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Mexico’s Monetary Policy and Economic Outlook
United States-Mexico Chamber of Commerce, California Regional ChapterLos Angeles and San Diego, October 31st - November 1st, 2019
Javier Guzmán Calafell, Deputy Governor, Banco de México*
*/ The opinions and views expressed in this document are the sole responsibility of the author and do not necessarily represent the institutional position of the Banco de México or of its Governing Board.
Monetary policy in Mexico faces a challenging situation:
A complex external environment.
A weak economic activity with a negative output gap.
Headline inflation in line with the target, but relatively high core inflation.
An increase in the perception of country risk.
A situation of high uncertainty.
2Mexico’s Monetary Policy and Economic Outlook
World economic growth and the expansion of global trade havedecelerated significantly.
Mexico’s Monetary Policy and Economic Outlook 3
Source: IMF. Source: IMF.
-15
-10
-5
0
5
10
15
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Trade Volume of Goods and ServicesAnnual % change
Real Gross Domestic ProductAnnual % change
-6
-4
-2
0
2
4
6
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
World United States Advanced Economies
-30
-20
-10
0
10
20
30
40
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
Global Vehicle Production
Global Vehicle Sales
US: Motor Vehicles and Parts Production47
48
49
50
51
52
53
54
55
56
-3
-2
-1
0
1
2
3
4
5
6
20
15
20
16
20
17
20
18
20
19
Global Industrial Production →US Manufacturing Production →← Global Manufacturing PMI: New Orders
The situation is particularly difficult in the case of industrial output, and especially inthe automobile sector.
Mexico’s Monetary Policy and Economic Outlook 4
Source: International Organization of Motor Vehicle Manufacturers and Federal Reserve.Source: CPB Netherlands, Markit and Federal Reserve.
Sales and Production of New Vehicles and PartsAnnual % change
Economic Activity Indicators Annual % change of 3-month moving average
and diffusion index with a threshold of 50
AugustSeptemberSeptember
201820183Q 2019
This has been the result to a significant extent of uncertainty, especially from globalprotectionist trends.
Mexico’s Monetary Policy and Economic Outlook 5
World Trade Uncertainty Index Index
Source: Economic Policy Uncertainty. Source: Economic Policy Uncertainty.
World Uncertainty Index 4-quarter moving average
0
25
50
75
100
125
19
95
19
98
20
01
20
04
20
07
20
10
20
13
20
16
20
19
0
50
100
150
200
250
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
Global (simple average)
Global (GDP weighted average)
3Q
Other sources of uncertainty include:
o The possibility of a sharper deceleration of world economic activity.
o The exit process of the United Kingdom from the European Union.
o The economic situation of several advanced and emerging marketeconomies.
o Problems of a political or geopolitical nature in some regions of theworld.
More specifically related to Mexico, the ratification of the tradeagreement with the US and Canada is of major importance.
Mexico’s Monetary Policy and Economic Outlook 6
As a result of the weakness of economic activity, many countries have relaxed theirmonetary policy stance, leading to easier global financial conditions. However, netportfolio capital flows to emerging market economies through this year show slightlynegative figures.
Mexico’s Monetary Policy and Economic Outlook 7
1/ Weights are based on nominal GDP. The sample includes: Canada, Eurozone, Japan, United States and United Kingdom.Source: Banco de México with data from Bloomberg and Goldman Sachs.
Weighted Reference Rate and Financial Condition Index Units, %
Capital Flows to EMEs2/
Billions of US dollars
2/ Accumulated flows from January through October 2019.Source: EPFR.
98
99
100
101
102
0.0%
0.3%
0.6%
0.9%
1.2%
Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Dec-17 Sep-18 Jun-19
Weighted Reference Rate 1/ →
← USA Financial Conditions Index
← Global Financial Conditions Index
October
34.9
-35.0
-0.062
-40
-30
-20
-10
0
10
20
30
40
Fixed Income Equity Total
In Mexico, economic growth has decelerated…
Mexico’s Monetary Policy and Economic Outlook 8
Mexico: Gross Domestic ProductAnnual % change, s.a.
s.a. / Seasonally adjusted series.*/ Preliminary data for 3Q 2019.Source: INEGI.
-15
-10
-5
0
5
10
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
Average 1994-2018
3Q 2019*-15
-10
-5
0
5
10
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
Average 1994-2018
2Q 2019
Mexico: Domestic Aggregate DemandAnnual % change, s.a.
s.a. / Seasonally adjusted series.Source: INEGI.
… mainly as a result of the evolution of investment.
Mexico’s Monetary Policy and Economic Outlook 9
Seasonally adjusted series.Source: INEGI.
Contributions to the Real GDP Annual Growth (GDP percentage points)
2018 I-2019 II-2019
GDP 1.98 0.10 0.32
Total Consumption 1.64 -0.04 0.18
Private Consumption 1.48 0.12 0.40
Public Consumption 0.16 -0.15 -0.23
Total Investment 0.12 -0.70 -1.07
Private Investment 0.15 -0.41 -0.69
Public Investment -0.02 -0.33 -0.34
Change in Inventories 0.08 0.05 -0.11
Trade Balance (Goods and Services) -0.24 0.73 0.91
In fact, the downward trend of the investment rate is a source of concern…
Mexico’s Monetary Policy and Economic Outlook 10
Investment% of GDP, s.a.
s.a. / Seasonally adjusted series.Note: Total investment rates based on both gross fixed capital formation and inventories.Source: INEGI.
s.a. / Seasonally adjusted series.Note: Public and private investment rates based on gross fixed capital formation only.Source: INEGI.
10
12
14
16
18
20
2
3
4
5
6
7
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
Public →
← Private
2Q15
17
19
21
23
25
19
93
19
94
19
95
19
96
19
98
19
99
20
00
20
01
20
03
20
04
20
05
20
06
20
08
20
09
20
10
20
11
20
13
20
14
20
15
20
16
20
18
20
19
2Q
… and more so in view of its low level as compared with other EMEs…
Mexico’s Monetary Policy and Economic Outlook 11
1/ The sample includes: Brazil, Chile, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Peru, Poland, South Africa, Thailand and Turkey.Note: Figures may vary from INEGI statistics due to methodological differences.Source: IMF.
Total Investment% of GDP
0
5
10
15
20
25
30
35
40
45
50
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
Range Mexico EMEs Average 1/
… and its implications for potential growth, since it combines with decliningproductivity. These trends should be reversed to take advantage of still-favorabledemographic perspectives.
Mexico’s Monetary Policy and Economic Outlook 12
Note: The age dependency ratio is the ratio of dependents (people younger than 15 or older than 64) to the working-age population (those ages 15-64).Source: CONAPO.
Age Dependency Ratio % of working-age population
PopulationAnnual % change
Source: CONAPO.
40
50
60
70
80
90
100
110
195
0
195
5
196
0
196
5
197
0
197
5
198
0
198
5
199
0
199
5
200
0
200
5
201
0
201
5
202
0
202
5
203
0
203
5
204
0
204
5
205
0
-1
0
1
2
3
4
5
19
51
19
56
19
61
19
66
19
71
19
76
19
81
19
86
19
91
19
96
20
01
20
06
20
11
20
16
20
21
20
26
20
31
20
36
20
41
20
46
15-64 years Rest
Despite the weakness of economic activity, unit labor costs haveincreased.
Mexico’s Monetary Policy and Economic Outlook 13
Productivity and Unit Labor Costs for the Economy1/
Annual % change, s.a.
s.a. / Seasonally adjusted series.1/ Labor productivity based on worked hours. Source: Banco de México with data from INEGI.
-10
-8
-6
-4
-2
0
2
4
6
I-2
013
I-2
014
I-2
015
I-2
016
I-2
017
I-2
018
I-2
019
Productivity Real Compensation Unit Labor Cost
2Q
II-2
01
9
This combination of factors has been reflected in the evolution of the labor market.
Mexico’s Monetary Policy and Economic Outlook 14
Underemployment Rate% of working population, s.a.
s.a. / Seasonally adjusted series.Source: IMSS.
s.a. / Seasonally adjusted series.Source: INEGI.
5
7
9
11
13
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
TrendSeptember
Formal Sector WorkersAnnual % change, s.a.
1
1.5
2
2.5
3
3.5
4
4.5
5
20
13
20
14
20
15
20
16
20
17
20
18
20
19
September
Economic activity is expected to recover gradually in 2020.
However, a negative output gap is anticipated for this period.
In addition, the economy faces a number of downside risks:
o A sharper-than-expected deceleration of external economic activity,especially in the United States.
o An increase in global protectionist trends.
o Delays in the ratification of the USMCA.
o A further weakening of global industrial production and theautomobile sector.
o A downgrade of sovereign or Pemex credit ratings.
o Persistent uncertainty related to domestic factors.
o A continued downward trend in productivity.
Mexico’s Monetary Policy and Economic Outlook 15
Headline inflation has declined faster than anticipated.
Mexico’s Monetary Policy and Economic Outlook 16
0
1
2
3
4
5
6
7
8
2015 2016 2017 2018 2019 2020 2021
General Quarterly Average Banco de México's Forecast *
Variability Interval
October**
Consumer Price IndexAnnual % change
*/ As of August 2019 (latest).**/ Data through the first fortnight of the month.Source: Banco de México and INEGI.
2
3
4
5
6
2015 2016 2017 2018 2019
October*
However, this is explained by the evolution of non-core inflation. Core inflationremains relatively high, but is beginning to decline.
Mexico’s Monetary Policy and Economic Outlook 17
CPI: Core InflationAnnual %
*/ Data through the first fortnight of the month.Source: INEGI.
July August September October*
3.82 3.78 3.75 3.68
Core inflation should continue to fall in coming months, in view of theweakness of economic activity and as some of the supply shocks thataffected it in previous months vanish.
The Banco de México projects that both headline and core inflation willconverge to the 3 percent target during the second half of 2020.
This is subject to risks in both directions.
o The evolution of the exchange rate, wages and public finances,among other factors, may exert upward pressures on prices.
o A negative output gap, in a context of downside risks for economicactivity, is the main force in the opposite direction.
Mexico’s Monetary Policy and Economic Outlook 18
Inflation expectations for 2019 have fallen but remain above the Central Bank’sprojections for 2020 and for the long term.
Mexico’s Monetary Policy and Economic Outlook 19
Consumer Price IndexAnnual % change
1/ As of August 2019 (latest).2/ As of the second fortnight of October 2019 (latest).3/ As of October 2019 (latest).Source: Banco de México and Citibanamex.
2.50
2.75
3.00
3.25
3.50
3.75
III IV I II III IV I II Next 2-4 Years
Next 5-8 Years
2019 2020 2021 Long Term
Forecast by Banco de México 1/
Analysts' Expectations (Citibanamex Survey) 2/
Analysts' Expectations (Banco de México Survey) 3/
Headline Core
2.50
2.75
3.00
3.25
3.50
3.75
III IV I II III IV I II Next 1-4 Years
Next 5-8 Years
2019 2020 2021 Long Term
Forecast by Banco de México 1/
Analysts' Expectations (Citibanamex Survey) 2/
Analysts' Expectations (Banco de México Survey) 3/
Mainly as a result of external developments, the evolution of domestic financialmarkets has improved in recent weeks.
Mexico’s Monetary Policy and Economic Outlook 20
Exchange RateMexican pesos per dollar
Source: Banco de México. Source: Banco de México, Proveedor Integral de Precios and Federal Reserve.
1.50
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Jan-19 Feb-19Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19
← Mexico: Target Rate
← Mexico: 1-month rate
← Mexico: 10-year rate
US: 10-year rate →18.50
18.75
19.00
19.25
19.50
19.75
20.00
20.25
20.50
Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19
Interest Rates%
The economy continues to face a situation of high uncertainty andimportant risks.
One rating agency downgraded the sovereign rating in mid-2019. Themain arguments were a combination of possible spillovers from Pemex’sworsening credit profile to public finances, a weak macroeconomicoutlook, trade tensions, domestic policy uncertainty and ongoing fiscalconstraints.
In addition, the other two main agencies have kept the sovereign ratingwith a negative outlook. Moreover, the financial situation of Pemex hasgiven rise to concern.
Mexico’s Monetary Policy and Economic Outlook 21
A number of actions recently taken by the government have alleviatedPemex’s liquidity problems, with a positive impact on market indicators.
Mexico’s Monetary Policy and Economic Outlook 22
2/ As measured by Pemex bond interest rate minus the government bond interest rate.Source: Bloomberg.
1/ This refers to 5-year Credit Default Swaps.Source: Bloomberg.
-50
0
50
100
150
200
250
300
350
400
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
No
v-1
8
Jan
-19
Mar
-19
May
-19
Jul-
19
Sep
-19
No
v-1
9
30 years 3 years
150
200
250
300
350
400
Jan
-18
Feb
-18
Mar
-18
Ap
r-1
8
May
-18
Jun
-18
Jul-
18
Au
g-1
8
Sep
-18
Oct
-18
No
v-1
8
Dec
-18
Jan
-19
Feb
-19
Mar
-19
Ap
r-1
9
May
-19
Jun
-19
Jul-
19
Au
g-1
9
Sep
-19
Oct
-19
Market Indicators of Credit Risk1/
Petróleos Mexicanos
Interest Rate Spread2/
However, the company’s long-term challenges remain.
One of the main risks derives from the possibility of a rating downgrade byone of the agencies, since this would reduce it below investment grade.
This agency has noted that a downgrade of Mexico’s sovereign A3 rating, alower-than-expected government support to the company, significantincreases in Pemex’s net debt, an operational performance below projectionsor a decrease in reserves or reserve replacement, among other factors, canresult in a downgrade.
At the same time, this agency considers that capital spending planned byPemex for 2019 and 2020 is well below the amounts needed to replacereserves.
Therefore, the possibility of a downgrade is significant, with the consequentrisks for the sovereign rating and financial markets in Mexico.
Mexico’s Monetary Policy and Economic Outlook 23
Under these circumstances, monetary policy continues to face a situationcharacterized by contrasts.
A relaxation of monetary policy in the United States.
Weak economic activity in Mexico.
Importance of fostering an orderly convergence of inflation to the target.
Relatively high core inflation.
Inflation expectations above the target.
An increase in the perception of country risk.
A situation of high uncertainty.
Mexico’s Monetary Policy and Economic Outlook 24
The anticipated convergence of inflation to the target in 2020 and the easingof monetary policy in the United States and other countries, have allowed areduction in the reference rate in Mexico from 8.25 to 7.75 percent.
Looking forward, in view of the risks faced, a cautious monetary policy isfundamental, with any adjustments subject to new information and evolvingcircumstances.
The atmosphere of uncertainty prevailing in Mexico is to an important extentlinked to domestic factors.
The implementation of decisive actions to tackle this situation would not onlyopen margins of maneuver for monetary policy, but also deal with one of thecentral factors behind the complex evolution of the economy.
In addition, it is necessary to undertake any additional economic andinstitutional measures required to increase productivity and, in general,potential growth.
Mexico’s Monetary Policy and Economic Outlook 25
