巴黎银行-新兴市场-投资策略-墨西哥宏观观察：是狂风暴雨还是微波起伏？-2019.7.5-36页_2mb

MEXICO MACRO TRACKER: IS IT A STORM OR JUST CHOPPY WATERS?

Core Content Summary

This report provides an analysis of Mexico's macroeconomic outlook in 2019, focusing on the interplay between global conditions, domestic economic performance, monetary policy, fiscal targets, and political sentiment. It is authored by Joel Virgen Rojano, an Economist at BNP Paribas Securities Corp.

Main Views and Key Information

1. Global Conditions and Mexico

• The Mexican economy is decelerating, influenced by a weak U.S. manufacturing sector and global trade tensions.
• Emerging Markets (EMs) are facing trade contraction and protectionism, but a weak USD may provide some support through commodity prices.
• Mexico has significant exposure to the U.S. economy, making it vulnerable to global slowdowns.
• EM exports have not yet recovered, indicating a downside bias for economic activity.

2. Political Cycle and Economic Performance

• The current administration is experiencing a subpar growth year, with issues related to slow policy execution.
• The slowdown is driven by both supply-side challenges (e.g., U.S. manufacturing deceleration, capital goods imports) and demand-side weakness (e.g., weak consumption, subdued government spending).
• Political uncertainty and public security concerns are affecting the business climate and investment sentiment.
• There is a risk of a technical recession in Q2 2019, with a 40% probability.

3. Monetary Policy Normalization

• Banxico has adopted a more dovish tone, signaling potential rate cuts in the near future.
• The report expects the first 25bp cut in September 2019, with a total of 150bp cuts by Q2 2020.
• Despite narrowing inflation differentials, the central bank is cautious due to local inflation risks and a target to converge inflation expectations to 3%.
• The policy rate spread between the U.S. and Mexico is expected to end 2019 at 550bp.

4. Fiscal Targets and Credit Rating Outlook

• The government is committed to maintaining fiscal responsibility and a primary surplus target of 1% of GDP.
• However, the report is skeptical about the government's ability to meet this target, given structural challenges in PEMEX and fiscal constraints.
• Credit rating agencies like Fitch, Moody's, and S&P are under pressure due to fiscal and economic underperformance.
• Fitch has downgraded Mexico's credit rating to BBB from BBB+ due to risks from PEMEX and macroeconomic outlook.
• The report anticipates further credit rating downgrades from other agencies.

5. Political Popularity and Public Sentiment

• President AMLO remains popular, with 60% of the population optimistic about his leadership.
• Public sentiment is influenced by a perception that previous governments are responsible for the country's problems.
• Despite this, there is room for disappointment if the administration fails to deliver on its promises.
• Surveys show that a majority of the population expects the economic situation to remain unchanged in the short term.

Key Figures and Projections

• GDP Real Growth (2019): Revised down to 1.5% from 1.0%.
• Inflation (2019): Expected to end within Banxico's 2–4% range.
• Banxico Rate (2019): Projected to decrease from 6.75% to 7.50%.
• Primary Surplus: Targeted at 1% of GDP, but the government is unlikely to meet it.
• Credit Rating Downgrade: Fitch downgraded to BBB from BBB+ in June 2019.

Conclusion

The report highlights that while Mexico is not immune to global economic deceleration, it faces significant domestic challenges, including fiscal constraints, structural issues in PEMEX, and political uncertainty. Despite a strong public approval rating for President AMLO, the economic outlook remains cautious, with the risk of a technical recession and potential credit rating downgrades. The central bank is expected to respond with monetary easing, but the effectiveness of this will depend on the broader economic environment and the government's ability to manage fiscal targets.