Country Report Mexico September 2008

Outlook for 2008-09

• Eighteen months into his six-year term, the president, Felipe Calderon, has just a small window of opportunity to advance a controversial energy reform before attention focuses on the 2009 mid-term election.
• 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.
• Rising oil revenue will facilitate a countercyclical increase in expenditure in 2008 without jeopardising the fiscal balance. However, energy reform to raise oil output will be needed to contain contingent liabilities in the longer term.
• The Economist Intelligence Unit continues to expect real GDP growth to expand by 2.3% in 2008, but we now forecast a sharp slowdown to 1.6% in 2009 (previously 2.5%), in line with downward revisions to our US forecast.
• We now expect inflation to end 2008 at 6.2%, significantly higher than the 4% target ceiling. Our forecast of a decline to 4.4% at end-2009 is vulnerable to a risk of wider contamination from food and producer price pressures.
• We continue to expect the Mexican peso to depreciate against a firmer US dollar, ending 2008 at Ps10.98:US$1 and 2009 at Ps11.33:US$1.
• In the light of downward revisions to our forecasts for oil prices and US growth, wider trade deficits will push the current-account deficit to 1% of GDP this year and 1.3% next (previously 0.8% and 1% respectively).

Monthly review

• Following rising public frustration at escalating violent crime, the government has signed a 75-point plan aimed at tackling the causes of crime. But with few new policy initiatives, it is unlikely to have a significant effect.
• Mr Calderon's approval ratings have been holding up, in spite of a deteriorating security situation. An August poll put his popularity rating at 62%, only down slightly from a year earlier.
• The price of diesel was raised by 10 centavos to Ps6.48 per litre in late August as part of the government's efforts to close the gap between domestic and foreign energy prices.
• Banxico (the central bank) raised interest rates by 25 basis points at its August meeting amid rising domestic inflation, taking the policy rate to 8.25%.
• Real GDP growth came in at 2.1% in the second quarter of 2008 on a seasonally adjusted basis.
• The current-account deficit widened to US$2bn in the second quarter.