Mexico: Economic View and Opportunities

Guillermo Ortiz

June 12, 2015

IMF 2015 Growth Forecasts%

Disappointing Global Economic Growth

Source: IMF*WEO five-year-ahead growth forecasts

China

EM

Japan

Eurozone

US

Advanced

World

0 1.5 3 4.5 6 7.5

7.1

4.9

0.8

1.4

3.12.3

3.8

6.8

4.3

1

1.5

3.1

2.4

3.5

Apr 15Oct 14

70

80

90

100

110

120

130

140

Fall 2007

Fall 2008

Fall 2014

Output Compared to Precrisis ExpectationsIndex, 2007=100

World Advanced Economies

Emerging Markets

0

1.5

3

4.5

6

7.5Fall 2011

Fall 2012

Fall 2013

Fall 2014

Medium-term Growth Expectations*%

1

Divergent Monetary Policies Create Distortions

Source: IIF, Bloomberg, Banorte-Ixe

Jan-15 May-15 Aug-15 Dec-150.0

0.5

1.0

ECB

Fed

BoJ

BoE

AE Central Banks Interest Rates%

2010 2011 2012 2013 20140.0

0.2

0.4

0.6

0.8

1.0

1.2

3.5

4.0

4.5

5.0

5.5

6.0

6.5AE

EM (rhs)

EM excl. Brazil, Russia, and Ukraine

Trends in Official Policy Rates%

Sovereign Bond Yields in Local Currency% as of May 29, 2015

  1Y 2Y 5Y 10Y 20Y 30Y

US* 0.25 0.60 1.47 2.09 2.47 2.85

UK 0.48 0.51 1.34 1.81 2.38 2.54

Switzerland -0.97 -0.96 -0.55 -0.08 0.34 0.53

Germany -0.25 -0.23 0.00 0.49 0.94 1.11

France -0.18 -0.18 0.15 0.79 1.32 1.58

Spain 0.02 0.02 0.78 1.83 2.71 2.85

Portugal 0.02 0.11 1.31 2.55 3.28 3.43

Greece* 11.47 22.95 15.10 11.06 9.19 n.a.

* With linear interpolation in some nodes as the benchmark bond is not currently outstanding.

2

Greek's Bonds Maturing in 2015Billion, Euro

Brent and WTI Prices $/barrel

Lower Oil Prices and Geopolitical Tensions

Mar Apr May Jun Jul Aug Sept Oct Nov Dec0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

ECB

IMF

Bonds and bills

Strong debt ma-turity episodes this summer

Jan-14 May-14 Sep-14 Jan-15 May-1540

50

60

70

80

90

100

110

120

Brent

WTI

Source: Bloomberg, Banorte-Ixe 3

20

22

24

26

28

30

32

34

36

Mexico

Latin America

Mexico and Latin America GDP per capita relative to the US%, GDP per capita in 1990 US$*

Source: Conference Board Total Economy Database* converted at Geary-Khamis Methodology (1970), Sample of 17 countries, the region was calculated as population-weighted averages

Mexico's Economic Convergence

1950-1970s: Strong period of

growth.

1980s: "The lost Decade"

1990-2012:

NAFTA Agreement

94 Financial Crisis

Strengthening of macro

fundamentals

China joined the WTO

(2001)

2013-… Structural reforms

4

6

Range in Regional GDP per Worker% of national average 2010

Source: OECD, Regions at a Glance 2013

Regional GDP Growth: 1995-2010% annual average growth rate (constant 2005 USD PPP)

Regional Productivity Differentiation

Higher than 10%Between 7% and 10%Between 3.5 and 7%Between 1.5% and 3.5%Between 0% and 1.5%Lower than 0%Data no available

5

7

Strong Macroeconomic Fundamentals

Fiscal Deficit% of GDP 2014

Source: Banorte-Ixe, IMF, CNBV, Banxico, Ministry of Finance

Capitalization Index for Commercial Banking%

2008 2009 2010 2011 2012 2013 201414

15

16

17

15.3

16.516.8

15.716

15.5 15.5

International Reserves and IMF's FCLUSD billion

Flexible Credit Line

International Reserves

Net Public Sector Debt% of GDP (LHS), years (RHS)

0

5

10

15

20

25

30

35

40

0.0

1.0

2.0

3.0

4.0

5.0

6.0Domestic ExternalDuration

18.618.621.8

17.5

21.2

30.31.133.2

35.038.3

33.1

30.5

80%

20%

70%

30%

Jan-08 Jan-10 Jan-12 Jan-140

50

100

150

200

250

Flexible Credit Lline

International Reserves

Germany

Mexico

France

US

UK

Spain

Brazil

Japan

-1.5 -0.5 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5

-0.6

3.2

4.2

5.3

5.7

5.8

6.2

7.6

6

8

18991905

19111917

19231929

19351941

19471953

19591965

19711977

19831989

19952001

20072013

-40

10

60

110

160

210

260

Exchange rate (USD/MXN) CPI inflation 28-day interest rate

The Result of Stronger Fundamentals

Exchange rate, CPI Inflation and Interest Rate%, USD/MXN

Source: Banxico 7

9

No External Imbalances and Resilience Against Shocks

External Accounts Indicators

 External

Debt*

Short-term External Debt*

Current Account

FDI 2013

 % GDP % GDP

% Reserves

% GDPUSD

bUSD b

Brazil 21.8 2.5 14.4 -4.2 -90.9 80.8

India 23.4 5.0 35.6 -1.6 -34.0 28.2

Indonesia 29.8 8.9 68.0 -2.9 -25.0 23.3

South Africa

44.0 9.6 79.3 -5.6 -19.7 8.1

Turkey 46.7 15.8 113.2 -5.5 -44.9 12.9

Mexico 20.1 3.1 20.3 -2.0 -25.8 44.1

Source: Bloomberg, Banorte-Ixe, JP Morgan, World Bank, Promexico* Considering public and private external debt

Exchange RateIndex, may 2013=100

May-13 Nov-13 May-14 Nov-14 May-15100

110

120

130

140

150

160

170MXN

BRL

TRY

INR

IDR

ZAR

8

10

Current Account Deficit and Inflation Relative to Target

EM Internal and External Balance Scores

Source: Goldman Sachs Global Investment Research 9

11

Mexico's Strong Trade Patterns

US EU Canada China Brazil0

20

40

60

80 78.9

5.2 2.7 1.7 1.4

Mexican Exports by Main Destination%

Source: WTO, Banorte Ixe*Estimations after 2008

MEX

MEX

BRA

BRA

URU

URU

COL

COL

CHI

CHI

PER

PER

ARG

ARG

ECU

ECU

VEN

VEN

0 10 20 30 40 50 60 70 80 90 100

Fuels

Mining

Agriculture

Manufacturing

Latin America's Exports by Merchandise% of total exports

10

12

Wage Differential*USD, wages per hour

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

China

Mexico

Forecast

Source: WTO, ILO, US Census Bureau, Banxico, Bloomberg Banorte Ixe*Estimations after 2008

8

9

10

11

12

13

9.5

10.1

10.6

11.0

11.611.5

10.7

10.2

9.8

10.210.4

10.0

11.2

11.911.6

12.1

12.412.5

China joins the WTO

Participation in US Imports% of total imports

Higher External Competitiveness

11

13

Capacity to Produce Advanced Manufacturing

Mexican Light Vehicle Production Millions of Units

2008 2009 2010 2011 20120.0

0.5

1.0

1.5

2.0

2.5

3.0

2.1 2.22.5

2.8

1.5

For Export Purposes Domestic Sales

Aerospace Companies established in Mexico #

Source: ProMéxico, Banorte-Ixe, OECD**Data until 3Q2014, * FDI Forecast

2005 2006 2007 2008 2009 2010 2011 20120

50

100

150

200

250

300

61

67

120

193

199

238

249

270

Mexican IT Industry Exports %, growth YoY

2012

2011

2010

2009

2008

2007

2006

0 5 10 15 20 25 30

12.25

19

12

17

26

26

14

Foreign Direct Investment $, Billions

  2008 2009 2010 2011 2012 2013 2014 2015* 2008-2014**

FDI 28.7 18.0 25.9 23.6 18.9 44.1 22.5 28.4 181.1

Engineering Graduates

Mexico Germany

In 2012 95,832 73,536

12

15

Structural Reform

1993 1997 2000 2006 2007 2012 2013

NA

FTA

Sie

fore

s/A

fore

s

Bu

dg

et &

fisc

al r

esp

on

sib

ilit

y la

w

Pu

bli

c p

ensi

on

sys

tem

ref

orm

Eco

no

mic

co

mp

etit

ion

law

Go

vern

men

t ac

co

un

tin

g r

efo

rm

Pen

al P

roce

du

res

Ref

orm

Ed

uc

atio

n r

efo

rm

Ban

xic

o’s

au

ton

om

y

Inju

nct

ion

Act

Fis

cal

ref

orm

Ban

k-L

end

ing

ref

orm

En

erg

y re

form

Lab

or

Mar

ket

refo

rm

Tele

com

mu

nic

atio

ns

refo

rm

Ele

cto

ral

refo

rm

14

Population that finished upper-secondary school(%, share of total, ages 25-64)

Education Reform

Poor education performance

Source: OECD Education at a Glance 2012

China

South Africa

Portugal

Brazil

Spain

Greece

Belgium

Chile

New Zealand

OECD average

Luxembourg

Norway

Austria

Germany

Sweden

Canada

United States

Czech Republic

0 10 20 30 40 50 60 70 80

74

56

36 Mexico

Peru

Colombia

Tunisia

Uruguay

Kazakhstan

Chile

Romania

Serbia

Slovak Republic

Sweden

Iceland

Spain

United States

OECD average

France

United Kingdom

Australia

Viet Nam

Poland

Liechtenstein

Chinese Taipei

Hong Kong-China

MathReading Science

53 Mexico

Chile

16

Public spending on education (% GDP)

Education Reform: It is not a matter of public spending…

Source: OECD Education at a Glance 2012

Undereducated Populationindicators for OECD countries

The Teachers' Union strongly influences the expenditure on education.

13% of all people registered on the schools’ payroll do not turn up to work.

Among OECD countries, Mexico spends the second highest amount of current expenditure to compensate staff (91.7%).

Indonesia

Japan

Czech Republic

G20 average

Germany

Russian Federation

Hungary

Korea

Mexico

Netherlands

United Kingdom

OECD average

Switzerland

Austria

Israel

Ireland

New Zealand

Finland

Sweden

Denmark

0 1 2 3 4 5 6 7 8

5.4

Brazil

Argentina

Mexico5.0

4.4

Chile

17

19

Bank-Lending Reform

Bank Penetration% of GDP

Mexico: Companies with credit in 2012*% of total

Total Micro Small Medium Large0

10

20

30

40

50

60

7.4 6.5

29.2

39.6

52.6

Source: National Council of Financial Inclusion (2013), Banorte-Ixe, World Bank, Banxico

Objetive: Increase bank penetration in Mexico aiming to achieve the democratization of high productivity among companies and facilitate consumption smoothing for individuals from all social levels

Main points: Improve enforcing contracts processes for commercial banks, SME guarantees programs for Development banks and non-bank banks regulation

Bank penetration in Mexico% GDP

Mexico

Peru

Colombia

Brazil

Chile

0 25 50 75

16.2

23.1

41.4

45.5

72.0

05

1015202530354045

16.2

40Forecast

18

22

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15-15

-10

-5

0

5

10

-40

-30

-20

-10

0

10

20

30

40

50

60

2.9

-11.2

0.5

-4.3

-11.8

CPI Fixed-line phoneCable TV InternetMobile phone

CPI, Phone, Cable TV, Internet Sub-indexes% annually

Reforms are Starting to Work

Lower phone tariffs.

AT&T purchased Nextel and Iusacell.

Televisa internet and phone service for

less than USD$30.

Telmex new internet and phone

scheme of USD$22.

Positive Consequences

21

24

The Economy is Recovering: External Demand and Consumption

Feb-09 Feb-11 Feb-13 Feb-15-15.0

-10.0

-5.0

0.0

5.0

10.0

1.6

Source: Banorte-Ixe, INEGI

Industrial Production% annually

Retail Sales% annually, 3mma

Manufacturing Construction Production% annually

Feb-11 Feb-13 Feb-15-10

-5

0

5

10

4.0

1.1

Manufacturing

ene-09 ene-11 ene-13 ene-15-6

-4

-2

0

2

4

6

2.77598133392107

23

25

What to Expect in 2015

Inflation forecast%yoy

Dec-13 Jun-14 Dec-14 Jun-15 Dec-152.0

3.0

4.0

5.0

3.0

Forecast

Banxico's inflation target

Mexico 2015 GDP forecast%yoy

Source: Banorte-Ixe, INEGI

Ex

tern

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em

an

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Fis

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form

...

Pu

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sp

en

din

g...

Oil

pro

du

cti

on

To

tal

1.3

3.2

1.0

1.0 -0.1

24

26

Conclusions

The global context appears to be less supportive than in the past, with lower global growth forecasts.

Mexico has been able to strengthen macroeconomic fundamentals, which has improved the country's resilience against shocks.

Mexico has developed significant trade competitiveness.

The next step is to increase productivity and eliminate the “dual” economy. Therefore moving forward with the structural reform agenda is

fundamental. In addition, the next most important reform is to strengthen the "Rule

of Law"

The economy is starting to recover driven by the external demand and domestic consumption.

The outlook for the Mexican economy seems promising for 2015 and for the longer run.

25