The Mexican Economy in the First Semester of 2012

Mexico's macro-economy performed quite well in the first six months of the year, with most indicators pointing upwards. Considering the general distress signals from the global markets, ranging from Greece and Spain to Argentina and Brazil, Mexico's first semester performance has to be considered as successful.

Official first quarter Gross Domestic Product (GDP) was up 4.6% in real terms (constant 2003 pesos). This included a growth rate of 5.5% for manufacturing and a surprising –and welcome—upturn of 6.3% in the drought-plagued agriculture and livestock sector. In April, manufacturing activity rose 4.65% from the like month last year.

Second quarter GDP figures will not be known before mid-August, but a year-onyear growth of 4%, in real terms, doesn't seem remote.

That would translate into first half real GDP growth of above 4%. For comparison purposes only, probable first half real GDP growth for the U.S., Brazil and Argentina will be half that. Even less for the Euro zone nations.
While the economy showed very positive growth signs through April, these signs were showing some wariness as of the May-June period. Domestic and export demand seemed to be slackening a bit, due to such diverse factors as the pending Presidential elections in Mexico, the international (and therefore, peso) jitters generated by the Euro zone morass and very mixed macroeconomic signals from the U.S.

As concerns the international outlook, Banco de Mexico in June indicated it considered the European-provoked balance of risks for the country appeared to have worsened. In its Monetary Policy announcement recently, the central bank emphasized the lack of definite monetary and political/economic solutions to the Euro zone problems. At the same time, it noted the less-than-dynamic growth of the U.S. economy, particularly the weakened rate of new jobs creation.

While Banco de Mexico in its recent document kept unchanged its balance of risks as far as inflation goes, the report reflected greater uncertainty because of peso depreciation (and volatility) and greater probability of a relative weakening in domestic and export demand.

There were a number of pluses and takeaways in May.

Retail sales at self-service and department stores were up a healthy 12.3% (all stores), buoyed by good Mother's Day sales. This is a year-on-year number, reported by ANTAD, the sector's trade association. The comparison April/April increase was 7.8%.

On another front, new car sales in May were up 16.9% from May of 2011. That figure covers only domestic market sales –an important bell-weather statistic.

New car production in May rose 2.8% y-o-y to 228,048 units, according to the OEM industry's trade association AMIA.

Meanwhile, the number of jobholders registered with the Mexican Social Security Institute rose by 68,410 in May, vs. 53,464 in May of last year. 
For the January-May period, the cumulative increase in Institute-covered jobs was 411,859, up almost 85,000 from the like 5 months last year.

On the downside, retail inflation in May was at an annualized rate of 3.85%, vs. an end-April annualized rate of 3.41%. The primary cause was higher food prices.

Perhaps significant was the May Index of Consumer Confidence (CCI). Said index, a monthly survey by Banco de Mexico and the National Statistics and Geographic Institute (INEGI), stood at 96.3 (January 2003=100), vs. 89.3 in May of last year. But it was below the 97.2 reading for April.

RECENT TRENDS

Significant for Mexico in view of the intensified global markets turbulence in the May-June period was the successful launch of two new government debt issues, both denominated in yen (Samurai bonds).

Interestingly enough, in promoting the successful placement of the Samurais, the Secretariat of Finance forecast a year-end exchange rate of 12.64 pesos to the dollar, whereas its previous forecast earlier in the year pegged the peso/dollar rate at 12.80 to one.

Also worth noting was the relatively small rate of peso depreciation, compared with other currencies. While the peso did depreciate more steeply in May, this trend slowed noticeably in June, as the peso leveled off in its daily fluctuations to the dollar.

As can be seen in the attached table, cumulative peso depreciation in the January- May period was only 2.7%. That was a good performance when considering the severe global economic and monetary uncertainties, fueled by Greece and Spain.

Meanwhile, Banco de Mexico international monetary reserves remained at an all-time high, surpassing $155.4 billion dollars by mid-June, this compared with a year-end 2011 level of $142.5 billion.

One important sign of confidence in peso stability came in late May, when volatility infected the exchange market given the news from Greece and Spain. On only two occasions –May 23 and May 31-- was the daily exchange rate variation severe enough to trigger the auction mechanism of Banco de Mexico.

That mechanism calls for the Central Bank to sell up to $400 million dollars per day in reserves when the daily downward variation exceeds 2%. But in those daily trading sessions, on neither occasion was this ceiling reached. The reserves auction of May 23 amounted to $258 million and that of May 31, just $107 million.

As of early June, the exchange rate stabilized and by mid-June had dipped below 14 pesos to the dollar (13.80 on June 22).

In the meantime, there has been a solid upturn in foreign purchases of Mexican peso bonds. That represents a vote of confidence, just the reverse of monetary situations in Greece and Spain. These purchases totaled a reported $5 billion dollars (in pesos) in the March-May trimester.

A RESPITE-FOR NOW

Mexico –and the world—got an apparent breather with the results of the Greek Parliamentary elections of June 17. At least a short-term breather. The elections outcome in Greece seemed to indicate that at least for now there will be no "Grexit" from the wounded Euro zone.

This belief was evident in the first peso trading day after the Greek elections. The 48- hour interbank rate gained strength, to close at 13.85 to the dollar. It then appreciated to a 13.69 exchange rate position one trading session later. Further helping: some apparent success in structuring a revamped integrated European banking and monetary system. That was announced at the G20 meeting. At least for the near term it would seem that the biggest threat –historically—to the whole Euro system –has been averted.

At the height of the Greece Spain-Euro zone crisis, Mexico's monetary, financial and foreign trade policies and results received a welcome –and neutral—pat on the back. The "thumbs up" report came from Richard Frasier, president of the Federal Reserve Bank of Dallas, in an article published in The Financial Times of London recently.

Dr. Frasier, in his comments, noted that as a result of these policies, Mexico is able to quickly market 20-to 30-year bonds in the international markets. Back in 1995, in contrast, "no one would buy any (bonds) of more than 27 days". Meanwhile, Mexico's debt profile is 27% of GDP, whereas in the U.S. it is "98% and keeps on growing". Also, by comparison, the Dallas Fed president noted that the public sector budget deficit is 2.5% of GDP, vs. an 8.6% ratio in the U.S.

Those highlights were contained in Dr. Frasier's much more extensive article in the FT, in which he lauded Mexico's "virtuous" financial and monetary evolution of recent years "which we (in the U.S.) have not wanted to see and do not see".

PROSPECTS FOR THE SECOND HALF OF 2012

Coming up to the July 1 Presidential elections, there was a mixed outlook for the Mexican economy in the second semester of this year. But the general consensus was that the rate of growth in the second half will be somewhat lower than in the first six months.

The international outlook certainly does not seem favorable, particularly given the sluggishness of the U.S. economy and the totally clouded Euro crystal ball.

For the past few years, one of the best "forecasters" –at least for the short-term— has been the monthly Banco de Mexico survey of expectations by 29 private sector economic specialists. The most recent survey as of this writing wastaken in mid-May, when the storm clouds darkened the whole Euro zone affair, combined with conflicting pre-election preference polls results in Mexico.

In summary fashions, the survey results showed the following:

• Real Gross Domestic Product in 2012 will increase by 3.72% (up from 3.62% in the April survey);
• A 6% increase in private sector fixed investment (6.25% in April);
• By year's end 2012, an exchange rate of 13.03 pesos per dollar (this had been 12.96 in April);
• An annual rate of retail inflation of 3.65% (down from 3.68% one month earlier); and
• A foreign direct investment flow of $19.86 billion dollars ($19.87 billion in April).
  
  Meanwhile, Banco Nacional de Mexico released the results of its monthly survey on the peso/dollar exchange rate at the end of this year. The June survey, taken just when the Euro uncertainty cauldron was at full boil, is with economists and exchange rate specialists at Banamex and other major commercial banks or representative offices in Mexico.
  
  As can be seen in the table below, the responses were in a substantial range, but the non-weighted average for year's end was 12.94 pesos to the dollar.