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M E X I C O : G R O W T H , I N F L A T I O N , U S D / M X N , A - PowerPoint PPT Presentation

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M E X I C O : G R O W T H , I N F L A T I O N , U S D / M X N , A N D S E C U R I T Y I S S U E S Gabriel Casillas, Ph.D. AC Mexico Economic Research June 16, 2011 (52-55) 5540-9558 C O N F I D E N T I A L gabriel.casillas@jpmorgan.com

  1. M E X I C O : G R O W T H , I N F L A T I O N , U S D / M X N , A N D S E C U R I T Y I S S U E S Gabriel Casillas, Ph.D. AC Mexico Economic Research June 16, 2011 (52-55) 5540-9558 C O N F I D E N T I A L gabriel.casillas@jpmorgan.com J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero A N D P R I V A T E S T R I C T L Y

  2. Agenda Strong growth, despite a soft patch in global manufacturing in 2Q11 1  Japanese disaster will moderate activity, but such a disruption is likely to be temporary Benign inflation will prevail in 2011 8 I S S U E S The peso strengthening cycle might be over 11 S E C U R I T Y Escalation of drug-related violence is about to reach an inflection point 13 A N D U S D / M X N , I N F L A T I O N , G R O W T H , M E X I C O : 1 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1

  3. Strong growth, despite a soft patch in global manufacturing in 2Q11  We believe there are five reasons to still be positive on Mexico’s economic activity forecasts Mexico’s growth in 2011: %oya 2010 1Q11 2Q11 3Q11 4Q11 2011 GDP AS 5.5 4.6 3.2 5.3 5.1 4.5 1. A reinvigorated auto sector Agriculture 5.7 1.2 1.3 1.3 1.4 1.3 2 Q 1 1 Industrial 6.1 5.2 1.3 4.5 4.8 4.0 2. Ascending domestic demand Manufacturing 9.9 7.4 1.6 6.9 6.3 5.5 I N Other 1.2 2.3 0.9 1.3 2.7 1.8 3. A positive outlook for banking credit; and M A N U F A C T U R I N G Services 5.0 4.4 4.1 4.6 4.7 4.5 Imports 22.1 7.5 4.7 6.1 8.5 6.7 4. Major infrastructure projects to begin construction GDP AD 5.5 5.1 4.0 4.6 4.3 4.5  As a result, we are forecasting Mexico’s GDP to grow Consumption 4.7 4.6 4.5 4.2 4.0 4.3 GFI 2.3 3.5 5.2 5.4 5.2 4.8 4.5% in 2011, and 3.8% in 2012 Exports 24.3 8.7 6.9 9.1 8.6 8.3 G L O B A L Source: J.P. Morgan.  We identify four key risks to our optimistic growth call: 1. A longer-than-expected transitory soft patch in manufacturing I N caused by the Japanese earthquake/tsunami and its aftermath P A T C H 2. The possibility of less vigorous growth in the US S O F T 3. High and persistent global energy prices A 4. Potential escalation of drug-related violence D E S P I T E G R O W T H , S T R O N G 2 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1

  4. 1. A reinvigorated automotive industry has been the main driver of manufacturing activity  Auto production disruptions due to Japanese disaster suggest manufacturing is likely to moderate during Wages in the manufacturing sector 2Q11. However, such downturn is likely to be US$ temporary and the drag it is causing is likely to fade Mexico China 2.5 away as we move toward the second half of the year 2 Q 1 1 2.3 to go back to 1Q11’s levels 2.1 17.4% 1.9 I N 1.7  M A N U F A C T U R I N G Several automakers across the world have reallocated 1.5 237% part of their production to Mexico to benefit from a 1.3 1.1 depreciated real exchange rate, a narrow wage 0.9 differential between Mexico and other Asian countries, 0.7 0.5 particularly China, still-high transport costs, and the 2002 2003 2004 2005 2006 2007 2008 2009 2010 country’s strategic geographic location G L O B A L Source: Ministry of Finance Participation of Mexican manufacturing exports in US imports vs. oil prices Mexican peso multilateral real exchange rate I N P A T C H Index, Jan 2003=100 15 Mexico's share in US manufacturing imports (%) 110 145 WTI, US$ per barrel (RHS) 14.0 S O F T 14 90 135 13.012.9 125 12.9 A 13 70 115 12.3 D E S P I T E 12.2 4.3% 11.912.1 11.9 Long-term 11.7 105 12 50 11.6 11.3 11.1 95 11 30 10.4 G R O W T H , 85 75 10 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1997 1999 2001 2003 2005 2007 2009 S T R O N G Source: J.P. Morgan with data from Banxico Source: US Census Bureau (up to October 2010), and Bloomberg 3 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1

  5. 2. Stronger domestic demand GDP – Contribution by aggregate demand component 1 %oya 2 Q 1 1 10 14.9 7.7 I N 5.3 14.7 4.6 M A N U F A C T U R I N G 4.5 4.6 3.7 3 5 2.8 3.5 1.7 2.3 2.9 14.5 0 14.3 -0.8 G L O B A L 14.1 Net exports -5 -2 I N GFI 13.9 P A T C H Public spending -5.5 -7.2 -10 Private consumption 13.7 S O F T Formal employment (RHS) -9.6 A -15 13.5 D E S P I T E Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Source: J.P. Morgan with data from INEGI G R O W T H , 1. GFI includes the incidence of the change in inventories S T R O N G 4 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1

  6. While Mexico’s economic rebound was initially externally-driven, now domestic demand is supporting the recovery  The external demand rebound has improved employment conditions, and domestic demand is now back on track  Three-phase crisis in 2009 unraveled a three-phase recovery in 2010 2 Q 1 1  We first observed an important rebound of external demand, particularly boosting Mexico's manufacturing activity I N (phase I) M A N U F A C T U R I N G  This led to a significant improvement in job market conditions (phase II)  Now, with a two-to-three quarter lag, domestic demand is starting to pick up (phase III) Contributions of internal and external demand to aggregate demand G L O B A L %oya 12.9 Internal External 9.2 7.9 I N 7.0 7.2 P A T C H 5.7 5.9 3.5 S O F T -1.7 5.9 3.7 3.6 3.1 A 1.7 D E S P I T E -3.4 G R O W T H , 4Q09 1Q10 2Q10 3Q10 4Q10 Source: J.P.Morgan with data from INEGI S T R O N G 5 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1

  7. 3. A positive outlook for banking credit  Mexico’s credit system could be a key driver for domestic consumption  Total commercial bank credit to the private sector Credit card cycle represents less than 15% of GDP  Mexico observed a credit card boom back in years %oya in real terms % of total credit 80 20 2003-06, in which non-performing loans increased Credit card Delinquency rate (RHS) 18 60 2 Q 1 1 significantly, making banks to rethink their credit-giving 16 40 14 policies, and this was exacerbated during the global I N 12 20 financial crisis 10 M A N U F A C T U R I N G 0 8  Nevertheless, commercial banks have now "cleaned 6 -20 up" their credit balances, credit card interest rates 4 -40 2 have moderated, and employment conditions have -60 0 improved significantly Jan-00 Oct-03 Jul-07 Apr-11  As a result, we believe that it is highly likely that all G L O B A L Source: J.P.Morgan with data from Banxico these will probably lead to an ascending trend in the country's domestic credit cycle Credit cards’ cost and formal employment I N P A T C H %oya in real terms % of total credit Banking credit to the private sector 45 6 S O F T %oya 4 40 40 2 30 A 35 D E S P I T E 20 0 Total 30 10 -2 Credit card interest rate Consumer credit 0 25 Housing credit -4 Formal employment (RHS) -10 G R O W T H , Credit to firms 20 -6 -20 Jan-04 Jun-06 Nov-08 Apr-11 -30 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 S T R O N G Source: J.P.Morgan with data from Banxico Source: J.P.Morgan with data from Banxico 6 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1

  8. 4. Infrastructure projects to start its construction phase  Several projects that had been in a feasibility study Government-sponsored infrastructure projects 1 phase over the past two years are now ready start construction Investment, US$ mn  Furthermore, several projects suffered important 2 Q 1 1 Project description Total Government Private delays because of the global financial crisis. Total 25,786 15,206 10,580 I N  However, the state-owned development bank M A N U F A C T U R I N G Crude oil and gas 13,778 13,778 - - Banobras modified its lending framework in 2010 to Gas pipelines 660 660 - - provide guarantees in addition to funding, and is now working with the National Infrastructure Fund to also Refining 10,740 10,740 - - provide direct, non-refundable funds to projects with a Crude oil production 2,378 2,378 - - high social return. Tourism 9,653 764 8,889 G L O B A L  According to data from Banobras, there are about Transportation and telecom 1,550 139 1,411 US$ 26 billion -out of a total of US$ 51.2 billion of Roads and highways 1,270 139 1,131 I N specific projects-, that are estimated to be invested P A T C H Seaports and airports 280 - - 280 between year-end 2010 and 2012 (with specific starting dates). Electricity generation 777 514 263 S O F T  Water 28 11 17 As it is shown in table, these US$ 26 billion are distributed between crude oil and gas (53.4%), A Source: J.P. Morgan with data from Banobras (State-owned development bank) tourism (37.4%), transportation and telecom (6%), D E S P I T E 1. Includes ongoing works and the ones projected to start in year 2011. electricity generation (3%), and water projects (0.1%). These investments have a major government G R O W T H , spending component (US$ 15.2 or about 60%). However, given the way these projects are planned, these could foster another US$ 10.6 billion of private S T R O N G sector investments as well. 7 L A T I N T R A D E C F O C O N F E R E N C E 2 0 1 1

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