Early Looks at the 2013 Mexican Economy

Can Mexico achieve 4% real growth in 2013?

The professional forecasters seem to feel that 4% or close to it is an attainable goal, even though the international economic, fi nancial and trade outlook remains extremely cloudy.

But there are “ifs” in the equation for next year that are domestic as well as international.
These include bringing down the recent food-driven infl ationary pressures, continuing to make Mexico a more competitive economy, markedly stepped up formal sector employment levels, public safety and easing the overall investment restraints.
Those are just a few for starters.


And Mexico next year will have a new Administration, still putting together its agenda. Most of that had not yet been clearly spelled out, understandably, as of late October, 2012.

In many respects, the overall economic outlook for 2013 frankly seems fairly similar to that of this year, certainly in terms of macroeconomic growth statistics.

Four percent economic growth, as measured by Gross Domestic Product (GDP) may not be reached, but the fi nal year-end fi gures will probably be close. And there could always be an unexpected “extra” detonator to make the 4% goal attainable.

IHS Global Insight’s Dr. Rafael Amiel looks for 4.2% real GDP growth in 2013, up from a projected 3.9% for this year. That fi gure is somewhat higher than other forecasts, although not by much. “The linked business cycle with the U.S. economy will continue to dominate Mexico’s dynamics” during next year.

“Looking at the international scene, this has to be seen as a very acceptable growth rate”, Amiel adds.

The latest Banco de Mexico consensus forecast expects 3.53% growth for the period, while Banco Nacional de Mexico (Banamex) is looking for 3.8% and BBVA Bancomer 3.6%. The International Monetary Fund in late October issued a 3.8% forecast (down slightly from its previous 3.9%).

Amiel feels that by the end of 2013, GDP growth could be at a 4.5% yearon- year clip. That would be the same as growth in the fi rst quarter this year.

“The new government’s agenda is enormous”, Amiel, the chief Latin American economist of IHS Global Insight emphasizes.
“Will all of the necessary (economic) reforms happen?”

Fortunately, he adds, “the high quality of Mexico’s policy framework increases resilience to external shocks. And public sector debt is relatively low and manageable, in the short-and medium-terms”.
According to Amiel, total external debt is 23.7% of GDP. That’s less than one quarter of the U.S. debt: GDP ratio. For some Eurozone nations the ratio is well above 100%.

Of interest was the range in the forecast of the professionals. Whereas IHS Global Insight is looking for a 4.2% GDP growth in 2013, the UTEP Region Modeling Project consensus expects just 3.4%, vs. 3.8% this year. The Project, from the University of Texas El Paso, takes into consideration the outlooks by economists from eight banks, private sector think tanks, universities and the American Chamber of Commerce of Mexico.

The most recent UTEP consensus forecast (3.4%) is not that far removed from the 3.5% of the Banco de Mexico end-September survey of 30 economic analytical sources. Project director Dr.
Thomas Fullerton labels the forecast as “moving ahead with trepidation”.

There are a host of macroeconomicrelated factors that must be considered in trying to gauge Mexico’s growth next year.

Just some of these include:

–The speed with which the new Administration moves in putting its working agenda in place,

–Congressional movement on diverse structural reform packages, including the fi nal outcome on the proposed reforms to the Federal Labor Law (still very much hung up in late October),

–The new Administration’s fiscal package for 2013, but no major changes are forecast,

–Administration plans for creation of new Cabinet positions, such as Transportation and Infrastructure (lumped together) and Water Resources,

–The government’s foreign policy, especially as concerns the U.S. in thorny social and trade matters,

–The degree of narcotics war success.

In just one area, that of foreign trade, will 2013 see more “surprise” decisions which negatively impact Mexico’s export prospects? Remember the unexpected 2012 restrictions placed by the Brazilian and Argentine governments on Mexico’s auto exports to those countries. And late-year ominous rumblings by the U.S. Commerce Department to limit tomato exports in order to “appease” Florida growers.

What will be the most likely “drags” on the Mexican economy next year? The results of the late September Banco de Mexico monthly survey of analysts came up with the following answers, all frankly quite predictable: weaknesses in the external market, international fi nancial instability, the absence of structural changes in Mexico, public safety and higher prices for raw materials both agricultural and mineral commodities.

Way down on the list were such answers as the change in Administrations, exchange rate uncertainty or lack of qualifi ed labor.

THE DOMESTIC MARKET

All signs at present point to Mexico’s consumer market performing in 2013 pretty much as it has this year, with sustained but not spectacular growth. Supermarket, department store and new car sales probably will go up at fairly high single-digit rates.

The various forecasts to date all concur that real domestic consumption will more up at least 4%. Once again, 2013 is seen as a record year for new vehicle sales.
And major retail outlet managers seem relatively optimistic. A 4% increase would compare with the estimated 3.7% real increase this year (4.5% in 2011).

There should be at least “adequate growth” in demand next year for new cars, computers and related equipment and domestic appliances. Exact upturns will depend as usual on increases in real wages, availability of consumer credit and a continuing expansion of the middle class.

Banamex is forecasting average wage increases of 4.5% in 2013, a bit above expected retail infl ation. But that would be below the 5% increase (average) it has forecast for this year. 4.5-5.0% also should be the range for offi cial minimum wage increases.

In the fi rst 7 months of 2012, collective bargaining agreements called for wage increases averaging 4.7%, 4.96% for those negotiated in August. Those fi gures do not include fringe benefi ts.

A final note on domestic demand. September was a record September for new light vehicle sales. These totaled 79,760 units, up 8.1% year-on-year. And it was one of the better sales months for the year.

On a different front, September department store sales were up 14%, all stores, from the like month last year, according to the sector’s trade association ANTAD.
September supermarket and hypermarket sales rose 15% year-on-year, once again all stores. In both instances, September was one of the strongest growth months of 2012.

The apparent bottom line: real GDP growth of 4% or thereabouts in 2013 will hinge in large measure on domestic market driven factors.

EXPORTS GROWTH TO SLOW

The World Trade Organization (WTO) has already forecast that global merchandise trade next year will grow by just 2.5%, an anemic performance at best.

Mexico of a certainty will do better than that WTO forecast for 2013. But its foreign merchandise trade growth will be substantially below the dynamics of the fi rst semester of this year, dynamics which began to evaporate as of August and September.
That trend is seen as lasting through year’s end and probably well into 2013.

Manufactures however will continue to account for around 81% of total exports.
And the automotive sector will continue as the pacesetter, despite growth obstacles in South America (host governmentsimposed) and Western Europe (poor to recessionary economic climate).

The most recent forecasts are that for 2013, total automobile and other light vehicle exports will reach 2.8 million units, vs. a projected 2.39 million this year. New vehicle unit exports did decline slightly in September, year-on-year. This included a drop of 3.1% in unit exports to the U.S.
(116,151).

However, Mexico retained its 10.3% share of the U.S. new light vehicle sales market. And this market share is expected to be at least retained in 2013. Mexico next year will continue as the world’s fi fth longest exporter of light vehicles, with a number 6 global ranking for commercial vehicle exports.

Crude oil exports, measured in dollar terms, are seen as declining. And agricultural sector exports growth is probably iffy. There are big growth question marks for major 2013 exports such as tomatoes and mangos.

For 2013, the forecasters are looking for overall goods exports growth of 6.5 to 7%, with a slightly higher growth rate for imports.
The overall exports growth in the fi rst nine months of this year was just under 9%.

Banamex economists are anticipating that for the full year this year total exports will amount to $370.6 billion dollars, up from $349.4 billion in 2011. That fi gure is then seen as reaching $398.7 billion in 2013. For next year Banamex forecasts a merchandise trade defi cit of $11.7 billion dollars vs. an expected full-year defi cit of just under $4 billion in 2012. The Banco de Mexico consensus survey taken in late September is somewhat more conservative.
That expects a 2013 trade defi cit of $7 billion dollars. IHS’ Amiel expects export growth of 5%, down a bit from a projected 5.9% this year.

Look for continuing but moderate growth in exports by the automotive and auto parts, aerospace, chemicals, mining (gold, silver, copper) computer related and Maquiladora Industry sectors.

On the total imports market for auto parts in the U.S. market, Mexico enjoyed a 33% participation in the fi rst seven months of this year. The value of said imports: $24.3 billion dollars, according to the U.S.
Department of Commerce.

That percentile is not expected to decline in 2013, but the value will increase as U.S. auto market demand continues to expand.

THE EXCHANGE RATE

The peso underwent substantial daily volatility in the May-July period, but then tended to settle down at under 13 to the dollar.
In late October, it was 12.82 to US$1.
Current forecasts by private forecasters plus Banco de Mexico are that the peso will remain remarkably steady between now and end-2013.

In the Banco de Mexico consensus forecast (see table), the peso at year’s end next year will settle in at 12.73 to the dollar, whereas its 2012 close will be 12.83 to one. BBVA Bancomer looks for an average 2013 exchange rate of 12.85:1.
Banco Nacional de Mexico economists are pretty much in line, 12.70 at year’s end 2012 and then 12.80 twelve months later.
For reference purposes, the peso closed last year at 13.97.

In discussing the exchange rate outlook, Banamex economists note that in their end-September opinion survey of 20 commercial banks and other fi nancial institutions, the consensus projection is for a year-end 2013 exchange rate of 12.50, vs.
12.81 at the end of this year. The consensus does vary somewhat from the forecast by the bank’s own economists.

Peso strength will continue to be buoyed by a basically unchanged monetary policy plus a continuing run-up in foreign exchange reserves. The bank foresees no change in the Banco de Mexico basic funds rate of 4.50%. The earliest time foreseen for a possible increase of maybe 25 basis points is May of 2014.

Reserve holdings meanwhile are seen as reaching almost $185 billion dollars by the end of the year, up nearly $20 billion from the expected reserves level at end-2012. During the year about to end, the international reserves level is seen as increasing by $23.4 billion.

Much of the increase this year will of course come from crude oil export dollars.

THE INFLATION DILEMMA

Critical to the incoming Administration will be controlling infl ation. As of the recent summer months, infl ation –as measured by the National Consumer Price Index– spiraled upwards, pushed by sharply higher prices for basic foods.

Through September the NCPI rose by 4.77% on an annualized basis. In that month alone, the retail-price index for agricultural and livestock products rose by a year-on-year 16%. The sharpest jumps were in prices for eggs, chicken and tomatoes.

However, forecasters say that the trend will decline in the near term, bringing infl ation levels back down to Banco de Mexico’s target band of 3-4% annually. According to Banco Nacional de Mexico economist Arturo Vieyra “we feel that the causes of this greater infl ation are of a defi nite transitory nature. The dynamics leading to that increase have now lost force”.

Banco de Mexico still expects the year-end infl ation a bit above the target band ceiling. For 2013, the central bank consensus forecast looks for a year-end 3.76%. But several other forecasts feel that the NCPI upturn will be at least 4%. Much will depend on food prices, especially basic grains. That “depend” means depending on international commodity prices, since Mexico probably will continue having to import substantial quantities of corn, soybeans, beans and sugar.

In 2013, retail infl ation (especially food-related) is probably going to continue as a strong pressure point in the economy. And therefore on social and economic policymaking.

WHAT ABOUT OIL?

As is usually the case, petroleum will be a major element in Mexico’s economic equation in 2013. Most particularly oil sector exports and the export price.

In recent months, the export price for the “Mexican mix” has remained above $100 dollars/barrel. In late October, it was in the $103-$105 range.

All current global indications are that the export price will remain above the $100 d/b benchmark figure during 2013. What is less certain is whether the average volume can be increased on a sustained basis. In recent months, daily export lifting has trended to be lower because of production problems. But both August and September export volume figures did show some improvement. For the year to date however, revenue from oil sector exports are down some 4% from one year ago.

There was some good production news in September, when crude output was at its highest monthly level of the year –2.56 million b/d average. But that was still some 500,000 b/d under the record high set several years ago. In the short term, there is no reason to expect crude oil production to return to those historic highs. Indeed it would be quite satisfactory if September’s monthly average could be sustained throughout 2013.

A big question mark is what will be the incoming Administration policy regarding the petroleum sector, including the much talked about “opening” to at least some private sector participation in petroleum.

That is only one of the question marks and challenges revolving around future oil sector developments. Others include the prospects for offshore deepwater drilling for new reserves, full fl edged shale exploitation and greater natural gas production.
All three seem to have enormous potential but realization of that potential will likely take most of this decade, which is the “best case” scenario.

As concerns private sector participation in Pemex, even just a small “opening” would require a boatload of fi scal, legal and constitutional changes. At least seven major ones, according to industry specialists.

Banamex forecasters meanwhile seem pessimistic. They are estimating oil sector export earnings of just $39.9 billion dollars next year, vs. a projected $46.8 billion in 2012. That in turn will be lower than the 2011 total of $49.3 billion. And Pemex has not shown a net profi t since 2006.

THE U.S. ECONOMIC OUTLOOK

While analyzing global economic prospects is always important for Mexico, one key question is how will the neighboring U.S. economy perform? All signs seem to point to at best moderate growth.

Fortunately, all of the principal forecasters, as of mid-October, were expecting that there will be no U.S. “fi scal cliff” as of 1/1/13.
Expectations are that there will be a “5 minutes to midnight” Administration-Congressional agreement comes December 31.
This has certainly been the case in recent years.

It may be a Band-aid approach, but it will be suffi cient –for now.

Assuming the pundits are right about averting the “fi scal cliff”, the U.S. economy is expected to perform a bit better than has been the case this year. Nothing spectacular, but not recessionary either. The U.S. economy will grow at a rate above 2%, although just barely.

For starters, the U.S. Federal Open Market Committee (FOMC) looks for a real GDP change next year of 2.5%. Not buoyant growth, but better than the rather anemic performance of 2012 (probable GDP growth of 1.7%). Unemployment is seen as coming down just a tad (7.8%) with stable infl ationary expectations (up 2.0%). However, BBVA Research economists look for a GDP increase next year of 1.8%, vs. a projected 2.1% in 2012.

The IMF is forecasting a U.S. growth rate of just under 2.2%. Banco de Mexico places it at 2.08%, according to its latest survey results.

IHS Global Insight senior macroeconomic principal Gregory Daco is a bit more optimistic than BBVA Research or Banco de Mexico forecasters. He looks for a 2.2% growth in the U.S., following a last minute “punt” to avert the “fiscal cliff”. A warning comment from Daco. “If the U.S. economy goes into recession, all other economies will go down the drain”.

One bright note for Mexico in the Daco IHS forecast. There will be further growth for U.S. new vehicle sales, on which Mexico’s automotive industry is so dependent. New light vehicle sales in that market should reach 14.8 million units, vs. a projected 2012 total of 14.2 million. The 2013 fi gure is seen as reaching 15.6 million in 2014.

But that could depend on the volatility of international oil prices. Daco forecasts that “if oil prices stay $10 dollars higher than the baseline ($100 dollars/barrel) for the full year”, it will mean a chop of up to 180,000 units in U.S. market new light vehicle sales.

But the rest of the economies can not be pushed under the carpet. The Euro zone’s severe problems, while perhaps ameliorated, have not been resolved. At least fi ve nations in the Euro zone –Spain, Italy, Portugal, Greece and Belgium– will have negative GDP numbers again in 2013. These fi ve probably will have economies in recession again in 2014. And there are forecasts that Greece could pull out of the Euro zone by mid-year.

“Strains in global fi nancial markets continue to pose signifi cant downside risks to the outlook”. That comment came recently from the U.S. Federal Open Market Committee.

There are also ongoing concerns about the 2013 performance possibilities of the “emerging market” nations. For example, Brazil will register less than 2% growth for the second year in a row. And the enormous geopolitical risks, especially in the Middle East, will not go away.

Global GDP growth next year is likely to be a very modest 2.8%, paced by close to 8% for China. Just about the same as what’s forecast for this year.

Mexico will outpace global growth. But the incoming Administration sill faces a very complex international and domestic panorama, which will continue posing multiple challenges but not without opportunities (if correctly seized) in the medium term.