Finance outlook

Country Briefing Mexico
The Economist Intelligence Unit/ Infoestrategica

* President Vicente Fox changed his mind about prosecuting Mexico City’s mayor, Andrés Manuel López Obrador. Charges were dropped, clearing the way for him to seek the presidency next year. Consumer confidence was undermined by the incident.

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* Economic growth slowed to around 3% year on year in the first quarter, largely due to weaker demand from the US as well as early Easter holidays. The central bank ended its nine-month stretch of interest-rate increases in April.

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* The peso moved up once more as domestic financial markets stabilised in late April. The currency traded at under Ps11:US$1 on May 4th, near an eight-week high against the greenback.

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* The IPC index of the Mexico City stockmarket dropped to its lowest level in nearly half a year in late April. It rebounded to over 12,600 by May 4th but remains some 10% below its early March records.

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The Bank of Mexico (the BoM; the central bank) left its monetary policy on hold on April 22nd, marking the first time in nine months that interest rates were not raised. The central bank hiked the amount of “corto”, or short position, vis-à-vis the domestic banking system in 12 of the past 14 months. The central bank impacts interest rates by forcing the country’s banks to borrow funds at higher interest rates when it increases its “corto” position. While rates remained unchanged following the BoM announcement, the overnight rate on the interbank market stood at 9.5% in late April, a two-year high.

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The central bank has indicated that it sees inflation moderating going forward, and slowing towards the 2-4% target range it set for the year as a whole. Core inflation has been easing in recent periods, even though headline inflation stood at 4.4% year on year in March. Consumer prices rose just 0.08% in the first half of April, taking economists by surprise. The government has contributed to price moderation by providing Ps500m in subsidies to reduce the natural-gas bill for consumers by 28% starting in May. Another factor staying the central bank’s hand has been slower economic growth. GDP expanded by around 3% year on year in the first quarter, a sharp slowdown even from the 3.4% rate seen in February. Weaker demand in the US, the destination for more than 90% of Mexico’s manufactured exports, was the main factor in keeping dampening growth.

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The authorities also fear that the well-publicised political crisis stemming from politically motivated criminal charges against Mexico City’s popular mayor, Andrés Manuel López Obrador, could impact consumer confidence. President Vicente Fox moved to diffuse the crisis in late April. After the president replaced the country’s attorney-general, the charges were dropped and Mr López Obrador was left free to run in next year’s presidential elections.

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The stockmarket plummeted in March and April, after hitting an all-time high at nearly 14,000 on the IPC index two months ago. Stocks fell to their lowest level since early November late last month, before rebounding into the 12,600 range by May 4th, in a series of strong upward moves. Still, the IPC is some 10% off its early March peaks. The return of calm to the stockmarket has been beneficial for the peso. The currency is trading at an eight-week high, and has moved into the Ps10:US$1 range at the start of May. This could provide another boost to the inflation-fighting efforts of the government and the central bank. Oil prices, although still elevated, have come down from their all-time highs and are hovering around US$50/b of benchmark Texas crude as of early May.

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SOURCE: EIU/ INFO-e

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