Country Report Mexico September 2009

Outlook for 2009-10

• Mr Calderon faces a struggle to advance his structural reform agenda after his party lost substantial ground to the opposition PRI in the July mid-term legislative elections.
• The piecemeal pace of reform will preclude fundamental improvements that would cushion the impact of a renewed bout of instability, potentially in 2011 depending on the trajectory of the global economy.
• Fiscal policy will only help mitigate the decline this year, but a cautious policy stance, and the substantial international aid this has attracted, will, however, prevent the downturn from being accompanied by major instability.
• 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 bearish outlook for reforms will sustain currency pressure, but revised oil price projections mean we now predict a rate of Ps13.92:US$1 at end-2009 and Ps14.55:US$1 at end-2010 (previously Ps14.52:US$1 and Ps15.75:US$1).
• We expect the current-account deficit to widen from 1.4% of GDP in 2008 to 2.4% of GDP this year and 3% of GDP next year. It will be partly financed in 2009 by the oil hedge, which will boost reserves in the final quarter.

Monthly review

• The election on August 8th ofCesar Nava as the new leader of the ruling PAN has fuelled accusations that Mr Calderon's dominance is undermining internal party democracy and that the PAN is becoming too similar to the PRI.
• A summit of the presidents of the US, Canada and Mexico produced some initiatives on security but no substantive statements on immigration reform in the US or the curtailment of illegal arms flows from the US into Mexico.
• A continuing shortfall in fiscal revenue owing to the recession and a sharper than envisaged decline in oil production, have prompted the finance ministry to announce austerity measures that will include cuts to investment spending.
• GDP shrank by 9.7% year on year (1.1% quarter on quarter) in April-June. The recession seems to be bottoming out, with confidence indicators ticking up in June and July, but they remain depressed, and a firm recovery is still distant.
• Inegi's latest household survey shows that income inequality rose between 2006-08, with rising food prices hitting poor households especially hard, and fuelling concern about the effectiveness of poverty-alleviation programmes.

Source: Country Report