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May 18, Special Breakfast Roundtable  – Federico Rubli Kaiser, Banco de Mexico
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May 18, Special Breakfast Roundtable – Federico Rubli Kaiser, Banco de Mexico

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Thanks to PDN member, Dr. Robert W. (Bill) Gilmer, our members had the opportunity to hear directly from a top official of the Mexican equivalent of the U. S. Federal Reserve. In light of recent ...

Thanks to PDN member, Dr. Robert W. (Bill) Gilmer, our members had the opportunity to hear directly from a top official of the Mexican equivalent of the U. S. Federal Reserve. In light of recent developments on both sides of the border and our organization’s new responsibilities, this is a timely and worthwhile presentation. You may especially want to note:

- Slide 9 which displays Public Debt and Fiscal Deficits as a Percent of GDP. Note how the U. S. compares to Mexico.
- Slides 27 – 29 which provide the economic outlook for Mexico.

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    May 18, Special Breakfast Roundtable  – Federico Rubli Kaiser, Banco de Mexico May 18, Special Breakfast Roundtable – Federico Rubli Kaiser, Banco de Mexico Presentation Transcript

    • The Mexican Economy: Recent Developments and Outlook Dallas FED Federico Rubli Kaiser*/ The Paso del Norte Group External Relations Director El Paso, Texas Banco de México May 18, 2010 frubli@banxico.org.mx */ The opinions expressed may not necessarily coincide with the institution’s official views.
    • Contents 1. The World Economy 2. The Mexican Economy 3. Final Remarks 4. Appendix: Mexico’s Exchange Rate
    • Gross Domestic Product1/ Balance of Bank Credit to the Non- (Annualized Quarterly Financial Private Sector % Change ) (Annual % Change) 12 15 Forecast 10 8 10 6 4 5 2 0 -2 0 -4 -6 United States 2/ World -5 -8 Eurozone 3/ Advanced -10 Japan 4/ Emerging -12 -10 Ene-08 Ene-09 Ene-04 Ene-05 Ene-06 Ene-07 I 2005 I 2006 I 2007 I 2008 I 2009 I 2010 Jul-08 Jul-09 Jul-04 Jul-05 Jul-06 Jul-07 III 2005 III 2006 III 2007 III 2008 III 2009 III 2010 1/ Adjusted for purchasing power parity. 2/ Commercial, industrial, & consumer loans, and mortgages. Source: IMF. 3/ Loans to the non-financial private sector. 4/ Total loans to the private sector. Source: Federal Reserve, ECB and Bank of Japan. 3
    • Expected Real GDP Growth in 2010 for Key Bank Credit to the Private Sector in Emerging Economies Emerging Economies (% Annual Change) (6-month Annualized % Change1/) 12 60 April 09 Asia exc. China July 09 China 50 10 Medio Oriente y África October 09 Europa January 10 América Latina 40 8 30 6 20 4 10 0 2 -10 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Dic-04 Dic-05 Dic-06 Dic-07 Dic-08 0 Brasil Rusia India China México Source: IMF, World Economic Outlook (WEO) April 2009 and 1/ Versus previous six months, elevated to the fourth. October 2009, and WEO Update July 2009 and January 2010. Source: IMF, International Financial Statistics. 4
    • The ongoing expansion of the world economy, led by EME, is expected to continue World Real GDP Growth Projections (%) 2009 2010 2011 World -2.1 3.2 3.3 USA -2.4 3.2 3.1 Japan -5.2 2.2 1.6 Euro Zone -4.0 1.2 1.5 France -2.2 1.4 1.7 Germany -5.0 1.6 1.7 UK -4.9 1.3 2.3 Asia 1.5 5.7 5.2 China 8.7 9.9 9.0 Latin America -1.9 4.2 3.8 Brazil -0.2 5.8 4.5 Mexico -6.5 4.2 3.5 Source: Consensus Forecasts, April 2010. 5
    • Expansionary policies in advanced countries entail the risk of capital flow reversals from EME Accumulated flows from funds dedicated to emerging markets (billion US dollars) Shares Debt 2007 9 2008 50 6 2009 3 30 2010 0 10 -3 2007 -6 -10 2008 -9 -30 2009 -12 2010 -50 -15 Apr Ags Nov Feb Jun Jul Dec Jan Mar May Oct Sep Apr Ags Nov Feb Jun Jul Dec Jan Mar May Oct Sep Source: Emerging Portfolio Fund Research. Source: Emerging Portfolio Fund Research. 6
    • …which might materialize as a result of exit strategies from their stimulus monetary and fiscal measures Fiscal Balance 1/ Public Debt 2/ (% of GDP) (% of GDP) 2 120 Forecast Forecast 0 100 -2 80 -4 60 G-20 -6 40 Advance economies G-20 Emerging economies -8 Advance economies 20 Emerging economies -10 0 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 1/ G-20 countries. 2/ G-20 countries. Source: IMF. Source: IMF. 7
    • Mounting fiscal pressures are especially evident in some European nations Credit Default Swaps (CDS): Selected Public Debt 1/ countries (% of GDP) (basis points) 140 Portugal Ireland Portugal 900 Forecast Italy Greece Ireland 800 120 Spain Italy 700 Greece 100 600 Spain 500 80 400 300 60 200 40 100 0 20 Sep-09 May-09 Jul-09 Mar-10 May-10 Nov-09 Jan-10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1/ Takes into account the latest stability programs but Portugal. Source: Bloomberg. Source: European Commission. 8
    • Public debt and fiscal deficits as a % of GDP, Maastricht criteria, 2010 targets Source: Fitch, UBS WMR, February 2010 9
    •  In sum, the expected scenario for the global economy is not free of risks:  Possible effects of withdrawing fiscal and monetary stimulus: • The vulnerability of the recovery. • Effects on interest rates of the withdrawal of monetary stimulus. • The need for fiscal consolidation in advanced-economy countries. →Capital flows to emerging economies.  Additional problems in case carry trade positions abruptly unwind. 10
    •  In sum, the evolution of the United States in general shows hopeful signs, but is not free of risk and uncertainty:  Doubts that the recovery is sustainable and risk of a new slump.  Badly timed monetary stimulus exit strategies.  The beginning of a phase of chronic fiscal deficits.  Reluctant reactivation of bank credit, particularly mortgages and consumer loans.  Lackluster creation of lost jobs (possible “jobless recovery”). 11
    • Contents 1. The World Economy 2. The Mexican Economy 3. Final Remarks 4. Appendix: Mexico’s Exchange Rate
    • Private sector analysts foresee a gradual recovery of the Mexican economy Mexico: Real GDP Projections (percent change) Blue Chip Consesus Forecasts Banco de Mexico's Survey Brokerage firms* 4.7 4.2 4.2 4.1 4 3.5 3.5 3.6 3.5 3 2 1 0 2010 2011 Source: Blue Chip, Consensus Forecasts, Banxico’s survey and brokerage firms. 13 */ Deutsche Bank, Goldman Sachs, JP Morgan, Merril Lynch y Morgan Stanley.
    • Mexico is already benefitting from a stronger US industrial activity Mexico: Real GDP Growth US and Mexico: Manufacturing Production (%) (annual growth; %; 3-month moving average) 4 Mexico 2.5 9 2.0 U.S. 2 6 0 3 0 -2 -2.3 -3 -4 Quarterly change* -6 -6 -6.1 -9 Annual change -8 -12 -15 -10 -18 -12 Sep-08 Sep-09 Mar-08 May-08 Jul-08 Mar-09 May-09 Jul-09 Mar-10 Nov-08 Jan-09 Nov-09 Jan-10 I II III IV I II III IV I II III IV 2007 2008 2009 */ Seasonally adjusted. Source: INEGI and US Federal Reserve. 14 Source: INEGI.
    • The business sector is expecting that the Mexican economy will continue to grow Mexico: Purchasing Managers’ Index (seasonally adjusted) Expanding 55 50 Contracting 45 40 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Sep-04 Dec-04 Sep-05 Dec-05 Sep-06 Dec-06 Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Dec-09 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: INEGI. 15
    • The main driver of the Mexican rebound has been the external sector, notably automotive sales Non-Oil Exports Vehicle exports from Mexico and (annual % growth; seasonally adjusted) Sales in the United States (thousands of units per month, s.a.) 30 160 20 140 120 10 100 0 80 -10 60 Exports -20 40 Sales of vehicles in the United States produced exclusively in Mexico -30 20 Mar-06 Jul-06 Mar-07 Jul-07 Mar-08 Jul-08 Mar-09 Jul-09 Mar-10 Nov-06 Nov-07 Nov-08 Nov-09 Mar-06 Jul-06 Mar-07 Jul-07 Mar-08 Jul-08 Mar-09 Jul-09 Mar-10 Nov-06 Nov-07 Nov-08 Nov-09 Source: Banco de México. Source: AMIA y Bloomberg. 16
    • There has been some geographic diversification of exports Non-oil Exports to Different Markets (%) Share Annual change, 2010 2010 2004 January February March* Jan-Mar Jan-Mar Total 100.0 100.0 20.7 26.8 35.2 28.1 US 88.7 79.7 18.6 25.4 32.4 26.0 Automotive 23.0 21.4 100.7 78.7 69.3 80.3 Other 65.7 58.4 3.3 12.6 22.9 13.5 Rest of the world 11.4 20.3 29.5 32.5 47.8 37.2 Automotive 2.1 4.5 88.0 48.6 95.3 77.0 Other 9.3 15.8 19.1 29.0 37.4 29.0 * Preliminary data Source: Banco de México. 17
    • However, recent data confirm the continued weakness of private investment, Private and Public Investment Imports (2007=100; seasonally adjusted) (annual growth, moving average 3-month%) 120 15 Private Public 0 110 -15 100 -30 Total Consumer goods 90 -45 Intermediate goods Capital goods -60 80 Jul-08 Jul-09 Nov-08 Nov-09 Sep-08 Ene-09 Sep-09 Ene-10 Mar-08 May-08 Mar-09 May-09 Mar-10 I II III IV I II III IV I II III IV I II III IV 2006 2007 2008 2009 Source: INEGI. Source: Banco de México. 18
    • Feb-07 Apr-07 Jun-07 Aug-07 Source: INEGI. Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 … private consumption Aug-08 Oct-08 Retail Sales Dec-08 Feb-09 Apr-09 (2007=100; seasonally adjusted) Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 94 96 98 100 102 19
    • … as well as the construction sector Industrial Production, Manufacturing Production and Construction (2003=100; seasonally adjusted) Construction (constant pesos) Share Annual var.% 124 2009 2009 Total 100.00 -6.34 120 Public Building 9.53 22.07 Private Residential Building 26.27 -16.62 116 Private Non-Residential Building 12.14 -28.63 Other Builiding 52.06 3.2 112 Private 10.46 -25.95 108 Industrial production Public 41.60 14.55 Source: INEGI. 104 Manufacturing 100 Construction 96 Jul-06 Jul-07 Jul-08 Jul-09 Nov-06 Nov-07 Nov-08 Nov-09 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: INEGI. 20
    • Family remittances from the US continue to fall, mainly as a result of employment losses in that country Family Remittances and Family Remittances US employment in the construction sector (2006=100; seasonally adjusted) (annual change, %) 120 US Dollars 20 Constant pesos 110 10 0 100 -10 Family remittances 90 -20 US Employment in Construction 80 -30 -40 70 Mar-05 Jul-05 Mar-06 Jul-06 Mar-07 Jul-07 Mar-08 Jul-08 Mar-09 Jul-09 Mar-10 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: Banco de México. 21
    • … while international travel has not yet recovered International Travel International Travel (annual change, %) (million travelers) 10 Visitors to Mexico 10 Mexicans travelers abroad 0 9 -10 -20 Revenues 8 -30 Expenditures -40 7 -50 Sep-07 Sep-08 Sep-09 Mar-07 Jun-07 Mar-08 Jun-08 Mar-09 Jun-09 Mar-10 Dec-07 Dec-08 Dec-09 6 2006 2007 2008 2009 *2009 *2010 Source: Banco de México. * January-March. 22
    • Despite a well-capitalized banking system, Capital Adequacy Index: Banking System Billion constant peso Percent (2009) 500 Tier 2 (left) Tier 1 (left) 17 400 Capital Adequacy Index (right) 16 300 15 200 100 14 0 13 *2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 * Until February. Source: Banco de México. 23
    • … adjustment to the recent crisis has implied that loans positive impact on activity will take time Commercial Banks’ Credit Adjusted Delinquency Rate*/ (%, real annual change) (%) 24 Firms 30 Consumption 20 Housing 20 Total 16 10 12 0 Consumption 8 -10 Housing Firms -20 4 Total -30 0 Jun-07 Jun-08 Jun-09 Dec-06 Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Dec-09 Mar-07 Mar-08 Mar-09 Sep-07 Sep-08 Sep-09 Feb-10 Mar-07 Jun-07 Mar-08 Jun-08 Mar-09 Jun-09 Mar-10 Dec-07 Dec-08 Dec-09 */ The Adjusted Delinquency Rate is defined as the quotient of the sum of the direct non-performing loan portfolio plus charges or losses taken by the banks in the previous 12 months, divided into the sum of the total loan portfolio plus those charges or losses. 24
    • Finally, public finances remain relatively solid Public Sector Balance Duration and Yield of (% of GDP) Government Securities Average maturity Economic Balance (left) 4 PSBR 2,200 45 3 Primary Balance Implicit interest % (6-month moving average) rate 40 2 1,950 (right) 35 1 1,700 0 30 1,450 Days -1 25 1,200 -2 20 950 -3 15 -4 700 10 -5 450 5 -6 200 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Until March * Source: Ministry of Finance Source: Bank of Mexico 25
    • … although, the dependence of public sector revenues from oil calls for further reforms Extraction of Crude Oil and, Volume of Oil Oil Revenue Exports: 1995-2015 (% of total Federal Government income) (thousand barrels per day) 45 4,000 40 3,500 35 3,000 30 25 2,500 20 2,000 Forecast 15 1,500 10 Crude oil output 1,000 5 Oil-export volume 0 500 2011 1995 1997 1999 2001 2003 2005 2007 2009 2013 2015 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 Source: Ministry of Finance. Source: PEMEX 26
    • Economic Outlook 2010  Growth in 2010: The external sector  Domestic demand:  In 2010 employment and consumption will improve but at a slow pace.  Inflexion point for employment.  Remittances in pesos have not decreased.  Imports of consumption goods are recovering.  Domestic automobile sales are increasing.  Consumer confidence recovered in January but is still weak.  Consumer credit is still falling but has stabilized.  As a result:  Retail sales growth will be slow and moderate; domestic demand will thus show slow recovery but will eventually catch up to the external sector. 27
    • Forecasts Gross Domestic Product Number of Workers Insured Current Account (Annual % Change) by the IMSS (% of GDP) (Millions) 4.0 – 5.0 6 Between 500 & 600 thousand 15.5 0.0 3.2 – 4.2 5 jobs 4 15.0 Between 500 & 600 3 thousand jobs 2 14.5 -0.5 1 0 14.0 -1 -1.0 -2 13.5 -3 -4 13.0 -5 -1.5 -6 12.5 -7 -8 12.0 -2.0 2005 2006 2007 2008 2009 2010p 2011p 2005 2006 2007 2008 2009p 2010p 2011p 2007 2008 2005 2006 2009p 2010p p/ Estimated. p/ Estimated p/ Estimated Source: INEGI and Banco de México. Source: IMSS and Banco de México. Source: Banco de México. 28
    • Inflation, monetary policy, exchange rate  2010 has seen a rebound in inflation due to clearly identified factors:  The impact of tax changes on consumer prices.  The realignment of energy prices with international reference prices.  Increases to tariffs and taxes determined by local governments.  Also, inflation in the 2010 first quarter was affected by increases in the prices of some fruits and vegetables as a result of adverse climate effects.  To date, inflation expectations for the medium- and long-term have not been affected.  The increase in inflation seen in the first quarter this year is consistent with Banco de México’s expectations. 29
    • Ene-04 May-04 Sep-04 Ene-05 May-05 Sep-05 Ene-06 May-06 Source: Banco de México. Sep-06 (%) Ene-07 May-07 CPI Core Sep-07 Non Core Ene-08 Headline Inflation May-08 Sep-08 Ene-09 May-09 Sep-09 Ene-10 1 2 3 4 5 6 7 8 9 10 Ene-04 May-04 Sep-04 Ene-05 May-05 Sep-05 Ene-06 Core Source: Banco de México. May-06 Services Sep-06 Merchandises Ene-07 (%) May-07 Sep-07 Ene-08 Core Inflation May-08 Inflation, monetary policy, exchange rate Sep-08 Ene-09 May-09 Sep-09 Ene-10 2 3 4 5 6 7 8 30
    • Inflation, monetary policy, exchange rate  In April 2010, the Consumer Price Index (INPC) saw a drop of 0.32%. Year- over-year headline inflation was 4.27%, a drop of 0.70 percentage points compared to the previous month.  The drop in the year-over-year INPC in April vs. March is explained in part by lower core inflation. At the same time, there was a negative change in the non- core index, influenced mainly by decreases in the prices of agricultrual products and electiricity. Consumer Price Index Annual percentage change 31 31
    • Inflation, monetary policy, exchange rate April 2010/ April 2010/ March 2010/ March2010 April 2009 March 2009 Core Inflation 0.11 4.11 4.40 Goods 0.25 4.68 5.11 Services -0.03 3.58 3.73 Non-core Inflation -1.46 4.70 6.53 Agricultural -2.29 3.71 9.11 Administered -1.01 5.24 4.66 32
    • Inflation, monetary policy, exchange rate Headline Inflation Forecasts (%) 6.5 IV-2009 IV-2010 6.0 5.5 5.0 4.5 4.0 3.5 3.0 Observed Inflation 2.5 First Quarter 2010, forecast 2.0 1.5 IV 2008 IV 2009 IV 2010 IV 2011 IV 2006 IV 2007 I 2009 I 2010 I 2012 I 2006 I 2007 I 2008 I 2011 II 2008 II 2009 II 2010 II 2006 II 2007 II 2011 III 2006 III 2007 III 2008 III 2009 III 2010 III 2011 The forecast in this report coincides with that of the previous one, with the addition of the corresponding forecast for the 2012 first quarter. In addition, the fourth-quarter forecast in the report coincides with that of the addendum of the third-quarter report. Importantly, in each inflation report, the time line for the forecast is for eight quarters ahead. This means that with each report a quarter is added to the forecast, while the first quarter in the previous report becomes an observed data point. Source: Banco de México. 33
    • Inflation, monetary policy, exchange rate Headline Inflation Expectations Yield Curve Annual for year-end 2010, 2011, (%) Next 4 and 5-8 Years (%) 5.5 9 Cierre 2010 31-Dec-09 5.0 8 Cierre 2011 07-May-10 Próximos 4 años 4.5 7 Próximos 5-8 años 4.0 6 3.5 5 3.0 4 1 1 3 6 1 2 3 5 10 20 30 Dic-07 Dic-08 Dic-09 Oct-08 Oct-09 Ago-08 Ago-09 Abr-08 Abr-09 Feb-08 Feb-09 Feb-10 Jun-08 Jun-09 día meses años Source: Banco de México y Proveedor Integral de Precios. Source: Banco de México Survey. 34
    • Inflation, monetary policy, exchange rate Overnight interbank interest rate 2/ (%) 11 10 9 8 7 375 bps. 6 5 4 01-07 03-07 05-07 07-07 09-07 11-07 01-08 03-08 05-08 07-08 09-08 11-08 01-09 03-09 05-09 07-09 09-09 11-09 01-10 03-10 2/ Starting on January 21, 2008 the overnight interbank interest rate is shown. Source: Banco de México. 35
    • Inflation, monetary policy, exchange rate International Reserves Intervention Mechanisms (In Billions of Dollars) 100 Accumulation of International Mechanism for the 90 Reserves accumulation of 80  Auction of dollar put options for 600 international 70 million dollars each month. reserves effective: 1996- 60  The holders of the options can sell 2001 dollars to Banco de México at the 50 Fix exchange rate from the previous 40 day, as long as the Fix is not higher 30 than the 20-day moving average from the previous 20 days. 20 10  This does not affect the free- floating exchange-rage regime. 0 Sales of International Reserves Abr-99 Ago-03 Feb-97 Jun-01 Sep-04 Oct-05 Nov-06 Feb-10 Ene-96 Ene-09 Mar-98 Jul-02 May-00 Dic-07  Daily sales are maintained via auctions at a minimum price. Fuente: Banco de México. 36
    • The floating exchange rate regime The floating-rate currency regime has proved to be a useful instrument in protecting the Mexican economy against external shocks in the last few years:  Instability in international financial markets.  Volatility in international oil prices.  Fluctuations in the terms of trade. 37
    • The floating exchange rate regime Interbank Exchange Rate 48 hrs* 16.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 15.5 14.5 13.5 12.5 11.5 10.5 9.5 8.5 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC * Last observation: May 12, 2010 (12.3695) 38
    • The floating exchange rate regime 550 95 Nominal Exchange Rate 500 90 Index Real Exchange 450 85 Rate Index (right axis) 400 80 350 75 300 70 Sep-07 Sep-08 Sep-09 Ene-07 Ene-08 Ene-09 Jul-07 Jul-08 Jul-09 Mar-07 Mar-08 Mar-09 Nov-07 Nov-08 Nov-09 May-07 May-08 May-09 39
    • The floating exchange rate regime  The variability of the exchange rate has been consistent with what should be expected under a floating-rate currency regime.  The currency movements have not been the result of a deliberate policy. Mexico maintains a firm commitment to the floating-rate regime without market intervention.  The country’s financial authorities are convinced that the currency regime that is most suited to the circumstances for Mexio is that of a floating rate. 40
    • Contents 1. The World Economy 2. The Mexican Economy 3. Final Remarks 4. Appendix: Mexico’s Exchange Rate 41
    • Final Remarks  The global economy is improving and its prospects are positive  The US rebound has been supported by inventories, consumption and recently investment. The construction sector and real estate markets are lagging behind the rest of the economy  Some global risk might materialize as advanced economies withdraw their monetary and fiscal stimulus measures. Mounting pressures are particularly acute in some European countries 42
    • Final Remarks  Growth in 2010 will be driven by the external sector, although it will be modest.  The domestic market will continue to lag, but as investment recovers, inflation falls back and employment increases, the recovery of the domestic market will pick up.  It is likely that potential GDP growth in the U.S. has decreased. This makes it more urgent for our domestic economy to grow at a faster pace, also rendering oft- discussed structural reforms necessary. 43
    • Final Remarks  The inflation outlook faces several risks. The most important is the possibility of deterioration in long-term inflation expectations associated with the foreseen rebound in inflation.  This could generate second-round effects on inflation if firms translate higher costs to consumer goods and services prices that are not directly affected, possibly putting at risk the objective of price stability. 44
    • Final Remarks  In order to enhance potential economic growth, major structural reforms must be implemented  Stronger public finances  Rule of law and protection of property rights  Public security  Deregulation  Competition and market flexibility  Education 45
    • Contents 1. The World Economy 2. The Mexican Economy 3. Final Remarks 4. Appendix: Mexico’s Exchange Rate 46
    • The floating exchange rate regime The floating-rate currency regime has proved to be a useful instrument in protecting the Mexican economy against external shocks in the last few years:  Instability in international financial markets.  Volatility in international oil prices.  Fluctuations in the terms of trade. 47
    • The floating exchange rate regime Interbank Exchange Rate 48 hrs* 16.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 15.5 14.5 13.5 12.5 11.5 10.5 9.5 8.5 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC * Last observation: May 12, 2010 (12.3695) 48
    • The floating exchange rate regime For an adequate analysis of currency movements, these should be referenced to defined periods of time. For example: Depreciation (+), apreciation (-) of the peso (nominal), % Sep. 2004 – Dec. 2007 */ -5.5 Dec. 2007 – March 2009 */ 35.9 March 2009 – April 26 2010 **/ -14.6 Dec. 2007 – April 26 2010 **/ 11.1 March 2009 – Dec. 2009 */ -12.8 Dec. 2009 – April 26 2010**/ -7.3 April 26 – May 12 2010**/ 1.9 Dec. 2009 – May 12 2010**/ -5.4 */ multilateral with 111 countries **/ bilateral with the United States 49
    • The floating exchange rate regime Nominal Exchange Rate Index Nominal Exchange Rate Index 2007 2008 398 490 Nominal exchange 396 470 rate index 2007 394 Nominal excahnge 392 450 430 rate index 2008 390 388 410 386 390 384 382 370 380 350 Nominal Exchange Rate Index 2009 530 520 Nominal exchange 510 rate index 2009 500 490 480 470 460 450 440 50
    • The floating exchange rate regime Particularly in a floating-rate currency regime, the nominal exchange rate is sensitive to all kinds of information, and thus it is common to observe overreactions and under-reactions (over and undershooting). For example, initial drops can be an overreaction to the eruption of a crisis (October 2008), with the ability to correct themselves partially later. However, from an analytical point of view, to evaluate the economic impacts, the relevant variable is not the nominal exchange rate, but the real exchange rate. The real exchange rate does not measure the quantity of pesos required to buy a dollar, but the quantity of non-tradable goods needed to buy a certain amount of internationally tradable goods. 51
    • The floating exchange rate regime That is, the real exchange rate is a relative value price that measures two baskets of goods and services: RER = Pnt/Pt As a practical matter, the idea of the real exchange rate is translated as the relative cost of two consumption baskets and can be expressed as the price differential between the “domestic” country and the rest of the world. This applies to the case of the multilateral real exchange rate, although it can also be used to calculate bilateral real exchange rates, such as those between Mexico and the United States. Banco de México publishes a multilateral real exchange rate that considers 111 countries using consumer prices. The nominal exchange rate (multilateral in this case) and the price vector required for this calculation are weighted to measure the relative importance of the countries. Thus: RER = (CPImex/CPIw) * 1/NER or RER = NER * (Pw/Pmex) 52
    • The floating exchange rate regime This, expressed in exchange rates (comparison between two periods) is: ΔRER = ΔNER * (πPnt/πPt) That is to say, the real exchange rage is a concept that corrects and adjusts the nominal exchange rate for relative inflation rates (Better than using consumer prices would be the use of unit labor costs or the indexes for prices of tradable and non-tradable goods). 53
    • The floating exchange rate regime Real Exchange Rate Index 2007 Real Exchange Rate Index 2008 78 90 88 77 86 Real exchange 76 84 rate index 2008 82 75 80 Real exchange 78 74 76 rate index 2007 73 74 72 72 70 Real Exchange Rate Index 2009 94 93 Real exchange 92 rate index 2009 91 90 89 88 87 86 85 84 54
    • The floating exchange rate regime Thus, we see the evolution of the real exchange rate in various periods compared with the nominal exchange rate: Multilateral Peso Depreciation (+), apreciation (-) (%) Period nominal real Sep. 2004 – Dec. 2007 -5.5 -1.1 Dec. 2007 – March 2009 35.9 20.8 March 2009 – Feb. 2010 -12.1 -9.3 Dec. 2007 – Feb. 2010 19.5 9.6 March 2009 – Dec. 2009 -12.8 -6.8 Dec.2009 – Feb. 2010 0.9 -2.7 As the information shows, despite the recent nominal appreciation (almost 13% between March and December 2009), the real exchange rate has devalued almost 10% in relation to the position it had before the start of the crisis (December 2007). 55
    • The floating exchange rate regime 550 95 Nominal Exchange Rate 500 90 Index Real Exchange 450 85 Rate Index (right axis) 400 80 350 75 300 70 Sep-07 Sep-08 Sep-09 Ene-07 Ene-08 Ene-09 Jul-07 Jul-08 Jul-09 Mar-07 Mar-08 Mar-09 Nov-07 Nov-08 Nov-09 May-07 May-08 May-09 56
    • The floating exchange rate regime  The variability of the exchange rate has been consistent with what should be expected under a floating-rate currency regime.  The currency movements have not been the result of a deliberate policy. Mexico maintains a firm commitment to the floating-rate regime without market intervention.  The country’s financial authorities are convinced that the currency regime that is most suited to the circumstances for Mexio is that of a floating rate. 57