Mexico Business Forecast Report Q3 2009

Publication Date	May 2009
Publisher	Business Monitor
Product Type	Report
Pages	64
ISBN Number	1744-8891
Product Code	BMI03889

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Summary

Crunch Time For Caldern

In this Business Forecast Report we examine the key economic and political risks that Mexico is likely to face as the global economy continues to underperform over the medium term. While we maintain an optimistic stance towards the country's longer-term growth prospects, we warn that President Felipe Caldern's administration will need to balance widening fiscal and current account deficits in an increasingly delicate political setting. With July's mid-term congressional elections fast approaching, and the ongoing media focus on Mexico's drug war, his decisions over the coming quarter could decide the trajectory of government policy for the remainder of the president's sexenio. We are particularly concerned about the longer-term effects of a potential rise of economic nationalism that could be provoked either by a deterioration in US-Mexican trade relations, or the domestic political realities encouraging the government to adopt more populist measures.

Support for the opposition Partido Revolucionario Institucional appears to be waning, suggesting the outcome of July's mid-term congressional elections could be closer than we previously thought.

In order to boost its electoral chances the governing Partido Accin Nacional (PAN) is aligning itself more closely with the country's powerful unions, which could help broaden the party's appeal away from its traditional Christian-democratic, centre-right support base. While the PRI may feel threatened by the PAN's move to the political centre, we are concerned that this could severely impede the government's business-friendly policies, as it would make it harder for the government to enforce its ambitious education and labour-market reforms.

We have recently downgraded our real GDP growth projections to negative 5.5% and -0.6% for 2009 and 2010, based on the pace of the economic decline in the early stages of 2009. With industrial production at a 14-year low and unemployment on the rise, we see some major similarities between the current downturn and the fallout from the 1994 Tequila Crisis, and while we believe the recession will not be as severe this time around, the global nature of this recession suggests any recovery will take longer. Tight credit conditions and collapsing demand in the US and other export markets is likely to exacerbate balance of payments and fiscal weaknesses, which could mean that our projections for 2010 and beyond are too optimistic.

US services company Weatherford International Oil Field Services has been awarded a US$646 mn contract by state-owned Petrleos Mexicanos (Pemex) to drill 500 wells at the Chicontepec oilfield.

Weatherford beat off competition from six other companies to win the four-year contract. Given the complexity of the drilling required to access Chicontepec's reserves, we question whether Pemex's target of between 600,000 to 700,000 barrels per day by 2017 is realistic, and believe further energy reforms are required to ensure the long-term health of the oil industry.

Content

Executive Summary
- Crunch Time For Caldern
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- PAN Chances Improving Before July's Elections
- With Mexico's mid-term congressional elections less than three months away, support for the opposition Partido
- Revolucionario Institucional appears to be waning, suggesting the outcome of July's ballot could be closer than
- we previously thought.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Contraction Of 5.5% In 2009
- The pace of Mexico's economic downturn has encouraged us to downgrade our 2009 real GDP growth forecast to
- negative 5.5% (from an already below-consensus -1.3%).
- Balance Of Payments
- Current Account Deficit To Widen Further
- Mexico's current account deficit hit a seven-year high in 2008, coming in at US$15.5bn, or 1.4% of GDP (slightly wider
- than our US$15.0bn target), confirming just how bad the country's export sector is suffering from lower global oil prices
- and the economic downturn north of the border.
- Balance Of Payments (II)
- BoP Concerns In 2009
- On the face of it, Mexico's financial and capital account surplus in Q408 looks healthy, with the 1.6% y-o-y increase in
- the surplus more than compensating for the poor performance of the current account deficit, which hit seven-year high
- of US$6.1bn in the same quarter.
- Fiscal Policy
- Drop In Taxes Highlight Fiscal Failings
- Despite the slight improvement in Mexico's nominal fiscal deficit in February, which narrowed from US$19.0bn in
- January to US$8.1bn, the 3.4% y-o-y drop in tax revenue - the largest on record - supports our bleak fiscal outlook.
- Monetary Policy
- No Stopping Banxico Now
- A moderating inflationary outlook in Mexico, highlighted by March's fall in headline inflation to 6.04% y-o-y (from 6.20% in
- February), gives the country's central bank room to push on with its cycle of monetary policy easing.
- Investment Outlook
- Drug War Not Hurting FDI... Yet
- Despite recent media attention on Mexico's drug violence and the 'failed state' assertions from some US officials, we see
- little to suggest that President Felipe Caldern's hardline approach towards the cartels is having a detrimental effect on
- the perception of the country as an attractive location for FDI.
Chapter 3: 10-Year Forecast
- The Mexican Economy To 2018
- 2009-18: Challenges Ahead, But Outlook Good
- Barring the transient bout of economic weakness over the next few years, sound macro-economic policies and favourable
- economic conditions north of the border should help Mexico register relatively robust levels of growth going forward,
- averaging 4.6% real GDP growth between 2012 and 2018 according to our forecasts.
Chapter 4: Special Report
- The Outlook For Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
Chapter 6: Key Sectors
- Automotives
- Pharmaceuticals
Chapter 7: BMI Global Outlook
- Global Outlook
List of Tables
- Table: Political Overview
- Table: ECONOMIC ACTIVITY
- Table: BALANCE OF PAYMENTS
- Table: FISCAL POLICY
- Table: MONETARY POLICY
- Table: MEXICO Long-Term Macroeconomic Forecasts
- Table: LOAN-TO-DEPOSIT RATIOS, Selected States
- Table: LOAN GROWTH (% CHG Y-O-Y), Selected States
- Table: COMERCIAL BANKING BUSINESS ENVIRONMENT RATINGS, SELECTED STATES
- Table: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Table: BMI LEGAL FRAMEWORK RATINGS
- Table: Latin America Annual FDI Inflows
- Table: BMI TRADE RATINGS
- Table: TOP EXPORT DESTINATIONS
- Table: Mexico Autos Sector - Historical Data And Forecasts
- Table: Generics Market, 2004-2013
- Table: Mexico's Medical Devices, 2006-2012 (US$mn unless otherwise stated)
- Table: GLOBAL ASSUMPTIONS
- Table: GLOBAL ASSUMPTIONS - LO NG-TERM FORECASTS
- Table: Developed States, Real GDP Growth Forecast
- Table: EMERGING MARKETS, REAL GDP GROWTH FORECAST
- Table: Commodities
- Table: GLOBAL & REGIONAL REAL GDP GROWTH