Economic Insights: Conversations with the Dallas Fed Webcast Series Mexico's Reforms, the Border and Progress May 29, 2013
Mexico s Reforms, the Border and Progress Roberto Coronado Assistant Vice President in Charge, El Paso Branch & Ed Skelton Business Economist The views expressed are those of the speakers and should not necessarily be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.
Policy Progress and Reform in Mexico Ed Skelton Business Economist Financial Industry Studies Federal Reserve Bank of Dallas
Policy Progress and Reform in Mexico
Overview Past history of macroeconomic instability Changes to the monetary policy framework Changes to the fiscal policy framework Reforms passed and pending
A history of crises US $/peso exchange rate, monthly percentage change Percent 30 20 10 0-10 -20-30 -40-50 -60 1970 1975 1980 1985 1990 1995 2000 2005 2010 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0
The rise and fall of inflation 12-month inflation rate Percent 200 180 160 140 120 100 80 60 40 20 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0
Crises hurt! Real GDP per capita growth, PPP-adjusted Percent 15 1976 crisis 10 5 14 12 10 0-5 -10-15 1982 crisis Tequila crisis Global financial crisis 1970 1975 1980 1985 1990 1995 2000 2005 2010 8 6 4 2 0
Improved monetary policy Central bank independence Focus on longer-term objectives Inflation targeting Price level is what central banks ultimately control Objective against which an independent central bank can be held accountable
Independent central banks deliver better inflation outcomes Average annual inflation rate, 1955-1988 Percent 9 8 7 6 5 4 3 2 1 0 NZL ESP ITL NOR/SWE/FRA GBR AUS BEL 0 1 2 3 4 5 Index of central bank independence DEN JPN CAN NED USA SUI DEU
Independence El Estado tendrá un banco central que será autónomo en el ejercicio de sus funciones y en su administración. Su objetivo prioritario será procurar la estabilidad del poder adquisitivo de la moneda nacional, fortaleciendo con ello la rectoría del desarrollo nacional que corresponde al Estado. Ninguna autoridad podrá ordenar al banco conceder financiamiento. Article 28 of the Constitution of the Mexican United States, August 20, 1993
Inflation targets and outcomes: the first 10 years 12-month inflation rate Percent 60 50 40 Actual inflation rate 30 20 10 Target inflation rate 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Inflation targets and outcomes: the last 10 years 12-month inflation rate Percent 7 6 Actual inflation rate 5 4 3 2 Target inflation rate 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Independence good for price stability Period Average annualized monthly inflation Standard deviation Prior to independence 1970 1994 Since independence 1994 current Since inflation targeting 2001 current 43.3% 42.9 10.3% 10.6 4.4% 1.0 1995 2000 22.1% 21.0
Mexico grows a yield curve Percent 60 50 40 30 20 1995 1999 2000 2003 2004 2006 2010 2013 10 0 O/N 28D 3M 6M 1Y 3Y 5Y 10Y 20Y 30Y 100Y
Fiscal reforms Budget and Fiscal Responsibility Law 2006 Balanced budget rule Integral Fiscal Reform 2007 Improving tax collection ISSSTE Law 2007 More sustainable pension system Governmental Accounting Law 2008 Harmonization of budget and accounting codes
Fiscal policy has remained disciplined Deficit as a share of GDP Percent 4 2 0-2 -4-6 1997 1999 2001 2003 2005 2007 2009 2011 Primary balance Budget deficit Public sector borrowing req.
National debt small Debt as a share of GDP 100 80 60 40 20 0
Premium flare-up small for Mexico Interest rate spread Basis points 1600 1400 1200 Tequila crisis Asian crisis 1000 800 2008-9 crisis 600 400 200 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
and less dramatic than similar countries Interest rate spread Basis points 1000 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Latin America Russia Brazil Mexico
less risky than peripheral Europe too? Interest rate spread Basis points 4000 3500 3000 2500 2000 1500 1000 500 0 2008 2009 2010 2011 2012 2013 Greece Portugal Ireland Spain Italy Mexico
less risky than peripheral Europe too? Interest rate spread Basis points 2000 1500 1000 500 0 2008 2009 2010 2011 2012 2013 Portugal Ireland Spain Italy Mexico
1986: Mexico joins GATT Index, 2003=100 130 120 110 100 90 80 70 60 50 Ties that bind Manufacturing production 1994: NAFTA 2001: China joins WTO U.S. Mexico 40 1980 1985 1990 1995 2000 2005 2010
Independence not as good for growth Period Average annualized quarterly growth Standard deviation Prior to independence 1970 1994 Since independence 1994 current Since inflation targeting 2001 current 2.7% 5.3 2.6% 6.0 2.2% 5.0 1995 2000 3.5% 7.7
Obstacles to development Human capital deficit - education Barriers to entry & foreign direct investment (FDI) Inefficient institutions PEMEX At root: labor productivity deficit
Pacto por Mexico: early successes Education reform Important signal Telecommunications reform Instituto Federal de Telecommunicaciones created Telecommunications giants targeted
Pacto por Mexico: pending reforms Financial system reform proposed Fiscal reform Energy reform
Economic growth Conclusion: Mexico s two paths 6% 5% 4% 3% 2% 1% Without Reforms With Reforms 0% 2010 2011 2012 2013 2014 2015
Mexico's Economy: Clouds Ahead, Brighter Future Roberto Coronado Assistant Vice President in Charge, El Paso Branch & Senior Economist
Increased interest in the Mexican economy Mentions in Google news, 100=peak 60 50 40 Mexico drug war Mentions in Google news, 100=peak 60 50 40 Mexico economy 30 30 20 20 10 10 0 0 Source: Google Trends Source: Google Trends
Today s agenda Mexico s economy feeling the pain from U.S. industrial sector slowdown How relevant is Mexico to the U.S. and Texas economies? Texas border economy in transition Prospects and challenges for the Mexican economy going forward
Mexico s economy slowing down GDP growth, Percent 8 7.2 6 4 2 5.2 4.2 3.6 2.5 4.8 5.5 5.0 3.6 6.0 1.4 4.0 3.2 5.1 3.2 1.2 5.3 3.9 3.9 2.2 0 0.1-2 -0.9-4 -6-6.2-6.0-8 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2013* represents Q1/Q1 data Source: Instituto Nacional de Estadistica y Geografia
Growth is broad-based, industrial sector moving sideways Index, 2003=100, S.A. 143 138 Services 133 128 123 IGAE Total Industrial Production 118 113 108 103 2007 2008 2009 2010 2011 2012 2013 Source: Instituto Nacional deestadistica y Geografia.
Drivers behind strong growth 1. External sector Mexico tapped into the strong growth of emerging economies, around 20% of its exports go to emerging markets U.S. exports rebounded nicely, especially autos 2. Internal sector Strong employment growth, over 2 million new jobs Healthy banking system Jobs + Lending = Strong consumption 3. Capital flows Foreign direct investment bouncing back after the Great Recession Portfolio investment taking the lead
Mexico s manufacturing losing momentum SA, 50+=Increasing 65 60 55 Increasing 50 Decreasing 45 Manufacturing 40 New Orders 35 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Indicador del Instituto Mexicano de Ejecutivos de Finanzas (IMEF) del Entorno Emperesarial Mexicano/Haver Analytics
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Mexico closely follows U.S. industrial sector Real GDP SAAR, Billions, Q42007=100 U.S. IP Index, SA, Q42007=100 110 110 100 90 U.S. IP 100 90 80 80 70 70 60 50 Mexico Real GDP 60 50 40 40 Sources: Federal Reserve Board, Haver Analytics, Instituto Nacional de Estadistica y Geografia
U.S. auto sales have slowed down Million Units, SAAR 20 18 16 April=14.9 14 Cash for Clunkers Tsunami disrupts auto output in Japan and the US 12 10 8 2006 2007 2008 2009 2010 2011 2012 2013 Source: U.S. Department of Commerce: Bureau of Economic Analysis, HAVER Analytics
Is Mexico important to the U.S. and Texas economies? Mexico is the third most important trading partner for the U.S. In 2012, the top three trading partners for the U.S. were: Canada $616 billion China $536 billion Mexico $493 billion For Texas, Mexico is the number one trading partner roughly 1/3 of Texas exports go to Mexico
1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 U.S. - Mexico total trade Billions of Dollars, Real, SA, 3 m-m-a 450 400 350 300 Mexico joined GATT, now WTO NAFTA 250 200 150 100 50 0 Source: U.S. Census Bureau/Haver Analytics
Autos leading in U.S.-Mexico trade Sector 2012 billions Road Vehicles 73.4 Petroleum 60.6 Electrical Machinery 50.0 Telecommunications 38.8 Office /Automatic Data Processing 30.4 General Industrial Machinery 24.2 Power-Generated Machinery 18.2 Total Trade U.S. - Mexico 494.0 Source: U.S. Census Bureau
Mexico auto exports Millions of units, SAAR, 3-mo moving avg. 3.0 6.4% 1.1% 6.3% 0.8% 2.5 16.5% North America Central America and Carribean South America 2.0 0.9% 68.1% Asia Europe 1.5 1.0 0.5 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Asociación Mexicana de la Industria Automotriz, A.C.
How relevant is Mexico in North American auto production? Today, roughly 1-in-5 light vehicles produced in North America come from Mexico. Mexico surpassed Canada as the second largest vehicle producer in North America in 2008. Mexico also plays a crucial role in auto parts. One-third of the auto parts imported into the U.S. come from Mexico. Source: Thomas H. Klier and James Rubenstein, The Growing Importance of Mexico in North America s Auto Production, Chicago Fed Letter, May 2013, No. 310.
Texas top five ports of entry Total land trade, 2012 $ billions % of total U.S.-Mexico land trade Laredo 168.8 40.91 El Paso 66.9 16.20 Hidalgo/Pharr 26.8 6.51 Eagle Pass 21.7 5.25 Brownsville-Cameron 15.4 3.73 Texas 304.92 73.9 Source: U.S. Department of Commerce Bureau of the Census, Foreign Trade Division
Border economy in transition Employment shifting from manufacturing to services 1990 Mfg. 2011 Mfg. 1990 Services 2011 Services El Paso 20% 6% 73% 85% Laredo 4% 1% 86% 91% McAllen 14% 3% 74% 87% Brownsville 16% 4% 76% 88% Source: Bureau of Economic Analysis As a result of service sector growth, per capita income closing gap with national levels
1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Per capita income in Texas border cities closing the gap with the U.S. As a share of the U.S. level % 75 75 70 70 65 65 60 60 55 55 50 50 45 45 40 40 Brownsville-Harlingen El Paso Laredo McAllen- Edinburg- Mission Source: Bureau of Economic Analysis
Mexico is expected to grow 4% in the near future Percent Change, NSA 6 5.3 4 3.9 3.9 3.4 4.0 4.0 2 0-2 -4 Forecasts -6-8 -6.0 2009 2010 2011 2012 2013 2014 2015 Source: Historical data are from Instituto Nacional de Estadistica y Geografia; forecast from Banco de Mexico, Encuesta Sobre las Expectativas de los Especialistas en Economía del Sector Privado: Abril de 2013.
Challenges ahead Immediate challenges 1. Slowdown in U.S. industrial sector 2. Overheating in emerging markets 3. Reversal of capital flows Long-term challenges 1. Contraction in oil production 2. Growing informal sector 3. Weak competition in key sectors
Mexico s main challenge: stagnant per capita income PPP converted US$ 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.1, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, July 2012.