Rating: 6.3 (A)
Mexico
STABLE OUTLOOK
Transparency and Accountability
Public Sector Fiscal Policy
• The general government debt-to-GDP ratio is moderate.
Social Cohesion
6.9 6.6 5.8 6.2
Future Resources
4.5
Monetary Policy
10
8
6
7.6
4
3.6
6.3
2
2
4
6
8
Strategic Capacity
5.5
Capital Markets and Financial Risk
6.1 7.1
Adaptability External Sector
6.9 Macroeconomic Indicators
• Although many reforms have been adopted, most of them face a difficult path toward implementation. • Federal tax revenue as a percent of GDP is the lowest among OECD countries and revenue may come under increasing pressure as about one-third of the state budget is derived from the petroleum sector.
Implementation
6.9
• Parties across the political spectrum have been willing to work together to pass needed reforms.
Weaknesses:
10
6.6
7.1
• The economy has integrated rapidly with that of the United States. • Major reform programs are underway that touch on many aspects of the economy.
Rule of Law
Economic Fundamentals
Strengths:
Crisis Management
Forward-Looking Indicators 5.7
• A lack of adequate transparency, accountability and weak rule of law could have an effect on FDI inflow.
Summary Between 2004 and 2014, the Mexican economy grew at a steady but moderate pace, with real GDP growth averaging 2.75%. That average took a hit in 2009 when the economy contracted 4.7% as a result of the global financial crisis. There was another slowdown in 2013, but Mexico eked out real GDP growth
of 1.4% that year. The 2013 downturn was blamed mainly on a contraction in the construction sector. However, this contraction did not affect the average Mexican because it was concentrated in beachfront housing, which is mainly occupied by foreigners.
Because most home purchases in Mexico are underwritten by governmentsubsidized loans instead of the banking system, construction revived in 2014. The economy grew by 2.1% in 2014, with a further acceleration in growth expected this year to approximately 2.5%. Much of the reason for the positive outlook
1
in 2015 is that Mexican manufacturing exports to the United States are expected to increase as the US economy maintains a reasonable rate of growth throughout 2015. Adding to optimism regarding exports is the sharp depreciation in the Mexican peso, which fell to a record low of 17.25 per US dollar on August 24. In 2016, growth is projected to accelerate to around 3%, fueled by an improvement in investment activity. The sharp depreciation of the peso against the Chinese currency, caused by a 1.9% devaluation in the yuan in August, means that Mexican exporters are becoming increasingly competitive in the US market, which puts Chinese-sourced products in direct competition with Mexican-sourced products. While petroleum remains an important source of revenue for the federal government, the sector’s share of the total economy has declined, with manufacturing picking up the slack. In addition, the Mexican economy is now one of the most open in the world, with an openness index (trade as a percentage of GDP) estimated to surpass 70% in 2015, up from 54.2% in 2004. Most of the growth in openness can be tied to increased integration between the US and Mexican economies. Inflation is under control, with the consumer price index (CPI) remaining around the central bank’s 3% target (plus or minus 1%); inflation has generally remained slightly above or below 4%. Recently, and despite the depreciation of the peso against the dollar, inflation slowed even a bit more; price increases were below 3% between May and August of 2015.
The government’s primary deficit remained in slightly positive territory between 2004 and 2009. However, as a result of the global financial crisis, the primary deficit fell into slightly negative territory, where it has remained ever since. However, as a result of recent changes to tax law, spurred by an overhaul of the government, revenue should improve, keeping the primary balance at a relatively low negative level. It should be noted that the present government and parties in opposition have been willing to cross party lines to achieve what are generally considered to be necessary reforms. For instance, the ruling Institutional Revolutionary Party (PRI) passed a constitutional amendment opening the petroleum sector to foreign investment with the assistance of its rival National Action Party (PAN). (The Party of the Democratic Revolution, or PRD, opposed the change.) Several commentators have stated that American legislators could learn a lot from the present Mexican congress in terms of genuine bipartisanship. The slate of reforms pushed through in recent years is impressive. The education, antitrust, energy, telecommunications, labor, and finance sectors have all undergone substantive legal and regulatory overhauls. However, the reforms face a difficult path toward implementation, with, for example, teachers unions vowing to resist the implementation of legislation. Despite these challenges, he IMF estimates that these reforms will eventually boost annual GDP growth to 3.5–4.0%, while the Mexican government believes that the increase to potential output may be even higher.
Despite encouraging steps toward reform, continued problems with corruption, lack of transparency and the rule of law weigh on the country, dampening perceptions abroad that could in turn lead to a loss in foreign direct investment. High profile conflict of interest cases involving the president’s house and a high speed rail project have called into question the government’s commitment to rooting out corruption and enforcing the rule of law, which could affect investor sentiment.
The Economy As noted above, the Mexican economy decelerated in 2013. The slowdown was caused by a combination of somewhat weaker growth in the United States, combined with problems in the housing sector. However, in 2014 these trends were reversed. US growth has proved stronger than most analysts had expected. In addition, the Mexican central bank maintained a relatively flexible monetary policy, while the federal government pursued a neutral fiscal stance. Although headline inflation has remained under control, it may rise somewhat in the latter half of 2015 given the sharp depreciation of the peso in recent months. The central bank has clearly indicated that if there is any upward pressure on inflation caused by the peso’s drop in value, it will act by raising interest rates. The economy still has excess capacity, which has held down price increases. Although the rate of unemployment remains high, there has been a significant movement of workers from the informal sector to the formal sector. The government has loosened labor contract rules in order to nurture this transition
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and has also mandated that the country’s development banks become more involved in micro lending, something that has proved effective in bringing more women into the formal sector as well as spurring overall economic growth. The economy will benefit from strongerthan-expected US growth, particularly in auto sales. There are two important risks that could affect this otherwise rosy scenario. One is external: the potential financial instability that might result from the Federal Reserve’s rise in short-term interest rates sometime in 2015 or early 2016. Both the IMF and the Banco de Mexico worry that this could cause rapid capital outflow from Mexico if the US raises interest rates abruptly. The second risk is the possibility that the new reform policies are not implemented in an appropriate manner. For instance, national oil company Pemex held its first auction of offshore oil blocks in July, and the result was disappointing. One reason for the limited number of bids was that the blocks put up for auction require a large ($6 billion) guarantee by an affiliate company in case of an oil spill. This is an obvious deterrent for many smaller oil companies. In addition, with the worldwide oil supply glut, exploration is viewed as a much riskier investment today. Despite these near-term problems, the government is likely to continue to hold annual auctions. For companies with a long-term outlook, such leases may yet prove popular. Some analysts estimate that Mexico’s untapped oil reserves may be as large as Kuwait’s proven reserves.
Fiscal Policy Ever since the so-called “tequila crisis” of
Unemployment Rate (%) 6 5 4 3 2 1 0
2008
2009
2010
2011
1994–1995, the Mexican government has followed relatively prudent fiscal policies. As noted above, primary and financial balances have remained reasonable, and plans to reduce the government’s debt burden are being laid out over the next few years. What is more interesting is that the government has also established a public sector borrowing requirement (PSBR) target. PSBR was set at 4% for 2014. Lower oil revenues caused by declining production were more than offset, at least in the first half of 2014, by higherthan-expected revenues from import tariffs and the value-added tax (VAT). The final result for 2014 was a PSBR of 4.2% of GDP. The PSBR approved by the Mexican Congress for 2015 is once again set at 4%. The challenge the government faces lies in the continuation of historically low oil prices over an extended period of time.
2012
2013
2014
2015
However, lower prices in the electricity sector (mainly as a result of recent reforms) may allow growth to accelerate further, again somewhat compensating for declining oil revenues. At the same time, the sharp fall in the peso against the dollar implies higher peso revenues from oil, compensating in part for the dollar decline in the oil price. In addition, the government operates a hedge against oil price changes, which keeps public finances under more strict control than if the government was subject to market prices. It is too early to know for sure how all this will play out for 2015 as a whole. Nonetheless, higher tax revenues from non-oil sources more than compensated for the decline in tax revenue from the oil sector during the first five months of 2015. Comparing January-May 2014 with the same period in 2015, we find that although oil revenues declined by Ps193,532 million, non-oil tax revenue rose by Ps307,105 million.
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The government has also indicated that it will once again hedge its oil price risk in 2016 at $49 a barrel. Officials have announced that they prefer to cut expenditures rather than raise taxes if the oil price remains low and is not adequately compensated by a lower peso exchange rate. The government expects oil production to decline slightly in 2015 and then to rise modestly as foreign companies begin production in 2016, with overall production estimated to increase and stabilize at around 3 million barrels per day by 2019. If this does not happen as planned and/or if oil prices remain low, future adjustments in government expenditures will be required. A growing risk is the sharp increase in foreign holdings of Mexican government debt. Last year, foreign holdings accounted for about 37% of total government debt denominated in local currency. However, foreigners held about 55% of the most liquid local-currency government debt. Since the 1994-1995 crisis, the Mexican government has been reluctant to allow foreigners to hold significant portions of its local currency debt. Such holdings were the trigger for that crisis, though there were many other fundamental reasons involved.
Current Account Balance to GDP (%) 0
2008
2009
2010
2011
2012
2013
2014
2015
-0.5 -1 -1.5 -2 -2.5 -3
addition to the $66 billion Flexible Credit Line (FCL) supplied by the IMF, provide a comfortable cushion. Another positive factor is Mexico’s banking regulations. It has adopted Basel III rules, which will be implemented over a five-year period. Most bank deposits are in pesos and there are strict rules on both
inter-party lending and borrowing from foreign owners of Mexican banks. Reform of these regulations would allow Mexico to better withstand financial turbulence.
External Accounts Mexico continues to report modest current account deficits, and trade has remained relatively stable. In 2013,
General Government Debt to GDP (%) 60 50 40
One positive note is that compared to 1994–1995, it is much easier today to cover peso-to-dollar exchange rate risk through the Chicago derivatives market. In addition, Mexico no longer maintains a fixed exchange regime as it did in 1994. That means that the government’s $190 billion in foreign exchange reserves, in
30 20 10 0
2009
2010
2011
2012
2013
2014
2015
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higher net factor payments accounted for a widening in the current account deficit because of positive developments in the Mexican economy due to higher profit repatriation and higher reinvested earnings. In 2013, the current account deficit was equal to 2.4% of GDP, while in 2014, the deficit-to-GDP ratio was slightly lower at 2.1%. In 2015, the current account deficit is expected to widen to 2.7%, a number easily covered by investment inflows. The head of the central bank, Agustín Carstens, has indicated that the bank will likely raise interest rates in 2015, especially if the US Federal Reserve raises interest rates this year. Carstens has indicated that he would prefer to avoid “leakages” from the banking system. Mexican interest rates remain at historic lows, and a slight increase in interest rates should not have an adverse effect on economic activity. The country’s external vulnerability indicator — the ratio of short-term external debt plus current maturities on medium-to-long-term external debt plus non-resident deposits as a percent of international reserves — remains around 70%, a comfortable level.
Political Developments This year, the date for national elections was moved from its traditional spot on the first Sunday in July to the first Sunday in June. This year’s election campaign was among the most violent in recent memory, and some commentators expressed worry that Mexican voters had given up on the need to vote. The election results proved such pessimism
wrong. Voter participation was 47%, the highest mid-term election turnout since 1997. In states with governors up for election, the participation rate was even higher. In the key northern state of Nuevo León, voter participation was over 60%. Given that Nuevo León has been racked by drug-related violence in recent years, high voter turnout appears to represent citizens’ demands for an increase in law and order. The June election was the first in which independent candidates were permitted to run, and the biggest surprise appears to be the strength of such candidates, with the governorship of the state of Nuevo León going to an independent candidate. In addition, the strong showing of the leftist party Morena (led by Andrés Manuel López Obrador) shows that the image of the mainstream left of center PRD has taken a hit following the disappearance of 43 students in Guerrero state in September of 2014. Most analysts argue that independents’ success should be a wake-up call to the traditional parties that they must modernize to better reflect the needs and desires of an increasingly sophisticated electorate.
the election results suggest that the process of economic reform begun under the previous administration will continue. In other developments, a recent inquiry into the sale of luxury homes to the families of President Enrique Peña Nieto and Finance Minister Luis Videgaray marks another scandal for Mexico. Despite having been cleared by the federal comptroller of wrongdoing on August 21, the president’s reputation continues to suffer: opinion polls show that just 34 percent of Mexicans approve of his performance. On a positive note, the government’s recent crackdown on a militant teachers union in Oaxaca has allowed students to return to school, bolstering the government’s image when it comes to handling corruption and education reform.
In the national elections, a PRI-Green Party coalition won half the seats in the lower house. Although there was a small drop in the number of seats for the PRI, the Green Party added enough seats to keep the coalition in power, and ensures that the president will continue to have a working majority in the Chamber of Deputies. The New Alliance Party, which usually votes with the coalition, added another 10 seats to the government’s majority. Overall,
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Rating Committee Average Scores by Indicator Macroeconomic Indicators
6.9
Capital Markets and Financial Risks
7.1
Economic Fundamentals
6.6
Domestic Credit / GDP (%)
6.8
Real GDP Growth %
5.8
Domestic Credit (% Change)
7.2
GDP per Capita
5.9
Overall Strength of Banking Sector
7.3
Real Exports (% Change)
7.0
External Sector
7.1
Real Imports (% Change)
6.7
Current Account
6.9
Gross Domestic Investment / GDP (%)
6.4
External Debt
7.3
Gross Domestic Savings / GDP (%)
6.3
Inflation-CPI (%)
7.4
Forward Looking Indicators
5.7
Population Growth (% Change)
7.2
Political Economic and Social Stability
5.2
Public Sector / Fiscal Policy
6.2
Rule of Law
6.9
General Government Debt / GDP (%)
7.1
Legal Certainty
6.5
Nominal GDP Growth (Local Currency %)
6.8
Independent Judiciary
6.8
Separation of Powers
7.9
Property Rights
6.2
Transparency / Accountability
5.8
Corruption Prevention
3.3
Independent Media
7.0
Civil Society Participation
7.1
General Government Debt / General Government Revenue (%) General Government Interest / General Government Revenue (%)
6.1 6.1
General Government Primary Balance / GDP (%)
6.4
General Government Fiscal Balance / GDP (%)
6.7
General Government Revenue / GDP (%)
4.8
General Government Expenditure / GDP (%)
5.9
Monetary Policy
7.6
Accommodative Monetary Policy
7.6
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Social Cohesion
4.5
Implementation
5.5
Social Inclusion
4.6
Government Efficiency
6.2
Trust in Institutions
2.9
Resource Efficiency
4.7
Societal Mediation
5.4
Adaptability
6.1
Conflict Management
5.1
Policy Learning
6.6
Future Resources
3.6
Institutional Learning
5.5
Education
2.9
Crisis Management
6.9
Research and Innovation
3.0
Historical Evidence of Crisis Management
7.5
Employment
4.3
Crisis Remediation
6.7
Social Security
2.9
Signaling Process
6.6
Environmental Sustainability
4.9
Timing and Sequencing
6.8
Steering Capability and Reform Capacities
6.3
Precautionary Measures
6.9
Strategic Capacity
6.6
Automatic Stabilizers
6.8
Prioritization
7.1
Policy Coordination
6.9
Stakeholder Involvement
6.4
Political Communication
6.1
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macroeconomic indicators I. Economic Fundamentals
2008
2009
2010
2011
2012
2013
2014
2015
Nominal GDP Growth (%)
7.5
-1.3
9.8
9.5
7.3
3.1
6.6
7.5
Real GDP Growth (%)
1.4
-4.7
5.2
4
4
1.4
1
2.5
Unemployment Rate (%)
4.0
5.5
5.4
5.0
5.0
4.9
4.7
4.5
Real Exports, Goods (% Change)
6.9
-20.9
29.8
17.5
5.9
2.3
4.7
Real Imports, Goods (% Change)
9.1
-23.7
28.4
16.8
5.5
2.7
5.2
Nominal GDP (bn. US$)
1101.3
895.0
1051.1
1171.2
1185.7
1260.9
1295.9
1367.3
GDP per Capita (US$)
9939.9
7947.1
9196.9
10123.9
10129.4
10649.9
10836.7
11320.9
14 743.3
14 394.3
15 139.4
16 366.3
16 808.2
16 891.1
Inflation - CPI (%)
5.1
5.3
4.2
3.4
4.1
3.8
3.9
3.6
Population Growth Rate (% Change)
1.4
1.4
1.2
1.2
1.2
1.1
Gross Fixed Capital Formation / GDP (%)
23.1
22.6
21.1
21.7
22.4
21
20.9
21.3
Gross Domestic Savings / GDP (%)
22.1
21.4
21.7
21.2
21.8
19.5
19.5
19.9
II. Public Sector Policy
2008
2009
2010
2011
2012
2013
2014
2015
General Government (GG) Debt / GDP (%)
29.8
37.1
42.2
43.2
43.2
46.4
47.8
48.9
GG Revenue / GDP (%)
24.7
22.1
22.4
22.9
23.4
23.3
22.2
21.6
GG Expenditure / GDP (%)
25.6
27.2
26.7
26.2
27.1
27.1
26.4
25.6
GDP per Capita (PPP basis: US$)
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GG Financial Balance / GDP (%)
-1.2
-0.8
-4.8
-3.3
-3.7
-3.8
-4.2
-4
Primary Balance / GDP (%)
1.5
-2.4
-1.7
-1.0
-1.1
-1.3
-1.5
-1.4
GG Debt / GG Revenue (%)
173.7
198.6
188.2
188.6
184.5
199.2
216.1
227.2
7.7
8.6
8.5
8.3
8.5
8.6
9.5
10.2
2008
2009
2010
2011
2012
2013
2014
2015
8
8.8
4.6
9
5.9
GG Interest / GG Revenue (%)
III. Capital Markets & Financial Risk Domestic Credit Growth (YOY) Domestic Credit / GDP (%)
IV. External Sector Current Account Balance / GDP (%)
37
43.1
44.4
44.9
46.7
49.5
2008
2009
2010
2011
2012
2013
2014
2015
-1.8
-0.9
-0.4
-1.1
-1.3
-2.4
-2.1
-2.7
Sources: OECD, World Bank, IMF, Author’s Calculations
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About the Bertelsmann Foundation The Bertelsmann Foundation, established in 2008, is the North American arm of the Germany-based Bertelsmann Stiftung. The Foundation is a think tank that spurs debate and discussion on political, economic and social issues and it is committed to promoting the freedom of individuals and societies, and international understanding. The Bertelsmann Foundation develops, creates, and implements its own projects and programs. The Bertelsmann Foundation develops “Global Ideas and Transatlantic Action” and we serve as an international window in the US capital, providing a showcase for global best practices and a venue for thought leaders to exchange ideas for confronting society’s greatest challenges. The INCRA project was launched at the Bertelsmann Foundation’s 2012 Annual Financial Conference, which has developed a reputation for being the go-to event on the sidelines of the International Monetary Fund World Bank Group Spring Meetings. The Bertelsmann Foundation sees INCRA as an important contribution to the debate and discussion on new rules for international financial- and economic-policy governance. Therefore, the Foundation seeks to explore and support all avenues to turn the INCRA concept into reality.
About INCRA The Bertelsmann Foundation developed its INCRA (International Nonprofit Credit Rating Agency) proposal following the 2008 financial crisis and the subsequent criticism of the practices of the leading credit rating agencies. The INCRA blueprint presents a new model, both in its institutional setup and its methodology, for developing a credit rating agency (CRA) to assess sovereign risk as an alternative to the big three CRAs. INCRA is based on an operational business model funded by a sustainable endowment. Since publishing the original model for INCRA the Bertelsmann Foundation has assembled a team of international sovereignratings experts produce sovereign ratings based on INCRA’s transparent methodology. INCRA has developed a comprehensive new methodology that evaluates a country’s ability and willingness to repay its debt. INCRA uses, in addition to traditional macroeconomic data, forward-looking indicators in its analyses. These indicators include the ability of governments to master crisis management and to implement needed reform. TINCRA defines sovereign ratings as “public goods”, available to all citizens and correspondingly all detailed rating reports would be available online for free. The Bertelsmann Foundation sees INCRA as an important contribution to the debate and discussion on new rules for international financial- and economic-policy governance.
Contact Annette Heuser, Bertelsmann Foundation, (202) 384-1990 annette.heuser@bfna.org Jeffrey Brown, Bertelsmann Foundation, (202) 384-1995 jeffrey.brown@bfna.org Bertelsmann Foundation North America, 1275 Pennsylvania Ave NW, Suite 601, Washington, DC 20004 http://www.bfna.org/category/publication-type/incra www.incraglobal.org
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