PANAROMA THE MEXICAN ECONOMY FACES HEADWINDS

Since the signature of the Pacto por Mexico in December 2012, an agreement struck by the three main political parties, the country has witnessed a variety of reforms. President Peña Nieto was efficient in securing cross-party support and big improvements were made
in 2013. The government obtained approval for a landmark energy reform, bringing to an end the 75-year old monopoly of state-owned Pemex and, by opening the oil and gas industries to private investment, freed up the labor market. It has also introduced competition in the telecoms sector. However sluggish growth was reported in 2013 and during the early part of 2014. The upturn in the Mexican economy began in the 2nd quarter of 2014 and GDP expanded by 2.1% last year. The pick-up in growth has been partly
driven by stronger exports to the United States. Nevertheless, the freefall in oil prices in recent months has raised worries that the energy reform could be impacted, as could the government´s financials. Against this backdrop of headwinds, Coface expects moderate growth ahead (+3.1% in 2015). In this edition of the Panorama we will discuss the current impact of lower oil prices vs Mexican dependence on oil revenues. The overall current macroeconomic environment will also be presented. Secondly we will assess the outlook for the country´s main sectors. This section includes our Mexican sector barometer, which shows the financial performance of companies in different industries, coupled with Coface´s payment experience. The third section focuses on two major industries, illustrating the headwinds the Mexican economy is facing at the moment in the automotive and steel sectors.

CURRENT ECONOMIC ENVIRONMENT 

Mexican activity has been profiting from the economic vitality of the United States, thanks to its preferential trade access and geographical proximity. In addition, manufacturing exports have benefitted from the lower peso. Between September 2014 and February 2015, the peso depreciated by 13.5% and it is expected to weaken further as US monetary policy normalizes its stance. The upturn in the Mexican economy began in the 2nd quarter of 2014 and the country’s GDP expanded by 2.1% last year (according to officials). Agriculture was the fastest expanding sector, at 3.1%. Industry was the weakest, at only 1.8%, due to the contraction (2.2%) of the mining sector. Manufacturing showed growth (3.7%), as did services, which rose by 2.2%. Despite the recent drop in oil prices, the impact on the economy should be manageable in the short term. Admittedly government finances are very dependent on the
oil industry, which represents one-third of total fiscal income, but thanks to a portion of oil revenues that has been saved in stabilization funds; the need for a drastic reduction inpublic spending does not seem to be necessary. However, the government has announced a preemptive measure that consists of cutting the national budget by around 0.7% of GDP in 2015, in order to avoid raising taxes or adding further debt. Inflation closed 2014 at 4.1%, just above the Central Bank’s target range (2-4%). Inflation is expected to abate, thanks to slower rises in prices for food and oil products. February data confirms it is the second consecutive month in which annual inflation was within the target range (3%). However, since the Fed announcement anticipating an increaseof its main policy interest rate in 2015, Mexico will experience a period of volatility, reflected in particular by the depreciation of the local currency against the dollar. Thus inflationary pressures may accelerate if the peso depreciates further as a consequence of the strengthening of the dollar. Aweaker peso could put upwards pressure on prices, given the impact on import costs - as a large share of consumer goods is produced abroad. Despite lower oil prices, the economic outlook is improving somewhat. Coface forecasts GDP growth of 3.1% in 2015, mainly thanks to the performance of the manufacturing sector which will benefit from rising US demand - especially from the car sector. Consumption remains stagnant, but an improved labor market and increased remittances from Mexicans working in the United States will probablylead to a recovery. However the increase in private capitalinflows expected, following the deregulation of the energy market, could be compromised if the drop in oil prices persists - especially for deep-water and shale