GLOBAL CITIES INITIATIVE: THE MEXICAN ECONOMY
Gabriel Lozano, Ph.D. Chief Mexico Economist
(52-55) 5540-9558
gabriel.lozan...
Agenda

Introduction: The Mexican Economy


1

Past, present and future of the Mexican Economy

3

Where are we now?

GLO...
Past, present and future of the Mexican economy



Where do we come from?




By the same token, Mexico entered the NAF...
Agenda

Introduction: The Mexican Economy

1

Economic and social trends

3

Where are we now?

9

GLOBAL CITIES INITIATIV...
The Mexican Economy: A quick look into a US$ 1 trillion economy
GDP breakdown – demand side

Inventories
3%

GDP breakdown...
Economic activity in perspective
Economic activity in the last twenty years

Mexico has been stuck in low gear in the last...
Mexico has approximately 116 million people, making it the country with the 11thlargest population in the world; almost 80...
While Mexico has become a major emerging market, pending tasks remain
in place

Inequality in Mexico remains very high

In...
Consumption remains the main contributor to growth, but GDP per capita needs to
improve further

Private consumption in Me...
Agenda

1

Economic and social trends

3

Where are we now?

9

Where are we going?
GLOBAL CITIES INITIATIVE: THE MEXICAN ...
After years of low but steady growth, the Great Recession took its toll on the
domestic economy
Consumer confidence, credi...
However, it managed to recover swiftly on the back of a competitive manufacturing
sector
Wages in the manufacturing sector...
The manufacturing sector gained relevance with NAFTA, the destination of more than
80% of the exports

Main exports from M...
Imports however are somewhat less concentrated, with a heavy reliance on Asia and
the NAFTA area

Main imports to Mexico

...
Foreign direct investment has relied heavily on manufacturing for the last 20 years

Evolution of FDI to Mexico

FDI break...
While Mexico has become more competitive, it cannot rely only on a weaker
currency and wage-convergence with its competito...
Agenda

Introduction: The Mexican Economy

1

Economic and social trends

3

Where are we now?

9

GLOBAL CITIES INITIATIV...
The Pact for Mexico and democracy in Mexico: A new opportunity for fresh accords
Lower chamber of Congress




In Decemb...
Structural Reforms: Impact on potential growth


While the government expects potential output to jump

Impact on growth
...
Appendix: Political calendar and chamber composition

Key political events and congress deadlines to monitor
Event

Congre...
This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is direct...
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Gabriel Lozano | The Mexican Economy | Global Cities Initiative

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An overview of the Mexican economy from JPMorgan Mexico's Chief Economist Gabriel Lozano

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Gabriel Lozano | The Mexican Economy | Global Cities Initiative

  1. 1. GLOBAL CITIES INITIATIVE: THE MEXICAN ECONOMY Gabriel Lozano, Ph.D. Chief Mexico Economist (52-55) 5540-9558 gabriel.lozano@jpmorgan.com November, 2013 STRICTLY PRIVATE AND CONFIDENTIAL J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero
  2. 2. Agenda Introduction: The Mexican Economy  1 Past, present and future of the Mexican Economy 3 Where are we now? GLOBAL CITIES INITIATIVE: THE MEXICAN ECONOMY Economic and social trends 9 Where are we going? 16 1
  3. 3. Past, present and future of the Mexican economy  Where do we come from?   By the same token, Mexico entered the NAFTA in 1994, one of the biggest structural changes in the past twenty years.   Mexico has experienced a significant transformation since the mid 1990s, when it suffered the Tequila Crisis on the back of an ill-conceived financial liberalization. Since then, Mexico has advanced gradually in the process of institutional changes, transparency and accountability. Where are we now?  Mexico is a medium-sized free-market economy, committed to rely in the market forces to gain credibility and to provide certainty to investors.  INTRODUCTION: THE MEXICAN ECONOMY  While still in the early phase of a democratic process, there seems to be enough political willingness to push the multi-partisan agreement known as “Pact for Mexico”. Where are we going?  Mexico is facing many challenges, but the sound macroeconomic framework, and the democratic process that started in the late 1990s should pave the way for the achievement of structural reforms.  If Mexico continues with the implementation of the structural reforms, potential output could jump towards 4.5% in the medium term. 2
  4. 4. Agenda Introduction: The Mexican Economy 1 Economic and social trends 3 Where are we now? 9 GLOBAL CITIES INITIATIVE: THE MEXICAN ECONOMY Where are we going? 16 3
  5. 5. The Mexican Economy: A quick look into a US$ 1 trillion economy GDP breakdown – demand side Inventories 3% GDP breakdown – supply side Financial services -2% Net exports -1% Taxes 3% GFI-private 14% Agriculture 3% IP exmanufacturing 17% GFI-public 6% Private consumption 64% Public consumption 12% Services 58% Non-transport manufacturing 14% ECONOMIC AND SOCIAL TRENDS Transport equipment 3% Source: J.P.Morgan with data from INEGI Source: J.P.Morgan with data from INEGI 4
  6. 6. Economic activity in perspective Economic activity in the last twenty years Mexico has been stuck in low gear in the last two cycles % 3m/3msaar Index (100= Trough); t = first year of expansion 25 130 1995-99 2003-07 2009-13 125 15 120 5 115 110 -5 105 100 ECONOMIC AND SOCIAL TRENDS -15 95 -25 1994 Source: INEGI. 90 1997 2000 2003 2006 2009 2012 t t+1 Source: INEGI and J.P. Morgan. 5 t+2 t+3 t+4
  7. 7. Mexico has approximately 116 million people, making it the country with the 11thlargest population in the world; almost 80% live in urban areas Population in Latin America Urban population in Mexico Million % of total 100% 250 90% 2013 (rate of growth: 1.1%) 200 2030 80% 70% 150 60% 100 50% 40% 50 Source: INEGI and CELADE. 6 2010 2005 200 1990 1970 1960 1950 1930 Source: INEGI. 1940 20% Venezuela Perú México Guatemala Ecuador Colombia Chile Brazil Argentina ECONOMIC AND SOCIAL TRENDS 30%
  8. 8. While Mexico has become a major emerging market, pending tasks remain in place Inequality in Mexico remains very high Income distribution per deciles Gini index % of total 70 40% 60 30% Latin America 50 World 40 20% 30 20 10% 0 Source: INEGI. 7 X IX VIII VII VI V IV III I Source: CIA World Factbook. II 0% Colombia Paraguay Chile Brazil Mexico China Peru Argentina Uruguay USA Russia Turkey Venezuela Japan India UK France Canada Spain Italy Australia Germany ECONOMIC AND SOCIAL TRENDS 10
  9. 9. Consumption remains the main contributor to growth, but GDP per capita needs to improve further Private consumption in Mexico GDP per capita: Selected economies % of GDP USD, PPP 71.0 60,000 70.0 69.0 45,000 68.0 67.0 30,000 66.0 65.0 15,000 64.0 63.0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: INEGI. 8 India Indonesia Peru China Colombia Brazil Mexico Panama Uruguay Chile Greece Spain Japan Canada Source: CIA World Factbook. Venezuela 60.0 United Kingdom United States ECONOMIC AND SOCIAL TRENDS 61.0 Switzerland 0 62.0
  10. 10. Agenda 1 Economic and social trends 3 Where are we now? 9 Where are we going? GLOBAL CITIES INITIATIVE: THE MEXICAN ECONOMY Introduction: The Mexican Economy 16 9
  11. 11. After years of low but steady growth, the Great Recession took its toll on the domestic economy Consumer confidence, credit, retail sales and formal employment %oya, real terms (both axes) Consumer confidence Consumer credit Employment (RHS) Retail sales (RHS) * 60.0 12 50.0 10 40.0 8 30.0 6 20.0 4 10.0 2 0.0 0 -2 -20.0 -4 -30.0 WHERE ARE WE NOW? -10.0 -6 2004 2005 2006 2007 2008 2009 Source: J.P.Morgan with data from IMSS, INEGI and Banco de México. *Retail sales: 3mma 10 2010 2011 2012 2013
  12. 12. However, it managed to recover swiftly on the back of a competitive manufacturing sector Wages in the manufacturing sector Peso weakness vis a vis other emerging market currencies US$ Index 2001=100 Mexico China 2.5 150 2.3 140 2.1 México Depreciation 130 India 1.9 120 1.7 Russia 110 1.5 237% 1.3 100 1.1 90 0.9 Brazil 80 0.7 Appreciation 70 China 0.5 WHERE ARE WE NOW? 02 03 04 05 06 07 08 09 10 11 12 60 01 Source: Ministry of Finance. *Estimates for China. 03 05 07 09 Source: J.P. Morgan and Bloomberg. Data as of November 8, 2013. 11 11 13
  13. 13. The manufacturing sector gained relevance with NAFTA, the destination of more than 80% of the exports Main exports from Mexico Main export destinations Category Electric machinery and other industrial machinery US$ mn % of Total 140,577 37.9% Transport equipments, road vehicles 66,023 17.8% South America 5% Mining 54,154 14.6% Europe 6% Iron, steel and manufactures of those metals 17,062 4.6% Others 94,435 25.5% Total exports 372,251 100% Central America 2% Asia Other 4.5% 1% Canada 3% WHERE ARE WE NOW? United States 79% Source: Banco de Mexico. Source: Banco de Mexico. 12
  14. 14. Imports however are somewhat less concentrated, with a heavy reliance on Asia and the NAFTA area Main imports to Mexico Main import countries US$ mn % Total 144,593 39.0% Chemicals and related products 28,919 7.8% Transport equipments, road vehicles 31,143 8.4% Iron, steel and manufactures of those metals 30,772 8.3% Others 135,109 36.4% Total imports WHERE ARE WE NOW? Category Electric machinery and other industries machinery 370,537 100% Other 1% Canada South America 2.7% 3% Central America 1% Europe 11% US 50% Asia 31% Source: Banco de Mexico. Source: J.P. Morgan and Bloomberg. Data as of October, 2013. 13
  15. 15. Foreign direct investment has relied heavily on manufacturing for the last 20 years Evolution of FDI to Mexico FDI breakdown by sector US$ billion 35 Energy Mining & 1% construction 7% 30 Financial services 19% 25 Manufacturing 45% 20 15 10 Other 28% 5 0 WHERE ARE WE NOW? 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: Banco de Mexico. Source: Ministry of the Economy. 14
  16. 16. While Mexico has become more competitive, it cannot rely only on a weaker currency and wage-convergence with its competitors Labor productivity in Mexico vis a vis other OECD countries Year-to-date trade balance: Back to reality GDP per hour worked as % of USA Index USA = 100 US$ billion 160 4 140 2 120 100 0 80 -2 60 40 -4 1998-08 2011 20 2010 2012 -6 Jan Apr Jul Oct WHERE ARE WE NOW? Source: Banxico. Source: OECD. 15 Norway USA Germany Sweden Spain Canada Japan OECD average -10 Korea 2013 Russia -8 Chile Mexico 0
  17. 17. Agenda Introduction: The Mexican Economy 1 Economic and social trends 3 Where are we now? 9 GLOBAL CITIES INITIATIVE: THE MEXICAN ECONOMY Where are we going?  16 Strong macro framework but reforms are needed 16
  18. 18. The Pact for Mexico and democracy in Mexico: A new opportunity for fresh accords Lower chamber of Congress   In December of 2012, the new government signed a multi-partisan agreement that encompassed 95 accords focused at improving competitiveness and productivity in Mexico. Nueva Alianza 2% PRD-PT-MC 27% PRI-PVEM 48% This “Pact for Mexico” aimed at pushing core structural reforms in 2013:  Education Reform  Telecommunication Reform  Fiscal Reform  Energy Reform PAN 23% Source: IFE. Upper chamber of Congress  The Labor Reform was approved in the previous administration. PRD-PT-MC 22% WHERE ARE WE GOING?  The new government has made it clear that the main objective of the structural reforms is to extend productivity and improve competitiveness throughout the country. PRI-PVEM 47% PAN 30% Source: IFE. 17 Nueva Alianza 1%
  19. 19. Structural Reforms: Impact on potential growth  While the government expects potential output to jump Impact on growth towards 5.3% by the end of the current presidential term (2018), we believe the impact will be more gradual. Bill Impact on GDP Financial reform We estimate current potential output between 3.0% and 3.5%, and expect the most significant impact coming from the energy reform. 0.1% - 0.3% 0.2% - 0.4% 0.4% - 0.7% Total impact  Telecom reform Potential output should reach 4.5% by the end of the “sexenio”. 0.1% - 0.3% Energy reform  Labor reform 0.8% - 1.7% Potential Output 3.30% with reforms 4.1% - 5.0% Source: J.P. Morgan forecasts. Contribution to potential growth  The benefits from the implementation of reforms will be larger in the long-term due to the positive externalities and the regional spillovers: Reduced costs for both producers and consumers  4.5% Current Potential Output Infrastructure gains  WHERE ARE WE GOING?  Expected Positive and long-term growth in total factor productivity 3.3% Labor Source: J.P. Morgan forecasts. 18 Telecomm Financial Energy
  20. 20. Appendix: Political calendar and chamber composition Key political events and congress deadlines to monitor Event Congress composition: votes for constitutional reforms Date Income Bill (deadline for approval by Upper House) 1 28 7 15 5 16 1 500 128 334 86 PAN & PRI & PVEM 355 99 71% 77% October 31, 2013 Expenditure Bill (deadline for approval by Lower House) November 15, 2013 End of first ordinary session (2nd legislature) December 15, 2013 Source: IFE, J.P. Morgan. WHERE ARE WE GOING? 10 MC October 20, 2013 54 Constitutional Reform Income Bill (deadline for approval by Lower House) 213 PVEM September 8, 2013 38 Total Budget 2014 (deadline) 114 PANAL September 1, 2013 22 PT Ordinary Session (kick- off of 2nd legislature) 104 PAN July - August Upper PRD July 7, 2013 Extraordinary Sessions Lower PRI Local Elections (14 States) Source: IFE, J.P. Morgan. 19
  21. 21. This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of J.P. Morgan. The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. J.P. Morgan’s opinions and estimates constitute J.P. Morgan’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity. J.P. Morgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. Notwithstanding anything herein to the contrary, the Company and each of its employees, representatives or other agents may disclose to any and all persons, without limitation of any kind, the U.S. federal and state income tax treatment and the U.S. federal and state income tax structure of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment and tax structure insofar as such treatment and/or structure relates to a U.S. federal or state income tax strategy provided to the Company by J.P. Morgan. J.P. Morgan's policies on data privacy can be found at http://www.jpmorgan.com/pages/privacy. WHERE ARE WE GOING? J.P. Morgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation. J.P. Morgan also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. J.P. Morgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities LLC, J.P. Morgan Limited, J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in EMEA and Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A. J.P. Morgan deal team members may be employees of any of the foregoing entities. This presentation does not constitute a commitment by any J.P. Morgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services. 20

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