PANORAMA MEXICO’S ECONOMY: MORE DIFFICULT TIMES AHEAD

PANORAMA MEXICO’S ECONOMY: MORE DIFFICULT TIMES AHEAD
Mexico’s economy has been increasing above the Latin American average since 2012. While the region contracted by 0.5 % in 2015, Mexico, its second largest economy, grew by 2.5 %. Looking ahead however, the outlook is less optimistic. Coface forecasts that the country’s GDP will grow by 1.6 % in 2016 and 1.5 % in 2017.
A less supportive global environment is the key rationale behind this expected slowdown. The US presidential elections have created volatility in the Mexican market, due to its strong economic dependence on its northern neighbour. The less open approach to trade shown by the presidential andidates is also threatening the future of of trade relations. Beyond this political issue, Coface expects that the US economy will continue to slow in 2017 (to record +1.5%, following +1.6% in 2016). Against this backdrop, along with lackluster industrial activity in the US, the Mexican manufacturing sector is likely to disappoint again. Moreover, the slump in oil production, with low international prices, continues to represent a major concern on the fiscal front. Public debt rose to 42.3 % in 2015, up from 38.3 % in 2013, and is expected to reach 45 % by the end of this year.
This deteriorating macroeconomic outlook is clearly having repercussions at micro level. Momentum is therefore slowing in private consumption-related sectors. Coface is downgrading its risk assessment for the country’s retail and automotive sectors, while commodity dependent sectors remain at risk.

The economy lost steam in the second quarter of 2016.

According to national statistical institute Inegi, seasonally adjusted activity decelerated to 1.5 % in 2Q2016, down from 2.5 % y/y reported in the previous period (chart 1). On a quarter on quarter basis, GDP dropped by 0.2 %, marking the first contraction since 2013. Industry, which shrank by 1.5 q/q, was the main contributor to this weak result, due to the fall in oil production and challenges faced by manufacturing and construction industries. The services segment continued to lead growth, backed by consistent consumption indicators. Inflation remains low (at 2.97 % for the 12 months accumulated until September 2016), credit has observed rapid growth (recording 16.9 % YoY as at July 2016) and both the labour market and remittances are solid. Nevertheless, the services sector did slow during the period, to a growth rate of 2.4 % YoY, down from 3.4 % for 1Q2016.

Income fundamentals are expected to gradually loose strength.

The sharp depreciation that the Mexican peso has experienced this year, leading to higher import prices and inflation, has reduced consumer purchasing power. According to the Bank for International Settlement (BIS), in a comparison of 61 currencies, the Mexican peso reported the third largest negative variation during the period from January to September 2016 (-12 % YoY). It stood only behind the British pound and the Argentinean peso (both with -14 %). This, combined with the recent recovery in oil prices, has put pressure on prices, driving them up from the historical low of 2.1 % recorded in December 2015, to 3.0 % in September 2016 (chart 2). The dissipation of base effects related to telecom reforms (which reduced tariffs) and the potential acceleration in the liberalisation of gasoline prices (proposed in the 2017 budget) could also drive up inflation. Furthermore, there is a growing probability that the United States will raise interest rates in December. Mexico’s Central Bank (Banxico) is thus expected to continue monetary tightening. At the end of September, Banxico raised interest rates for the third time in 2016 - by 50 basis points up to 4.75 %. According to the Central Bank, these increases in interest rates have reduced the credit available for investment and consumption. The rising cost of credit has negatively affected credit demand, while credit supply has shrunk due to higher risks of portfolio recovery. Within this context, consumer confidence has been deteriorating for the last three months (falling from 93.4 in June, to 84.1 % in September).