Mexico Business Forecast Report Q3 2007

Publication Date	April 2007
Publisher	Business Monitor
Product Type	Report
Pages	49
ISBN Number	0969-5974
Product Code	BMI00287

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Summary

Making Real Progress

From both a political and economic perspective, the outlook in Mexico is relatively favourable. We are encouraged by the recent accord between the opposition Partido Revolucionario Institucional (PRI) and the ruling Partido Accin Nacional (PAN). While this 'marriage of convenience' will remain tentative, it has already facilitated the successful passage of public pension reform, and should pave the way for key fiscal reforms later this year. The economy has started to slow down in the first few months of 2007, but this is hardly an unexpected development given our US concerns and the somewhat less accommodative external backdrop. The major challenges ahead thus lie in boosting the country's economic autonomy, reducing its overarching dependence on the US and oil export receipts, and improving efficiency and productivity in the export sector in the face of increasing competition from East Asian rivals. The government can play a supporting role on this front by developing the country's legislative and financial framework.

By successfully passing the public sector reform proposals, Caldern has managed to achieve in three months a feat that his predecessor Vicente Fox failed to implement during his entire presidency. Furthermore, we hold high hopes that the government's tax reforms will be approved later this year, although the risk of a watered down package remains high. Beatrix Paredes' appointment as leader of the PRI has been fundamental to the improving political outlook. She holds important ties to the reform wing of her party, and has already shown herself to be open to discuss the government's legislative agenda.

The Mexican economy has started to moderate in 2007. We expect real GDP growth to slow to 3.6% this year (from 4.8% in 2006), and US growth to fall to 2.3%, from 3.3% in 2006. Mexican exports have started to feel the pinch of lower external demand, while retail sales and economic activity indicators have disappointed of late. From a medium-term standpoint, however, we believe the economy is on the right road to achieving sustainable growth. The US factor will remain a key risk to the economy, as will the vulnerability of the external and fiscal accounts to a drop in international energy prices and the anticipated decline in domestic oil production.

Although steadily improving, Mexico's overall score of 52.8 in BMI's business environment ratings is some way off regional benchmark Chile's score of 66.3. The domestic financial markets have started to make considerable progress. The Mexican bourse has unveiled the creation of eight new indices, with the aim of improving investment opportunities in local equities. Furthermore, the recent extension of the 30-year peso-denominated bond demonstrates a confidence in Mexico's increasingly sophisticated and dynamic financial make-up. This increasingly liberal business environment must now be applied in state-sector industries, which currently suffer from constrained productivity and a lack of investment.

Content

Executive Summary
Making Real Progress
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- A wind of change has started to blow across the Mexican political landscape of late, which could precipitate a
- move towards much-needed structural reform and potentially lend momentum to the country's growth prospects
- over the medium term
- Domestic Politics
- The Long And Winding Road To Reform
- Table: Mexico Cabinet List: Last Updated 29 DEC 2006
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Economic Slowdown Underway In 2007
- Despite a higher-than-expected outturn in 2006, the Mexican economy started to lose steam in the final three
- months of last year - forewarning a downturn in growth in 2007
- Table: Mexico - Economic Activity
- How Resilient Is The Economy?
- In a recent address to the Inter-American Development Bank (IDB), Mexico's Finance Minister Agustn Carstens
- stated that the domestic economy has become more resilient than ever before to external factors Al
- Balance of Payments
- Take External Conditions Into Account
- The Mexican economy consolidated a healthy external position in 2006, registering a full-year current account
- deficit of US$148bn (just shy of our own forecast of US$150bn)
- Table: Mexico - Balance Of Payments
- Monetary Policy
- CPI Up, But Banxico To Hold
- Mexico's headline inflation rate rose to 411% y-o-y in February, with the core rate climbing for a fourth successive
- month to 395% y-o-y
- Table: Mexico - Monetary Policy
- External Debt
- Fitch For A Change
- Fitch Rating's decision to improve its credit outlook on Mexico from 'stable' to 'positive' vindicates the view that
- we have held for some time - the county's credit status will be determined by its ability to implement much-needed
- structural reform
- Table: Mexico Foreign Debt
- Investment Outlook
- The Afores Story: 10 Years On
Chapter 3: Special Report
- A Survey of Global Housing Risk
- The US Risk
- Concerns over poor quality mortgage lending in the US precipitated global market volatility in Q107 Although
- the furore has since subsided, as the risks are thought to be non-systemic, the vulnerabilities identified could
- hit US economic performance
- An Assessment of Selected Countries2
- South Korea - Sub-prime Vulnerabilities Clearing
- We have considered a selection of key emerging markets to assess their vulnerability to housing credit risk and
- to highlight some major themes in the development of financial systems in general and the mortgage market in particular
Chapter 4: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Legal Issues
- Labour Force
- Foreign Investment Policy
- Table: Mexico, Annual FDI Inflows
- Table: Latin America, Annual FDI Inflows
- Foreign Trade Regime
- Table: Top Export Destinations
- Tax Regime
Chapter 5: Key Sectors
- Infrastructure
- Market Overview
- The construction industry is forecast to grow about 58% on an average during the 2007-2011 period The
- construction industry contributed 515% to gross domestic product (GDP) and stood at a value of MXN46650bn
- (US$4355bn) in 2006
- Table: Mexico Infrastructure And Macroeconomic Historic Data And Forecasts
- Tourism
- Market Overview
- We feel that 2007 and 2008 should see a bounce back in tourist arrival numbers, provided the political situation
- remains stable This is also a result of the tourism industry finishing the rebuilding process after Hurricane Wilma
- Table: Mexico Tourism Industry - Historical Data & Forecasts
- Table: Mexico Travel Industry-Historical Data & Forecasts