
• After the steepest recession in Latin America in 2009, Mexican GDP growth will be lacklustre in 2010-11, as a combination of continuing dependence on the US and internal structural weaknesses prevent a firmer rebound.
• Consumer price inflation is expected to remain subdued during the forecast period, and a return to the levels registered in early 2009 (6-6.3%) is unlikely.
• The bearish outlook for the reform process combined with falling oil output will sustain downward pressure on the currency during 2010-11. We forecast year-end exchange rates of Ps14.6:US$1 in 2010 and Ps14.5:US$1 in 2011.
• We forecast a marked widening of the current-account deficit in 2010-11, mainly driven by a rise in the merchandise trade deficit. It will mostly be financed by FDI inflows.

Monthly review

• Mr Calderon used his annual state of the nation address on September 2nd to make an emphatic bid for structural reform, including tax reform, a second energy bill and tighter regulatory measures for some sectors.
• The government's plans to raise taxes in 2010 have met with significant opposition among the public and the business community.
• The attorney-general, Eduardo Medina Mora, has been replaced by the more controversial choice of Arturo Chavez, in part of a wider cabinet reshuffle.
• The release of the 2010 budget estimates has underscored the weakness of the revenue base. This will complicate efforts to sustain 2009 spending levels.
• A recovery in the peso and falling domestic demand has contributed to a more rapid disinflationary trend in recent months, with consumer price inflation falling to 5.1% in August from 6-6.3% in the first quarter.
• The current-account balance improved dramatically in the second quarter, but this was driven by the recession, which prompted a collapse of import spending and lower profit remittances from foreign firms operating in Mexico.

Source: Country Report