Mexico Business Forecast Report Q4 2009

Implications Of 'Lame-Duck' Presidency In the wake of the government's poor performance in July's mid-term congressional elections, we assess the impact of what is effectively a 'lame-duck' presidency on Mexico's political, economic and business environment for the remainder of President Felipe Calder??n's sexenio. We also examine Mexico's longer-term economic growth potential, and whether the country can really be considered one of the major EM players in the years ahead. Despite the many challenges the country has undergone in recent months (ranging from the swine-flu fallout, ongoing drug-related violence and dire economic readings) we have been pleasantly surprised by the resilience of the country's financial markets, encouraging us to adopt a more constructive stance towards the Mexico peso for the remainder of 2009 and into 2010.

Calder??n's Partido Acci??n Nacional (PAN) was hammered in the recent mid-term congressional elections, which saw his party lose significant legislative support to the opposition Partido Revolucionario Institucional (PRI) (and also saw the left-wing Partido de la Revoluci??n Democr??tica relegated to third largest party in congress). After several years in the wilderness, the PRI is now well and truly back as a major player in Mexican politics, and this will have significant consequences for the success of the government's reform agenda going forward. While on the whole we are relatively negative about the PAN's ability to push through structural reforms, we do see some potential for cooperation between the largest political parties.

While our below-consensus 2009 real GDP growth forecast for Mexico remains at 7.1%, we believe that H209 will see a moderate improvement in economic activity figures. This does not mean we expect a rampant uptick in growth, but base effects and the likelihood of increased demand north of the border means the downturn probably reached its nadir in H109. Nevertheless, we are more pessimistic about the potential for Mexico to become a major EM player over our ten-year forecast, as we see little hope of any medium-term fix to key structural problems. Furthermore, more subdued growth in the US is likely to continue to expose Mexico's over-dependence on its northern neighbour.

Our concerns regarding Mexican companies' exposure to peso weakness have again emerged in the form of debt restructuring and bankruptcy talks. The most recent victims are cement giant Cemex, which has just restructured US$14.5bn worth of debt, and tortilla corn flour producer Gruma, which is attempting to stave off bankruptcy. Both companies' problems stem from the rapid sell-off in the peso back in October, which meant Cemex was unable to service short-term debt obligations, and left Gruma with forex derivatives losses totalling MXN11.2bn by end-2008.

Cemex has also been hard hit by the downturn in key international markets such as the US, UK and Spain, although it is Gruma that currently looks the most likely to go the way of former-retail giant Controladora Comercial Mexicana, and be forced to file for bankruptcy.