巴黎银行-拉美地区-宏观经济-墨西哥通货膨胀：谨慎推进-20180724-9页_457kb

Mexico's Inflation: Drive Carefully - Summary

Core Content

This report provides an analysis of inflationary risks in Mexico, with a particular focus on the impact of gasoline prices and the role of subsidies in mitigating these risks. It outlines the current economic outlook, including monetary policy expectations and the potential for inflation to rise in the second half of 2018.

Main Points

• Gasoline price is a key inflation risk
  Despite lower global fuel price increases, Mexico's gasoline prices have remained relatively stable due to a combination of tax breaks and state-controlled distribution through PEMEX. This has kept domestic prices about 32% lower than the international benchmark.

• Subsidy mechanism and its limitations
  The tax break scheme (IEPS) has helped keep fuel prices low, but it is not without cost. The current subsidy level can only compensate for an additional 10% in fuel price increases. The Finance Ministry still has some room to adjust, but this is becoming more constrained.

• Impact on budgetary revenues
  The tax incentive for fuel is expected to cost 3% of budgetary revenues, which may hinder the achievement of the 2018 primary surplus target of 0.9% of GDP. The government is likely to reduce subsidies gradually to meet these targets.

• Monetary policy outlook
  The report anticipates that Banxico will raise interest rates by 25 basis points at its next meeting on 2 August. However, the authors do not expect additional hikes immediately and believe easing may start in 2019. Inflation expectations are a key concern for the second half of the year.

• Inflation scenarios
  Two alternative inflation scenarios are outlined:

  • If subsidies are reduced slowly in H2, end-2018 CPI could rise to nearly 5% y/y.
  • If crude prices rise sharply or the Mexican peso depreciates significantly, CPI could finish above 4.3% y/y.

Key Information

• Fuel price control mechanisms:

  • IEPS (Special Duty on Fuel): Aims to stabilize fuel prices by reducing the effective tax rate.
  • PEMEX: State-owned entity with a virtual monopoly over local gasoline distribution.

• Current IEPS impact:

  • In July 2018, IEPS was approximately 57% lower than its actual rate.
  • Full application of IEPS would result in fuel prices being 24% of the retail price, but with subsidies, it is reduced to 11% on average in H1 2018.

• CPI forecasts:

  • The report maintains the end-of-year CPI forecast at 4.0% for 2018.
  • It highlights the sensitivity of CPI to fuel price changes and inflation expectations.

• Political and economic context:

  • Both the outgoing and incoming administrations are expected to maintain fuel subsidies, which suggests inflationary pressures may remain contained for now.
  • The report references a more benign outlook for the Mexican peso and the expectation that crude prices will not rise as sharply as in 2016.

Charts

• Chart 1: Evolution of gasoline prices (100 = Feb 2017)
• Chart 2: CPI (% y/y) under different gasoline price scenarios

Legal and Regulatory Information

• The document is a marketing communication and not independent research.
• It contains information that may be subject to conflicts of interest.
• The document is intended for professional clients and relevant persons only.
• It does not constitute an offer to sell or issue securities.
• It does not provide investment, financial, legal, or tax advice.
• The information is subject to change and should not be relied upon as authoritative.

Disclaimer

• All estimates and opinions are based on current assumptions and may change.
• Indicative prices and scenarios are not actual transaction terms.
• BNPP may have financial interests in the securities discussed.
• The document is for informational purposes only and does not guarantee any outcomes.
• It is not a prospectus or public offering document.
• Reproduction or distribution without prior consent is prohibited.

Summary of Risks

• Fuel price increases could push inflation higher, especially if subsidies are reduced.
• Inflation expectations are likely to rise, increasing pressure on the central bank.
• Budgetary constraints may force the government to reduce subsidies, affecting fuel prices and inflation.
• Exchange rate volatility and crude price fluctuations are potential drivers of inflation.

Conclusion

The report highlights that while fuel subsidies are currently limiting inflationary pressures, the long-term sustainability of these subsidies is a concern. The authors maintain a cautious outlook, emphasizing the need for Banxico to reinforce its hawkish stance in response to rising inflation risks. The end-of-year CPI forecast remains at 4.0%, but alternative scenarios suggest a potential rise to 4.3% or 5% depending on the trajectory of fuel prices and subsidies.