Mexico Business Forecast Report Q4 2012

Mexico Business Forecast Report Q4 2012 - new country guide report published
2013-01-01 01:05:55 - Mexico Business Forecast Report Q4 2012 - a new country guide report on

We have turned cautiously optimistic regarding Mexico´s growth outlook, raising our average real GDP growth forecast for 2012-2021 from 2.7% to 3.3%. This view is underpinned by our expectation for robust credit growth, which is likely to bolster consumer spending, and the increasing likelihood for greater energy sector reform under the next president. We believe Mexico´s central bank retains an



underlying fundamentally dovish bias, underpinned recently by concerns about growth in the facing of rising external headwinds as well as the stability of the country´s external account position. However, with the passthrough impact of a weaker peso as well as high corn and poultry prices boosting inflation, we believe the bank may be forced to delay easing until 2013. Cartel activity will continue to weigh on growth for the foreseeable future, though we believe the situation is unlikely to deteriorate further.

Major Forecast Changes

After a strong Q112 and the election of business-friendly presidentelect Enrique Peña Nieto (who will assume office on December 1), which will likely drive stronger investment inflows, we are revising up our real GDP growth forecast from 3.4% to 3.8% in 2012. Investment will continue to rise in 2013. However, we believe growth will slow as a weaker external environment begins to weigh on Mexican consumer confidence.

We are forecasting growth of 3.4% in 2013. We have pushed back our call for a policy rate cut on the back of higher than anticipated inflation. We are forecasting the policy rate at 4.50% (from 4.00%) as of end-2012. We see potential for economic and security-related reforms in the wake of Mexico´s July 1 presidential and legislative elections. However, we note that these changes may be less rapid than initially anticipated given that the Partido Revolucionario Institucional failed to win a majority in parlia ment.

Key Risks To Outlook

Inflation came in above the Banco de México´s 2%-4% target band in June, mostly on the back of supply-side pressures including rising corn prices and the impact of the bird flu outbreak. If inflation remains above the bank´s target band, we could see rising pressure on the monetary authorities to hike the policy rate.

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