THE EFFECTS OF THE GLOBAL FINANCIAL CRISIS ON THE MEXICAN ECONOMY

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THE EFFECTS OF THE GLOBAL FINANCIAL CRISIS ON
THEMEXICAN ECONOMY
June 2009
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Index

1. International Environment
2. Effects on the Mexican Economy
3. Inflation
4. 2009 Outlook
5. Effect of the Flu epidemic on Mexico
6. Final Comments

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1. International Environment

• The current economic crisis, which began in the
  U.S. mortgage sector, has been one of the worst
  global crises in many years. It has provoked
• A lack of confidence in the financial system and
  its impact on the real economy
• A decrease in wealth for the consumer
• Contagion to practically all the worlds
  economies, coupled with a significant drop in
  international trade
• The worst drop in U.S. GDP since World War II
  and
• A generalized reduction in inflation.
• However, some signs of stabilization are already
  appearing.

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1. International Environment

Real GDP growth expectations and inflation
2009-2010 ( Change)
Source Consensus Forecasts, Asia Pacific
Consensus Forecasts and Latin-American Consensus
Forecast, May 2009.
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1. International Environment

USA SP /Case-Shiller home price index and NAR
median home prices (Annual variation)
Libor and federal interbank funding rates ()
Stock Markets (January 2nd, 2007100)
Source NAR and SP.
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1. International Environment

World Exports (Billions of dollars per month)
2008-2009
2001-2009
Source JPMorgan.
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1. Effects on the Mexican economy Real transmission
   channels

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1. Effects on the Mexican economy Production
   indicators

Industrial production ( annual change,
three-month moving)
Manufacturing production Mexico and U.S. (
annual change, three-month moving)
Source IMF.
Manufactured goods not including computers,
communication equipment and semiconductors.
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1. Effects on the Mexican economy

Manufactured exports ( annual change,
three-month moving average)
Oil exports and imports (Billions of dollars per
month)
Income from family remittances (Per month,
seasonally adjusted)
Source Banco de México with data from INEGI.
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1. Effects on the Mexican economy Financial
   transmission channels

Low-quality assets
Direct
Financing from abroad
Financial Transmission Channels
Banking system
Domestic debt markets
Indirect
Asset prices
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1. Effects on the Mexican economy Effect of
   financial flows

Stock Markets (January 2nd, 2008100)
Exchange Rate Peso per dollar
Accumulated flows from funds dedicated to
emerging markets Debt (Billions of dollars)
60-day moving average coefficient
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1. Effects on the Mexican economy Banking system

Commercial Banks Current Portfolio (, real
annual change)
Interest Rates of Credit to Firms5/ (, annual )
Average Loan Cost (, annual)
Housing 4/
Credit cards3/
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1. Effects on the Mexican economy Aggregate supply
   and demand

Sales of consumer goods ( annual change,
seasonally adjusted, 3-month moving average)
Gross domestic product ( annual change)
Gross fixed capital investment (2006100,
seasonally adjusted data)
Informe sobre la Inflación Enero-Marzo 2009 ,
Banco de México.
Source National Retailers Association (ANTAD).
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1. Current account deficit and Foreign Trade

FDI and current account deficit (Billions of
dollars)
Oil and Non-Oil Exports (Billions of dollars per
month, seasonally adjusted)
Oil and Non-Oil Imports (Billions of dollars per
month, seasonally adjusted)
Private-sector expectations survey, Banco de
México, April 2009.

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1. Current account deficit

Current Account (Billons of dollars)
/ Estimated figures. Source Banco de México.
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1. Mexican economy Employment

Workers insured by social security (IMSS) (
annual change in thousands of workers)
Permanent and temporary urban workers ( annual
change in thousands of workers)
National unemployment rate (, seasonally
adjusted)
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1. Mexican economy Monetary and Fiscal Policy
   Reactions

• Monetary and financial policy
• Foreign exchange auctions and interventions.
• Provision of liquidity (in pesos).
• Support for refinancing commercial paper.
• Monetary policy reference rate changes
• Agreement with the U.S. Federal Reserve for a
  temporary reciprocal currency arrangement (US30
  billion).
• Access to the Flexible Credit Line from the IMF
  (in effect for one year for about US47 billion).
• Fiscal stimulus
• More infrastructure investment.
• Employment support programs.
• Support for small- and medium-sized companies.
• Publicly administered prices
• Gasoline prices frozen for 2009.
• Lower gas prices.
• Reduced electricity rates.

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1. Inflation

Inflation expectationse/ (annual change)
INPC and its components (annual change)

Half month. e/ Private-sector expectations
survey, Banco de México, May 2009.
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1. Inflation Balance of risks

• The balance of risks for inflation
• Measures taken by the federal government on
  energy prices.
• Lower global inflation caused by a reduction in
  economic growth could contribute to less
  inflationary pressures in Mexico.
• Slower domestic demand growth.
• Pass-through from currency movements to import
  prices. However, this could be partially
  compensated for by the fall in the prices for
  primary goods caused by the global slowdown.
• Volatility in the prices for fruits and
  vegetables.

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1. Outlook for 2008 and 2009

Additional monetary policy action by the
Governing Board will be, within the economic
environment, conditioned by the behavior of the
inflation path, with an aim toward meeting the 3
inflation target at the end of 2010.
Headline Inflation Forecasts ()
1/ Inflation Report. January-March 2009 2/
Inflation Report October-December 2008.
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1. Outlook for 2009 and 2010

Outlook for 2009 and 2010 Private Sector
Source Banco de México. Private-sector
expectations survey, May 2009.
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1. Effect of the Flu Epidemic on Mexico

• The outbreak of the AH1N1 flu virus in Mexico
  will have negative effects on services
• Tourism
• Airlines
• Commerce and restaurants
• The effect of the epidemic on GDP growth could be
  around 0.5.
• The Mexican governments reaction was to favor a
  high level of safety due to the viruss unknown
  malignity.
• The shut-down of various types of activities has
  caused economic losses.
• The outbreak of the epidemic has turned out to be
  less lethal than other recent epidemics, such as
  SARS.
• The estimated effect on the Mexican economy will
  be a contraction in the above areas for three or
  four months.

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1. Final Remarks

• Globally and in particular in the United States,
  some indicators are showing signs of stabilizing,
  which could indicate that the trough of the
  recession is near.
• The outbreak of the AH1N1 virus in Mexico will
  have a negative impact on the economy, although
  this is estimated to be of short duration.
• During the last two years, the behavior of
  inflation in Mexico has not followed a pattern
  similar to that of other emerging countries, due
  as much to rigidities in the domestic market as
  to energy price controls (mainly gasoline).
• At the same time, inflation in the short term has
  been affected by volatility in the prices of
  fruits and vegetables.

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1. Final Remarks

• This year, despite the expected drop in GDP and
  oil exports, fiscal income will be sufficient to
  cover budgeted expenses, due to the oil price
  hedge, Banco de Méxicos operating surplus and,
  the Oil-revenue Stabilization Fund.
• Mexico should plan a medium-term tax reform to
  diminish dependence on non-recurring income
  sources and reach international standards in tax
  collection.

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1. Final Remarks

• Elements of strength in the Mexican economy have
  permitted it to weather the crisis in an orderly
  way.
• Fiscal and monetary discipline
• Reduced and well-structured foreign debt
• A high level of international reserves
• It is important to make sure these factors do not
  weaken.

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1. Final Remarks

• To face the crisis Mexico should
• Increase productivity and consequently, the
  competitiveness of our base of production
• Maintain employment levels as much as possible
  and
• Continue making structural reforms and perfect
  the ones already implemented.
• The federal government as well as Banco de México
  have taken and will continue to take the measures
  needed to face the crisis.
• The Governing Board of Banco de México ratifies
  its commitment to achieve the 3 inflation target
  in 2010.