20181112-法国巴黎银行-REVISING_OUR_OUTLOOK_FOR_MEXICO_39页_1mb

Summary of BNP Paribas Report: Mexico Outlook (November 2018)

Core Content

This report from BNP Paribas provides an updated outlook for Mexico's economic and monetary policy environment in 2019, focusing on fiscal pressures, inflationary risks, and the impact of the new administration's policies.

Main Views

• Fiscal Outlook: The fiscal situation is expected to deteriorate sharply, with total spending pressures amounting to more than 3% of GDP. Despite less approval of the full amount, Mexico will not achieve a primary budget surplus in 2019.
• Monetary Policy: The window for monetary normalization is closing, with Banxico likely to postpone rate cuts. Inflationary risks and uncertainty around the new government's policies are expected to keep the policy rate at around 8.00% for 2019, up from the previously expected 6.25%.
• Inflation Projections: Inflation is forecasted to rise to 4.0% year-on-year by the end of 2019, with core CPI expected to stall around 3.5%. The weaker peso and energy price impacts on service prices are contributing factors, although regulated prices may limit headline inflation.
• GDP Growth: The GDP growth forecast for 2019 has been revised downward by 1 percentage point to 2.0%, due to subdued private investments, credit expansion, and tight financial conditions.
• Political Shifts: The new administration under AMLO is moving Mexico closer to the traditional Latin American pack, with a focus on regime change, anti-corruption, and a more populist approach. This has led to a shift in market dynamics, with increased uncertainty affecting economic fundamentals.

Key Information

• TIIE Positions: The report mentions that BNP Paribas has cut its allocation to Mexico, with the exception of maintaining a 1y1y TIE position. The stop level for this position has been extended to 9.50% with a new target of 7.00%.
• Minimum Wage Plan: AMLO's plan to increase the minimum wage by 12% in 2019 is expected to have a moderate inflationary impact. The report highlights the transmission mechanism from minimum wage increases to inflation, with a 1.8pp impact on CPI for a 12% raise.
• Regulated Prices and FX Impact: Regulated prices are expected to keep inflation in check, while the weak peso may contribute to inflationary pressures. The report suggests that the impact of FX pass-through on inflation is significant.
• PEMEX and Energy Sector: AMLO's energy policies include increasing production capacity, modifying tax structures to boost investment, and giving workers the freedom to join unions. However, there are concerns about potential disruptions and the financial health of PEMEX.
• Regional Comparison: Mexico is now part of the Latin American pack, with similar economic forecasts and challenges. The report compares Mexico's performance with other Latin American countries, highlighting the potential for slower growth and higher debt levels.

Strategic Views

• Tactical Approach: Given the increased uncertainty, the report recommends smaller and more tactical trades rather than large structural positions.
• Risk Heat Map: The report updates the risk heat map, indicating a higher likelihood of materialization of risks, especially related to fiscal and inflationary pressures.
• Policy Tracker: The report outlines key policy dates to watch, including the 2019 budget, minimum wage decisions, and public consultations.

Contributors

• Joel Virgen Rojano – Mexico Economist at BNP Paribas Securities Corp.
• Luiz Eduardo Peixoto – Latam Economist at Banco BNP Paribas Brasil S.A.
• Gabriel Gersztein – Global Head of Emerging Markets Strategy at Banco BNP Paribas Brasil S.A.

Important Notes

• The report contains non-independent research and is subject to conflicts of interest.
• It is intended for professional clients and eligible counterparties.
• The content may include "Research" as defined under MiFID II, which is only available to those who have signed up to BNPP's research packages or are out of scope of the MiFID II unbundling rules.
• The information is based on public sources and may not have been independently verified.