mexico’s monetary policy under current economic and financial … · 2019-04-02 · mexico’s...

Mexico’s Monetary Policy under Current Economic and Financial Conditions

OMFIF RoundtableLondon, April 2nd , 2019

Javier Guzmán Calafell, Deputy Governor, Banco de México*

*/ The opinions and views expressed in this document are the sole responsibility of the author and do not necessarily represent the institutional position of Banco de México or of its Board of Governors as a whole.

2

As in the case of other emerging markets, the Mexican economy isfacing a complex external environment:

o A deceleration of world trade and economic activity.

o Uncertainty related to trade negotiations between the United Statesand China.

o Concerns surrounding the UK exit from the EU.

o Protectionist trends.

o Potential for turbulence in international financial markets andvolatility of foreign capital flows.

o Vulnerabilities in China and other emerging market economies.

o Other political and geopolitical risks.


3

This situation is complicated by a number of idiosyncratic factors:

o Ratification of USMCA.

o Uncertainty over several elements of public policy.

o Low levels of business confidence.

o Financial difficulties at Pemex.

o Vulnerabilities in the country’s sovereign rating.

o Structural and institutional obstacles to economic growth.


4

Economic activity has decelerated since 2016, although still showing an output gaparound zero by the end of last year.

Mexico

s.a./ Seasonally adjusted series.Note: The dashed line represents a polynomial (order 4) trend.Source: INEGI.

Gross Domestic ProductAnnual % change, s.a.

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

-12

-10

-8

-6

-4

-2

0

2

4

6

8

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

GDP GDP Excluding Oil Sector 2/

4Q

Output Gap1/

% of potencial GDP, s.a.

s.a./ Estimated with seasonally adjusted data.1/ Estimated with the Hodrick-Prescott filter.2/ It excludes oil and gas extraction, services related to mining and the manufacture of oil and coal products.Source: Estimated by Banco de México with data from INEGI and Banco de México.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

I II III IV I II III IV I II III IV I II III IV I II III IV

2014 2015 2016 2017 2018

Annual % change Trend


5

Partly as a result of temporary factors, the deceleration of economic activity was morepronounced at the end of 2018 and at the start of this year. The dynamism of privateconsumption and exports, particularly to countries other than the US, is beginning to weaken.

Consumer Confidence and Private ConsumptionPoints and annual % change of the three-month moving average, s.a.

Manufacturing ExportsIndex 2013 = 100, s.a.

s.a. / Seasonally adjusted series.Source: Banco de México, INEGI, SAT and SE.

5

10

15

20

25

30

35

40

45

50

-12

-9

-6

-3

0

3

6

9

12

15

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Retail Sales

Aggregate Private Consumption

ANTAD Retail Sales

Consumer Confidence→

January4Q

FebruaryFebruary

50

60

70

80

90

100

110

120

130

140

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Total US Rest

February


s.a./ Seasonally adjusted series.Note: Except for Aggregate Private Consumption, annual variations are based on 3-month movingaverages.Source: INEGI

6

In addition, investment is showing a worrisome trend...

s.a. / Seasonally adjusted series.Note: The dashed line represents a polynomial (order 4) trend line.Source: INEGI.

s.a. / Seasonally adjusted series.Source: INEGI.

Gross Fixed Investment Index 2013 = 100, s.a.

Investment Rate% of GDP, s.a.

90

95

100

105

110

115

120

125

130

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Total Machinery and Equipment Construction

December


16

17

18

19

20

21

22

23

24

25

26

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Investment Rate Trend

4Q

7

…explained to a significant extent by low levels of confidence.

Right Time to Invest 1/

Indicators with reference level at 50 points, s.a.Perception of Adequate Economic Conditions to Invest by

Analysts 2/

% of answers

s.a. / Seasonally adjusted series.1/ Refers to the question: “Considering the current situation of the country and of your firm vs. oneyear ago, do you believe it is the right time to invest?”Source: INEGI.

2/ Refers to the question: “Do you consider current economic conditions are good/bad for firms toinvest?”Source: Banco de México.


10

15

20

25

30

35

40

45

50

55

60

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

Construction Commerce Manufactures

March0

10

20

30

40

50

60

70

80

90

Jan

-17

Jun

-17

No

v-1

7

Ap

r-1

8

Sep

-18

Feb

-19

Good Time Bad Time

March

8

Decisive actions are needed to reduce uncertainty and increaseinvestment.

This is particularly important given:

o Low rates of potential growth.

o Poor productivity performance.

o Existing constraints on public investment.

o Downside risks to economic growth from other sources.


3.0

3.5

4.0

4.5

5.0

5.5

6.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

February

9

The labor market, though still tight, has also weakened.

Formal Sector WorkersAbsolute annual variation in thousands of workers

Source: IMSS.

Unemployment Rate%, s.a.

s.a. / Seasonally adjusted series.Source: INEGI.

0

100

200

300

400

500

600

700

800

900

2012 2013 2014 2015 2016 2017 2018 2019

Total

Permanent Workers

Temporary Workers

February


1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

2018 (Actual)

2019

2020

2019 (Banco de México Midpoint Forecast)

2020 (Banco de México Midpoint Forecast)

March

10

In this context, expectations for GDP growth in 2019-2020 have declined.

Mexico: Growth Expectations and ForecastsAnnual %

Source: Banco de México.

Banco de México Forecast

2019 1.1 - 2.1

2020 1.7 - 2.7


11

The evolution of analysts’ expectations for the long run is more worrisome.

Long-Term Growth Expectations, Next 10 yearsAnnual %



2.0

2.5

3.0

3.5

4.0

4.5

2013 2014 2015 2016 2017 2018 2019

March

12

Inflation has fallen significantly since late 2017. However, core inflation has remained stable for nearly a year.

CPI InflationAnnual %

*/ Data through the first fortnight of March 2019.Source: INEGI.

0

1

2

3

4

5

6

7

8

2015 2016 2017 2018 2019

Headline

Core

Variability Interval

March*


13

Inflation expectations for 2019 and 2020 have declined, but they show figures aboveBanco de México’s projections.

Inflation Expectations and Forecasts Annual %


2.0

2.5

3.0

3.5

4.0D

ec-1

6

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec

-18

Jan

-19

Feb

-19

Mar

-19

End-2019

End-2020

End-2019 (Banco de México Forecast for Q4)

End-2020 (Banco de México Forecast for Q4) March


14

In addition, long-term inflation expectations, though stable, remain above the 3percent target and those for general and core inflation seem to be converging.

Long-Term Inflation ExpectationsMedian, %



2.5

3.0

3.5

4.0Ja

n-1

4

Jun

-14

No

v-1

4

Ap

r-1

5

Sep

-15

Feb

-16

Jul-

16

Dec

-16

May

-17

Oct

-17

Mar

-18

Au

g-1

8

Jan

-19

Headline Next 5-8 Years Permanent Target Core Next 5-8 Years

March

15

The balance of risks for inflation continues to be skewed to the upside:

o Potential pressures on the exchange rate.

o Volatility of agricultural and energy prices.

o Direct and indirect effects of minimum wage adjustments.

o Risk of a deterioration of public finances.

o Persistently high core inflation that could contaminate long-terminflation expectations.

o Potential escalation of protectionist measures at a global level.


16

Financial markets in Mexico have shown an improvement over the course of thisyear, but risks remain.

USD/MXN Exchange Rate and Government Bond Interest RatePesos per dollar and %

Note: Vertical lines on the dates of the following recent events: Moody’s communiqué (18-October), cancelation of the NAIM (28-October), Fitchcommuniqué (31-October), presidency inauguration (1-December), economic package for 2019 announced (15-December), Fitch Ratings communiquéabout Pemex downgrade (29-January), Pemex’s government aid announcements (15-February & 28-February), Standard & Poor’s communiqué aboutPemex negative outlook (1-March).Source: Banco de México and PiP.

18.20

18.50

18.80

19.10

19.40

19.70

20.00

20.30

20.60

20.90

7.75

8.00

8.25

8.50

8.75

9.00

9.25

9.50

9.75

10.00

Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19

30-Year Rate

10-Year Rate

←FIX Exchange Rate


17

The latter is underlined by recent decisions by several rating agencies. Mexico

Note: The red dots represent the recent revisions to the rating outlook from stable to negative.The dotted lines represent the investment grade.Source: Moody’s, Standard & Poor’s, HR Ratings and Fitch Ratings.

20

06

20

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19

- A-- BBB+- BBB- BBB-- BB+- BB

A3 -Baa1 -Baa2 -Baa3 -

Ba1 -Ba2 -

- A-- BBB+- BBB- BBB-- BB+


Moody's

S&P

Fitch HR

Pemex

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

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20

19


A3 -Baa1 -Baa2 -Baa3 -

Ba1 -Ba2 -

- A-- BBB+- BBB- BBB-- BB+


Moody's

S&P

Fitch HR

Note: The red dots represent the recent revisions to the rating outlook from stable to negative.The dotted lines represent the investment grade.Source: Moody’s, Standard & Poor’s, HR Ratings and Fitch Ratings.


18

Recent revisions to Pemex rating or outlook are the result of a combination of factors.

HR Ratings

November 6th , 2018

Fitch Ratings

January 29th, 2019

Standard & Poor’s

March 4th, 2019

Action on

Pemex

rating or

outlook

Rating Outlook Revised to

Negative from Stable (A-)

Long-Term Foreign-Currency Issuer

Default Rating Downgraded to BBB- from

BBB+ (Negative rating outlook)

Rating Outlook Revised to Negative from Stable (BBB+)

Action

drivers

• Revision to Mexico’s

rating outlook from

stable to negative on

October 30th 2018 led to

the modification of

Pemex rating outlook.

• HR considers that Pemex

rating has a direct

relation with Mexico’s

global rating given the

implicit guarantee from

the Mexican federal

government to the

enterprise.

• Downgrade reflects continued

deterioration of Pemex’s standalone

credit profile (SCP) as a result of

persisting negative Free Cash Flow

and material under-investment in the

upstream business.

• SCP deterioration has led Fitch to

lower its assessment of the

government’s incentive to support

the company to “strong” from “very

strong”.

• In Fitch’s view, announced support

measures for Pemex are not enough

to offset the recent deterioration in

Pemex’s SCP.

• S&P considers that ratings on Pemex mirrors those for the

sovereign, since incremental budgetary allocations for

Pemex in 2019 and public statements at the time assures

that the company will meet all its financial obligations in

a timely manner because there is an almost certain

likelihood of extraordinary government support.

• The drop in Pemex’s standalone credit profile is due to:

1. Company’s core businesses underperforming

relative to S&P previous expectations.

2. Government’s plan to restore Pemex’s credit

fundamentals is limited in scope, particularly to

address some of the company’s long-term business

and financial risks.

3. Execution risk for Pemex is high.

Source: HR Ratings (2018) “Entidades Mexicanas con Calificación en Escala Global”, November 6th, 2018; Fitch Ratings (2019) “Fitch Downgrades PEMEX’s IDRs to ‘BBB-’; Outlook Negative”, January 29th, 2019; and,Standard & Poor’s (2019) “PEMEX Outlook Revised To Negative On Similar Action On Mexico; SACP Cut to ‘b-’ From ‘bb-’ On Weak Credit Fundamentals”, May 4th, 2019.


19

Credit default swaps for both Pemex and the sovereign are above those ofcounterparts with similar, and even lower, ratings.

1/ This refers to 5-year Credit Default Swaps. The range corresponds to the difference between themaximum and minimum value.Note: For category BBB it includes Andeavor, Apache, Canadian Natural Resources, Eni, Halliburton,Repsol and Valero Energy and for category BB it includes Anadarko, Devon Energy, Encana, Hess,Nabors, and Petrobras.Source: Bloomberg and Indeval.

Market Indicators of Credit Risk for Pemex and Other Oil Companies1/

Basis points

Emerging Economies Market Indicators of Domestic Sovereign Credit Risk1/

Basis points

1/ This refers to arithmetic mean of the 5-year Credit Default Swaps.Note: For category BB it includes Brazil and South Africa and for category BBB it includes: Colombia,Hungary, India, Indonesia, Peru, Russia, and Thailand.Source: Bloomberg and Standard & Poor’s.

0

50

100

150

200

250

300

J A J O J

Mexico Average BBB (excluding Mexico) Average BB

20192018


0

150

300

450

600

750

900

J A J O J

Range BBB Range BB

Pemex Average BBB

Average BB

20192018

29-march

20

Challenges for the implementation of monetary policy are evident in asituation characterized by:

o Weakening economic activity.

As well as:

o Persistent core inflation.

o Balance of risks for inflation biased to the upside.

o Short- and long-term inflation expectations above Banco de México’sprojections.


21

Under such circumstances, consistent with Banco de México’s mandate,monetary policy must focus on achieving the inflation target within theannounced time frame.

At the same time, it is important to take into account:

o The existing high levels of uncertainty.

o The need to achieve convergence to the target in an orderly andefficient way.

This implies the adoption of a prudent approach, with monetary policydecisions carefully considering incoming information and with priorityattached to enhancing the credibility of the Central Bank.


22

Macroeconomic stability needs an adequate implementation of bothmonetary and fiscal policies.

While public finances’ targets announced for this year represent a step inthe right direction, further efforts are needed to improve Pemex’s long-term financial situation, and its productive capacity.

The latter is crucial for the health of public finances and, in general, for thecountry’s economy.

In addition, to achieve rates of economic growth consistent with our needs,the structural and institutional factors that have discouraged investmentand productivity growth have to be tackled.

It will also be essential to carefully monitor the implications of the currenteconomic strategy, and to introduce the corresponding corrective actionswhenever required.


mexico’s monetary policy under current economic and financial … · 2019-04-02 · mexico’s...

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