Mexico Business Forecast Report Q2 2009

Publication Date	February 2009
Publisher	Business Monitor
Product Type	Report
Pages	66
ISBN Number	not applicable
Product Code	BMI03440

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Summary

Prolonged Downturn On The Cards In this Mexico Business Forecast Report we examine how Mexico's current economic, political and business environment weaknesses will be exacerbated by the global economic downturn, and a severe recession in the US. While we remain relatively confident that President Felipe Caldern's administration will help return the country's economic growth to a robust 5.1% by 2012, given his strong economic performance and business-friendly policies since coming to office in 2006, we believe the challenges ahead are considerable.

With Caldern's war against the country's powerful drug cartels leading to a record number of drugrelated killings in 2008, we examine the success of the government's security policies to date, and the most likely outcome of the hardline approach towards Mexico's drug cartels. While we believe projections of Mexico becoming a 'failed state' over the next decade are highly unlikely, we do believe that complete eradication of the cartels is an unrealistic goal and, as such, think the most likely outcome is some kind of informal agreement between the government and the cartels.

Almost all economic indicators are moving in line with our bearish medium-term outlook for the Mexican economy, meaning our below-consensus real GDP growth forecast of -1.3% for 2009 is looking increasingly likely. Even the governor of Mexico's central bank, Guillermo Ortiz, is now projecting a recession in 2009, which supports our dovish monetary policy projections for an additional 275bps of cuts in the country's overnight lending rate by year-end to 5.00% (after our forecast 50bps rate cut in January's monetary policy meeting proved correct). While we believe that Mexico's economy is well placed to come out of this downturn in relatively good shape, especially when compared to other regional economies, at present we appear more bearish than most about the extent to which overall growth will suffer.

An additional concern regarding Mexico's economic outlook in 2009 is the risk to the proposed economic stimulus package, a large proportion of which is destined for infrastructure spending. The recent postponing of several key infrastructure projects, such as the US$5bn Punta Colonet port, supports our view (first adopted back in December) that the persistence of global financial market instability and risk aversion means more projects would be shelved over the coming months due to lack of private-sector participation and the inability of the government to go it alone. The failure of long-term infrastructure projects would, in our view, mean the government would have to resort to more short-term spending projects, which could hamper the potential for stronger growth once global economic conditions improve.

Content

Executive Summary
- Prolonged Downturn On The Cards
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Tackling The Drug Cartels An Unwinnable War?
- With the level of violence in Mexicos drug war reaching a record high in 2008, the success of President Felipe
- Calderns hardline approach towards the countrys powerful cartels is now in doubt
- Table: Mexico Political Overview
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Recession In 2009
- Poor industrial production data for October and the recent downward revision to our G7 growth outlook have led us
- to downgrade Mexicos 2009 real GDP growth forecasts, from growth of 0.7% to a contraction of 1.3%
- TABLE: ECONOMIC ACTIVITY
- Economic Activity
- Port Problem A Sign Of Things To Come
- News on January 13 that Mexico is postponing the construction of a US$5bn Punta Colonet port reinforces our
- view that the global financial meltdown will severely hamper President Felipe Calderns infrastructure spending plans
- Monetary Policy
- Monetary Easing: More On The Cards In 2009
- In line with our call, Mexicos central bank kick started an aggressive rate cutting cycle in their monetary policy
- meeting on January 16 with a 50bps cut in the overnight lending rate, from 8.25% to 7.75%
- Table: MONETARY POLICY
- Fiscal Policy
- Limited Energy Reforms To Increase Fiscal Pressures
- Reforms To Have Limited Effects
- We believe that limited energy reforms, which were passed through congress in late October, will be insufficient to
- provide a significant boost to already declining oil production, threatening the longer-term outlook for Mexicos
- fiscal accounts
- Table: FISCAL POLICY
- Balance Of Payments
- Balance Of Payments In For A Pounding
- Recent balance of payments and trade data support our view that Mexicos external picture will deteriorate rapidly
- over the coming months
- Table: BALANCE OF PAYMENTS
- Banking Sector
- Growing Risks To The Banking Sector
- The persistence of global financial market turmoil means we are beginning to question the stability of Mexicos
- banking sector
Chapter 3: 10-Year Forecast
- The Mexican Economy To 2018
- 2009-2018: Better Placed To Weather The Storm
- Barring the transient bout of economic weakness over the next few years, we believe Mexico is well positioned to
- register relatively robust levels of growth going forward, averaging 4.9% real GDP growth between 2012 and 2018
- according to our forecasts
- TABLE: Long-Term Macroeconomic Forecasts
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest and least discussed wild cards that could rear its head in 2009 is dramatic political
- upheaval in China
- United States
- table: Banks Leverage Ratios
- Europe
- Big Trouble For European Banks In 2009
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will combine
- to spell trouble for the financial services sector in 2009
- tab le: Assets As % of Home Country GDP
- table: Assets As % of Home Country GDP When Eurozone Is Considered Home Country
- table: Exposure As % of Total Exposure To Region
- table: Banks Foreign Exposure (US$ mn)
- TABLE: Exposure As % of National GDP
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Institutions
- TABLE: BMI LEGAL FRAMEWORK RATINGS
- Infrastructure
- Table: Latin America Annual FDI Inflows
- Market Orientation
- TABLE: BMI TRADE RATINGS
- TABLE: TOP EXPORT DESTINATIONS
Chapter 6: Key Sectors
- Infrastructure
Executive Summary
- We have revised downwards our forecasts for growth in Mexicos construction industry, on the back of the crisis
- in the US and the implications this has for real economic growth
- Table: Mexico Infrastructure And Macroeconomic Historic Data And Forecasts
- Information Technology
Executive Summary
- According to BMI estimates, the number of Mexico internet users reached 23.3mn in 2007, representing 18.8%
- of the population
- Table: Mexicos IT Industry Indicators, 2005-2012 (US$mn unless otherwise stated)
Chapter 7: BMI Global Assumptions
- Global
- TABLE: GLO BAL ASSUMPTIONS
- Table: GLO BAL AND REGIONAL REAL GDP GROWTH, % chg y-o-y
- Economic Activity
- TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS
- TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS
- TABLE: DEVELOPED MARKET EXC HANGE RATES
- Monetary Policy
- TABLE: EMERGING MARKET EXCHANGE RATES