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T HE E FFECTS OF THE G LOBAL F INANCIAL C RISIS ON THE M EXICAN E CONOMY

T HE E FFECTS OF THE G LOBAL F INANCIAL C RISIS ON THE M EXICAN E CONOMY. June 2009. Index. International Environment Effects on the Mexican Economy Inflation 2009 Outlook Effect of the Flu epidemic on Mexico Final Comments. International Environment.

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T HE E FFECTS OF THE G LOBAL F INANCIAL C RISIS ON THE M EXICAN E CONOMY

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  1. THEEFFECTS OF THE GLOBAL FINANCIAL CRISIS ON THEMEXICAN ECONOMY June 2009

  2. Index • International Environment • Effects on the Mexican Economy • Inflation • 2009 Outlook • Effect of the Flu epidemic on Mexico • Final Comments

  3. 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 world’s 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.

  4. 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.

  5. International Environment USA: S&P /Case-Shiller home price index and NAR median home prices (Annual %variation) Libor and federal interbank funding rates (%) Stock Markets (January 2nd, 2007=100) Source: NAR and S&P.

  6. International Environment World Exports (Billions of dollars per month) 2008-2009 2001-2009 Source: JPMorgan.

  7. Effects on the Mexican economy: Real transmission channels Manufactured goods Exports Primary goods Real Transmission Channels Remittances Confidence

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

  9. 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. 9

  10. 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

  11. Effects on the Mexican economy: Effect of financial flows Accumulated flows from funds dedicated to emerging markets: Debt (Billions of dollars) Stock Markets (January 2nd, 2008=100) Exchange Rate Peso per dollar * 60-day moving average coefficient

  12. 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) Credit cards3/ Housing 4/

  13. 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 (2006=100,seasonally adjusted data) * Informe sobre la Inflación Enero-Marzo 2009 , Banco de México. Source: National Retailers Association (ANTAD). 13

  14. 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.

  15. Current account deficit Current Account (Billons of dollars) */ Estimated figures. Source: Banco de México.

  16. 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)

  17. 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 (US$30 billion). • Access to the Flexible Credit Line from the IMF (in effect for one year for about US$47 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.

  18. Inflation Inflation expectationse/ (annual % change) INPC and its components (annual % change) * * Half month. e/ Private-sector expectations survey, Banco de México, May 2009.

  19. 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.

  20. 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.

  21. Outlook for 2009 and 2010 Outlook for 2009 and 2010: Private Sector Source: Banco de México. Private-sector expectations survey, May 2009.

  22. 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 government’s reaction was to favor a high level of safety due to the virus’s 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.

  23. 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.

  24. 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 México’s 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.

  25. 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.

  26. 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.

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