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Effects of the US Crisis in Mexico


Effects of the US Crisis in Mexico By Pedro Aspe, Sergio S nchez and Fernando Aportela October 14th, 2011 – PowerPoint PPT presentation

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Title: Effects of the US Crisis in Mexico

Effects of the US Crisis in Mexico
By Pedro Aspe, Sergio Sánchez and Fernando
Aportela October 14th, 2011
  • US Current Conditions The View from the
  • The Transmission Mechanism
  • Mexicos economic cycle and its link to the US
    manufacturing cycle
  • Exports and Imports Mexico is a very open
  • Labor Figures
  • Foreign Direct Investment
  • Tourism Trends
  • Mexican Policy Responses
  • Fiscal policy
  • Monetary policy
  • The Taylor Rule
  • Mexicos currency depreciation vs. Latin America
  • Opportunities
  • Chinas Competitiveness Trend and its
  • The Demographic Bonus in Mexico
  • Migration into US is and will be cap by
    demographic factors
  • Development of a significant domestic market
  • Final Remarks
  • Appendix

  • US Current Conditions The View from the

Employment in the Recovery a major problem
  • Continuing weakness of the labor market
  • Unemployment rate at 9.1.
  • 8.75 million jobs lost in the recession, only
    1.89 million recovered.
  • 6.0 million unemployed for 27 weeks and over

Nonfarm jobs (monthly, percentage change since
the end of recession)
Source (percentage change since the end of
recession) Bloomberg, Wall Street Journal, IMF.
Housing Sector and Bank Lending in the Recovery
two additional problems
  • Housing prices are still declining and bank
    lendings growth rate is negative.

Home prices (quarterly)
Bank lending (monthly)
Source (percentage change since the end of
recession) Bloomberg, Wall Street Journal, IMF.
Exports and Corporate Profits two good news from
the Recovery
  • Corporate profits and exports are performing at
    least as well, as they did in several other

Exports, goods services (quarterly)
Corporate profits (quarterly)
Source (percentage change since the end of
recession) Bloomberg, Wall Street Journal, IMF.
  • The Transmission Mechanism

Mexicos economic cycle and its link to the US
manufacturing cycle
Employment (Mexico)
  • Mexican manufacturing follows closely this US
    sector. Nevertheless, since 2009 Mexican dynamism
    has been stronger.
  • Production is at pre-crisis level in Mexico and
    below in the US.
  • Employment in Mexico has recovered from
    pre-crisis levels.
  • Mexican exports have shown significant increases.

Manufacturing production index (2007100)
Mexican Exports (2007100)
Source INEGI, Federal Reserve, Bureau of Labor
Exports and Imports Mexico is a very open economy
Percentage of US exports (year to date, July 2011)
  • Mexico is the second manufacturing exporter to
    the US, only after China.
  • 80 of Mexican Exports are traded with the US.
  • Mexico has 21 preferential trade agreements and,
    except for Chile, is the most open economy in
    Latin America.
  • Mexicos total exports account for 30 of GNP,
    while exports just to the US account for about
    24 of GNP.

Percentage of US imports (year to date, July 2011)
Mexicos exports as of the GNP
Note Trade data includes manufacturing exports.
Source INEGI, Chiles Central Bank, World Trade
Labor Figures
  • Employment in Mexico has recovered since the
    2008 crisis. Nevertheless, that is not the case
    in the US
  • Unemployment rate (August 2011) 5.8 in Mexico
    vs. 9.1 in the US.
  • New jobs (Jan-Sept 2011) 600,000 (1.2 of labor
    force) in Mexico vs. 1.07 million (0.7 of labor
    force) in the US.

Manufacturing employment (2007100)
Employment (2007100)
Notes Using Social Security Affiliates in Mexico
and Non farm payroll in the US.
Source INEGI,. Bureau of Labor Statistics.
Foreign Direct Investment
  • Foreign Direct Investment (FDI) received by
    Mexico increased 26 in 2010 with respect to 2009
    (the worst year).
  • Not surprisingly, investments in manufacturing
    represents 57.7 of total FDI.

Foreign Direct Invesment (million USD)
Source INEGI
Tourism Trends
  • Tourism into Mexico showed a rebound in 2010.
    During that year, revenues from tourism were 9.2
  • Mexico had 12.6 million tourists in the same

Tourism revenues (billion USD)
Number of tourists (million people)
Source Mexicos Central Bank, INEGI
  • Mexican Policy Responses

Fiscal Policy
  • Fiscal deficit in 2011 is expected to be 2.2 of
    GDP, including Pemexs investment (at 84.9
    dollars per barrel), and 0.2 of the GDP without
    it. But in 2008 and 2009 Mexico had a Balanced
  • Government debt remains at 30 of GDP
  • 81.3 is internal debt and only 18.7 is
  • Total sub-sovereign debt in Mexico was 2.4 of
    GDP in 2010.

Total Public Sector Budget Balance of GDP
Total Central Government Debt of GDP
Source OECD, International Monetary Fund.
Fiscal Policy Balanced budget policy under
historically high oil prices
  • Since 2009, Government budget has been approved
    with a deficit reaching its peak in 2011 (2.7 of
    GDP, according to the Ministry of Finance
  • When revenues have surpassed the budgeted
    figures, extraordinary expenditures have been
  • Extraordinary oil revenues have represented
    between one and two thirds of overall
    extraordinary revenues. As it is well known, this
    does not represent a good indicator of sound
    public finances.

Government Budget (MXP billion)
Extraordinary entries (MXP billion)
Source Mexican Ministry of Finance.
Fiscal Policy Balanced budget policy under
historically high oil prices
  • In 2007, the Government enacted a new budget law
    that allowed oil surpluses to be used for fiscal
    stabilization purposes.
  • Nevertheless, even if during 2010 extraordinary
    revenues summed up to MXP 163 billion, the
    balance of stabilization funds was reduced.
  • Under historically high oil prices, balanced
    budget policy seems fairly reachable, but is a
    biased indicator of fiscal contention.

Mexican Mix oil prices (USDB)
Source Mexican Ministry of Finance.
Monetary Policy
  • Mexico has shown a consistent monetary policy.
    Its Central Bank became independent in 1994. The
    Central Bank Law laid a legal foundation with the
    following principal strengths the governor was
    to be appointed for a fixed term, it established
    staggered terms of office for other board
    members, and it took measures to ensure that the
    Banks financial base could not be undermined.
  • Mexicos monetary policy regime has undergone
    significant evolution in the last two decades,
    with the adoption of the inflation targeting (IT)
    scheme in the early 2000s, representing a key
  • It is under the IT regime, along with the support
    of prudent fiscal policies, that Mexicos Central
    Bank has succeeded in controlling inflation in
    the last decade.

1Tang, M. and Yu, X., Communication of Central
Bank Thinking and Inflation Dynamics, IMF working
paper series, August 2011
The Taylor Rule
  • In the period from January 1999 to January 20081,
    among the seven largest Latin American economies
    (Brazil, Argentina, Mexico, Chile, Colombia,
    Venezuela and Peru), only Mexico followed the
    Taylor principle, although not continuously.
  • Exchange rate major adjustments seem to be a
    relevant variable for interest rate decisions

Mexicos actual and Taylor-implied policy rate
Note Using actual inflation using expected
1De Carvalho, A. and Moura, M., What Can Taylor
Rule Say About Monetary Policy in Latin
America?, 2010
Mexico's currency depreciation vs. Latin America
  • Currently, Mexico is the only country in Latin
    America with sustained currency depreciation
    since the 2008 crisis (post-Lehman), relative to
    the US dollar.
  • Mexico has achieved a higher degree of
    competitiveness from the weaker peso, higher
    global transport costs, and lower unit labor cost
    differential between Mexico and other Asian

Exchange Rate (Sept/15/081)
Inflation (annual change, )
Source Bloomberg.
  • Opportunities

China Competitiveness Trend and its Consequences
Exports to the US (annual growth )
  • Manufacturers are moving away from outsourcing
    and are starting to embrace near sourcing.
  • China is loosing competitiveness
  • Wage and benefit rises of 15 to 20 annually in
    USD in the last decade.
  • Transportation costs and the continued
    appreciation of the yuan.

Unit labor costs (USD / Hours)
Transportation costs (USD)
Monterrey to Chicago4-5 days ground (53-ft
truck container)
Shanghai to Chicago22 days marine and ground
(40-ft shipping container)
Source Bloomberg, Boston Consulting Group , JP
Morgan, ILO, Mexican Ministry of Finance.
Fertility rate in Mexico and the demographic
  • Mexican fertility rate is approaching advanced
    economies level.
  • Favorable dependency ratio more people at
    working-age (15-64 years) than dependents.
  • Accumulation of savings and wealth development
    of a larger domestic market.

Average number of children, women 15-49 years
Population data
Total fertility rate
Dependency ratio ( of working-age population)
Source INEGI, CONAPO, World Bank.
Demographic transition
  • Mexico will not have more than 138 million
  • Life expectancy has increased 4 years in two
  • Infant mortality has gone down significantly.

Total Population Growth (thousands)
Population data
Life expectancy (years)
Infant mortality rate (per thousand)
Migration and Remittances
  • Mexico received a total of USD 21.27bn in
    remittances in 2010, an increase of 0.12 over
    the year before.
  • This source still represents the second largest
    source of foreign currency
  • Migration to the US will decline steadily
  • Less than 100,000 illegal border-crossers and
    visa-violators from Mexico settled in the US in
    2010, down from about 525,000 annually from 2000
    to 2004.

International migration (thousands)
Remittances (billion USD)
Source INEGI
  • Final Remarks

Final Remarks
  1. The ongoing Banking and Real Estate crisis in the
    US had made the recovery very anemic. Banks in
    the US have been capitalized but their negative
    impact on the economy will last some years. The
    household debt problem in the US has not been
    solved and its impact will affect the economy in
    the years to come.
  2. The Mexican recovery has been led by investment
    and exports, backed by an expansionary fiscal
    deficit around 2 of GNP and a monetary policy
    which has followed the Taylor rule. With a low
    debt/GNP ratio and a small fiscal deficit
    Mexicos macro picture is in good shape.
  3. However, in order to sustain and enhance this
    recovery, Mexico will have to maintain its
    international competitiveness making additional
    reforms to enhance productivity growth in areas
    like Energy, Fiscal, Basic Education, Science and
    Technology and Labor.
  4. Given the recent events in Japan, Europe and the
    US, Mexico has to move fast on its Reforms to be
    prepared for a prolonged period of Global

  • Appendix

Historic Oil Production
Oil Production (daily thousand barrels)
Source PEMEX.
Murders per 100,000 inhabitants, 2010
Source Instituto Ciudadano de Estudios sobre la
Inseguridad A.C., United Nations Office on Drugs
and Crime Homicide Statistics.
Europe banks CDS
Credit Default Swaps 5 years
Source Bloomberg.
Sovereign Debt CDS
Credit Default Swaps 5 years
Source Bloomberg.
Risk for French Banks has risen
  • There are three main factors that are
    contributing to the vulnerability of French
    banks large balance sheets with high leverage,
    significant liquidity needs and reduced capital
    rebuild prospects due to the economic slowdown.

Financial leverage ()
Note Financial Leverage Average Total Assets /
Average Total Common Equity (first semester of
Source Bloomberg.
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