C|oba| growth continues, but increases the divergence between

areas
1hanks to its stabi|ity and the prospect of reforms, Mexico beneits
from g|oba| |iquidity, which in turn supports the growth
Recent reform proposa|s signiicant|y improve Mexico's re|ative
position compared to other emerging economies
Mexico Economic Outlook
Second Quarter 203
Lconomic Ana|ysis
Mexico Economic Outlook
Second quarter 203
Index
1. Summary ........................................................................................................................................................................................................................................................... 1
2. Growing divergences in the global economy ............................................................................................... 3
3. Thanks to its stability and outlook for reforms, Mexico
is benefiting from global liquidity, which fuels growth ........................................................... 8
3.1 Growth prospects of more than 3.0% continue, underpinned by favorable financing conditions
and outlook for improvement in foreign demand ........................................................................................................................................................... 8
Box 1: The approval of the telecommunications reform will help boost the sector
and economic growth ..................................................................................................................................................................................................................................... 12
Box 2: The recent reform proposals are appropriately focused on a number of sectors
where Mexico has fallen behind other emerging countriess ........................................................................................................................... 13
3.2 New supply shocks once again push inflation above 4.0%,
while core inflation is at its lowest level in recent history ...................................................................................................................................... 14
Box 3: Consumer inflation expectations and their determining factors .............................................................................................. 17
3.3 Accommodative monetary policy insofar as inflation stands
within the target inflation variability range ............................................................................................................................................................................ 20
Box 4: Impact of possible implementation of structural reforms
on the long-term exchange rate level ......................................................................................................................................................................................... 24
4. Indicators and forecasts ....................................................................................................................................................................................... 26
C|osing Date. May 0, 203
SEE IMPORTANT INFORMATION ON PAGE 29 OF THIS DOCUMENT
Page 1
Mexico Economic Outlook
Second quarter 203
1. Summary
Thanks to its stability and reform prospects, global liquidity
is benefiting Mexico as it favors sustainable growth
Global growth has sustained its gradual recovery, but the main economies decidedly uneven
prospects limit the strength of GDP recovery expected for 2013 and 2014. Global GDP growth for the
most recent quarter, estimated by BBVA Research in 0.7%, would mark a slight improvement over the
0.6% expansion recorded for the last quarter of 2012. However, indicators to date point to a growing
dispersion of activity, especially among the most developed economies, with the Eurozone once
again lagging the US and even Japan. Still, global expansion is projected to reach 3.3% in 2013, a mere
tenth higher than what was estimated for 2012. Growth in 2014 is expected in the vicinity of 4%, but
downside risks prevail.
US growth prospects are underpinned by the vigor of private demand in the face of fiscal adjustment.
Uncertainty as to the near-term fiscal policy has abated relative to earlier scenarios that included a
shutdown of government ofices (even as we have yet to see credible measures for achieving long-
term fiscal consolidation). The combination of allowing some tax breaks to expire and implementing
spending cuts does not appear to have entailed a significant containment to private spending as
the monetary expansion has kept credit conditions highly favorable and is contibuting to greater
incomes and wealth levels. At this point it appears reasonable to sustain the 2013 estimate of 1.8%
growth despite downside surprises in public demand on 4Q12 and 1Q13 GDP.
We continue to look for Mexico to grow by better than 3.0% on the back of favorable credit conditions
and diminished external risk prospects. Government medium- and long-term debt rates have fallen
considerably. This improvement in conditions for financing the economy have trickled through to
corporate debt conditions, which in turn have grown more conducive to private investment. External
risks have attenuated, and as we have already noted, the US continues to grow at a moderate pace
and the efects of fiscal consolidation in that country have proven less severe than originally feared.
Monetary policy in Europe has helped limit the impact of new shocks, such as the recent crisis in
Cyprus, on credit conditions in Eurozone countries.
Graph 1
ICAL
C% change y / y)
Graph 2
Dierence between the rate of corporate and
sovereign debt, and the tota| investment
Cbasis points, and var.% y / y)
0
1
2
3
4
5
6
7
Feb
11
Jun
11
Oct
11
Feb
12
Jun
12
Oct
12
Feb
13
Manufactures Services Total IGAE
-20
-15
-10
-5
0
5
10
15 0
50
100
150
200
250
Jan
08
Jun
08
Nov
08
Apr
09
Sep
09
Feb
10
Jul
10
Dec
10
May
11
Oct
11
Mar
12
Aug
12
Jan
13
Diference between the rate of corporate
and sovereign debt (basis points, reverse axis)
investment (% Change Y / Y)
Source: BBVA Research and INEGI Source: BBVA Research and INEGI
Page 2
Mexico Economic Outlook
Second quarter 203
Graph 3
Noncore in|ation and its components
C% Change y / y and contributions)
Graph 4
1enure foreign sovereign debt and bond yie|d
rate for 0 years
CMi||ion do||ars and percentage, respective|y)
Rates set by local governments
-1
1
3
5
7
9
11
Jan
11
Apr
11
Jul
11
Oct
11
Jan
12
Jul
12
Oct
12
Apr
12
Jan
13
Mar
13
Energy
Non-core Agricultural
4
5
6
7
8
9
10
11
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Mar
05
Mar
06
Mar
07
Mar
08
Mar
09
Mar
10
Mar
11
Mar
12
Mar
13
Tenure foreign
sovereign debt
Rate M10
(right)
Source: BBVA Research and INEGI Source: BBVA Research, Bloomberg and Banxico
Despite the economic sluggishness expected for the first quarter of the year due to weaker external
demand undercutting industrial output, growth appears poised to accelerate towards the second half
of the year on the normalization of public spending and greater demand growth in the US once the
efects of the sequestration in that country are behind us. We note that the service sector in Mexico
has managed to sustain its growth profile, in part assisted by ongoing job creation. Furthermore, the
country has maintained one of its greatest assets: macroeconomic stability. Public finance remains in
line with the object of a balanced budget for the year, international reserves are at favorable levels and
continue to grow, there are no apparent external account imbalances, and inflation will return to the
variability range and near its target. Mexico has also begun the process of implementing reforms in
those areas where substantial change has eluded the country for some time, such as public education,
labor law, the telecommunications sector, and public security. This reform drive is expected to extend
into the second half of the year with more bills of this nature slated to go before Congress.
Inflation is projected to break back below 4.0% as we witness a dissipation of supply shocks and core
inflation remains firmly anchored. Following inflations good performance early in the year, falling as
low as 3.25% at the end of January in annual terms, the emergence of new supply shocks in markets
for agricultural and livestock products, combined with sharp upside adjustments in tarifs and prices
set by local governments propelled the headline rate past 4.0%. Despite this new wave of supply
shocks, core inflation remained near 3.0% during the quarter thanks to a sharp reduction in goods
inflation facilitated by a firmer Mexican peso, the absence of spillover supply efects to other prices,
and the general health of economy. As the recent upturn in inflation was mainly powered by supply
shocks, inflation is expected to start moving lower around May as the supply of goods begins to
normalize, and close the year below the 4.0% threshold.
The search for better returns in financial markets as a result of the liquidity glut, combined with
the local economys strong fundamentals, have significantly contributed to increased demand for
Mexican financial assets as evidenced by the exchange rate downtrend and falling bond rates. The
peso has fluctuated between 11.9 and 12.3 to the dollar in recent weeks, apparently heralding a long-
term scenario of greater appreciation on the implementation of structural reforms and a context
of global liquidity. As a result, the USDMXN could break below 11.9 towards the second half of the
year once the reform agenda intensifies. Should structural reform continue to impress in timing and
content, and global liquidity endures, interest rates could fall further and the peso continue to firm
over the medium term.
Page 3
Mexico Economic Outlook
Second quarter 203
2. Growing divergences in the global
economy
In the last three months some of the threats to world economic recovery have dissipated, however,
a greater divergence has been noted between diferent areas. Indeed, economic growth is diverging
between the US and the eurozone, where weakness has also reached the core economies. In addition,
despite doubts about the long-term sustainability of growth in China (or even the growth it finally
achieves in 2013), the country does not appear to be heading towards a sharp adjustment in the short
term. There is some disappointment in the rest of the emerging Asian economies when compared with
earlier growth expectations, though these were perhaps too high. Japan is on the crest of a wave of
economic optimism, although so far this has only manifested itself in the valuations of some financial
assets and indicators of confidence, rather than indicators of the real economy.
There has only been a limited response in the financial markets to events such as the continued
uncertainty regarding the definition of long-term fiscal policy in the US, on the one hand, and the
internal political paralysis in Italy and events in Cyprus and Portugal in the eurozone, on the other
(see Chart 5). Thus, risk premiums have fallen in the eurozone, largely due to the implicit support from
the ECBs OMT program and the abundant global liquidity, which is benefiting the dash for return
and the ensuing financial risk-on mood at the global level. Nearly all assets are benefiting from this
change in perception, with practically only one exception: the upturn in the credit risk indicators of
the eurozones banking sector.
The most recent economic indicators reflect the divergence between areas. In all, the trend towards
stability in global manufacturing confidence has been maintained, although with growing divergence
between regions (see Chart 6 and Chart 7). In any event, the positive tone in the financial markets and
divergence in cyclical prospects have not yet led to any significant change in activity or trade at a
global level. According to our BBVA-GAIN global activity indicator, 1 even the most recent data confirm
our expectations of continuing global GDP growth at a quarterly 0.7% (see Chart 8). However, more
disparate prospects among the main economies (in particular due to the downward revision in GDP
growth in the eurozone and also in some economies in emerging Asia) have put a brake on the strength
of the recovery expected in 2013 and 2014. As a result, we have revised our growth forecasts for the
world economy downward to 3.3% in 2013 and 3.9% in 2014, from 3.6% and 4.1% respectively.
1
For further details see our US Economic Watch, published on March 6, 2013, and available at:
[Link]
Graph 5
88VA Financia| Stress Indicator
Graph 6
Conidence indicators CPMI)
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Apr
08
Oct
08
Apr
09
Oct
09
Apr
10
Oct
10
Apr
11
Oct
11
Apr
12
Oct
12
Apr
13
U.S. EMU
25
35
45
55
65
Apr
08
Apr
09
Apr
10
Apr
11
Apr
12
Apr
13
U.S China Global Japan Eurozone
Source: BBVA Research Source: Markit and BBVA Research
Page 4
Mexico Economic Outlook
Second quarter 203
What |ies behind the sustained growth in the US, despite isca|
uncertainty Strong private consumption and continued monetary
expansion
Although GDP growth figures in the first quarter of 2013 were below market expectations, they confirmed
the continued healthy tone shown so far by private consumption. This is due to an improvement in job
creation, in terms of jobs and wages, and the financial situation of households (wealth efect). Private
spending has thus become a support for growth in the US. Furthermore, American financial markets
have not been afected by external contagion from risk events such as those from the euro area.
However, the most recent indicators of cyclical prospects (manufacturing expectations) have fallen in
March and April to levels compatible with a slump of activity, so we expect an additional slowdown of
the GDP in the second quarter. 2
In all, we maintain our forecasts for the US economy in 2013 and 2014 without major changes, with rates
of growth at 1.8% and 2.3%, respectively, mainly for two reasons. First, despite the uncertainty regarding
the fiscal clif and the coming into efect of the sequester (automatic public spending cuts), private
spending has given clear signs of resilience. Second, since inflation expectations are well anchored,
quantitative easing (QE) may continue without problems until there is significant improvement in labor
market prospects. Although some of the data at the start of the year could have prompted an early
withdrawal of stimuli, the most recent information shows that the American economy is still far from
suficiently robust growth rates, so monetary policy will continue to be a support for growth.
Stagnation in the eurozone, the LC8 begins to act
The most recent development in the eurozone situation is the weak activity spreading from peripheral
countries to the core economies in the area, particularly France, but also Germany and the Netherlands.
In France, economic agents confidence is being undermined by uncertainty about tax policy and fiscal
consolidation, and the lack of reforms. In April Germany saw how its confidence indicators resumed their
downturn, and how its exports have dropped despite resilient demand from emerging countries. The
Netherlands, lastly, has also seen how its recession has been compounded by the slump in investment
and household consumption despite its good performance in exports. Lastly, in the periphery of the
eurozone it is important to note the strong return of appetite for risk in sovereign debt thanks to the
2
For further details see our US Economic Watch, published on April 1, 2013:
[Link]
Graph 7
Deve|oped Lconomies. Standard deviation
Manufacturing PMI CUS, eurozone and Japan)
Graph 8
C|oba| growth based on 88VACAIN
C%, q/q)
0
1
2
3
4
5
6
7
8
Jan
08
Jul
08
Jan
09
Jul
09
Jan
10
Jul
10
Jan
11
Jul
11
Jan
12
Jul
12
Jan
13
Developed
Economies
(U.S., Eurozone,
Japan)
0.7
0.5
0.5
0.6
0.7
0.7 0.7 0.7
0.7
0.0
0.2
0.4
0.6
0.8
Q1 Q2 Q3 Q4 Q1
(15
Dec)
Q1
(15
Jan)
Q1
(15
Feb)
Q1
(15
Mar)
Q1
(15
Apr)
Observed Estimates
Source: Markit and BBVA Research Source: BBVA Research
Page 5
Mexico Economic Outlook
Second quarter 203
ECB, with its bond buyback program in the secondary market, and improvement in global liquidity with
quantitative easing in Japan. In particular, in April the Italian 10-year bond reached its lowest level since
November 2011, despite political uncertainty. Another example of this reduction of risk premiums is
Spain, where the 10-year bond has remained at 4.5% in recent weeks.
Although the most recent figures for retail sales and industrial output in February point towards
a certain degree of stabilization of eurozone activity in the first months of the year, the gloomier
confidence polls suggest that recovery is still a long way of. Meanwhile, eurozone authorities continue
with the process of building the areas economic architecture (how to achieve a single banking market),
while at the same time there is growing debate about the appropriate degree of fiscal consolidation to
achieve a credible reduction in public deficit and debt sustainability without damaging activity in the
short term in such a way that it would undermine adjustment eforts.
Turning to progress in banking union, the agreement finally reached for a solution to the Cyprus crisis
has included applying the bailout model which is being negotiated for the sector in the area. Before
the bailout, bank creditors will have to take part, including, if necessary, uninsured depositors. As far
as fiscal consolidation is concerned, the latest statements by the European Commission supporting
a delay in reaching the public deficit target of 3.0% by 2016 in Spain are focused on attaching more
importance to quality and the composition of the adjustment than to bringing about rapid corrections
which could have potential negative efects on growth.
In this context, our scenario includes a downward revision of eurozone growth. We estimate that GDP
will fall by 0.1% in 2013 and rise by 1% in 2014, 0.4 and 0.3 points, respectively, below the forecasts in
our January publication. In any event, the risks continue to have a downside bias. A key point is that
Germany must not remain the only source of growth in the area thanks to its easy access to finance,
high level of competitiveness and greater exposure to the best performing sources of global demand.
The easing of financial stresses acts as support for the growth achieved through the ECBs program
of buying public debt on the secondary market and thus ensuring that monetary policy is transferred
to the economy as a whole. But the fall in costs and improved access to finance for sovereign bonds
does not sufice; the fragmentation of the financial markets in the area is shown by the large variation
in availability and cost of lending to households and companies throughout the eurozone.
In a setting of prolonged economic weakness, spreading to a greater number of countries, with
inflation standing below the target, the ECB carried out a 25 bp cut in the benchmark rate, from
0.75% to 0.50%, while it narrowed the corridor of lending and deposit transactions from +/- 75 basis
points to +/-50 bp. Furthermore, the ECB announced an extension of liquidity auctions for banks at a
fixed rate and for unrestricted amounts for as long as necessary or at least until July 2014. The ECB
has also begun consultations with other European institutions (European Investment Bank and the
Commission) to boost the financial instruments market supported by business loans, in an attempt
to address the pressing need for credit by companies on the periphery. In all, the cut in interest rates
may have a limited impact on the real economy, and given that risks continue downward, the ECB has
stated that in the event of further deterioration in economic outlook it might have to take additional
measures. One of the measures which might be put forward by the ECB would be to cut the deposit
facility rate below zero, and to adopt non-standard measures or support to European institutions in
providing credit to SMEs.
In Asia, doubts |inger about the strength of Chinese growth Optimism
in Japan on the back of its massive quantitative easing
The Chinese economy has lost steam in the first quarter of 2013, with a negative surprise of weak
investment, despite the greater strength of foreign demand and growth remaining in line with the
governments target of 7.5% for 2013. The measures implemented to limit domestic financial fragility
Page 6
Mexico Economic Outlook
Second quarter 203
Graph 9
Successive rounds of QL CUSD bn),
Fed and 8oJ
Graph 10
JC8 ho|ders since 998, percentage structure
C%)
0%
5%
10%
15%
20%
25%
30%
0
400
800
1200
1600
2000
Fed QE1 Fed QE2 Fed QE3 BdJ QQE
(April 13)
Others Sovereign Bonds
MBS Agency Debt
Total no economy (%, right)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Mar
98
Mar
00
Mar
02
Mar
04
Mar
06
Mar
08
Mar
10
Mar
12
Mar
14
BdJ Foreign Investors
Insurance Banks
Pension General Government
Source: Haver and BBVA Research Source: Haver and BBVA Research
appear to have contributed to the slowdown. However, the change in the growth model towards a
greater weight of consumption continues. With inflation also lower than expected, there is less pressure
on tightening monetary conditions, so the authorities have room for maneuver, given their commitment
to sustainable growth for achieving the announced growth target. That is why our growth forecast for
China remains unaltered at 8.0% for 2013 and 2014.
In contrast, the Japanese economy will benefit from a package of more aggressive than expected
policies. Among them is the massive quantitative easing, whose size amounts to around 25% of Japans
GDP (each of the QE implemented by the Fed represented an average of 10% of Americas GDP), aimed
at changes in inflation expectations and boosting growth. This monetary boost will be more efective
if it is accompanied by efective fiscal measures and, in particular, structural reforms. Thus our growth
forecast for the Japanese economy for 2013 and 2014 remains at 1.7%, above the 1.3% consensus.
In any event, it is dificult to quantify the impact of this new move and know how investors will react,
given that many uncertainties still exist. For example, if this policy is successful in promoting growth
and confidence at the national level, it could generate greater net capital inflows globally (instead of
outflows). In addition, its impact at the domestic level in Japan is also uncertain, as the Bank of Japans
policy involves some risks: strong volatility in sovereign bonds (JGB), risks for bank balance sheets
and the costs of debt for the government when nominal yields grow, provided the Bank of Japan is
successful in meeting its inflation target of 2%.
However, the new monetary facility provides arguments in favor of Japanese investors investing
increasingly abroad. The Bank of Japans demand will push private Japanese investors away from
domestic assets, as the central bank plans to buy around 70% of all the new issues of sovereign bonds.
As a result, the Japanese governments share of bonds in 2014 will be over 20%. The movement of funds
will therefore also be uncertain. The appetite of Japanese investors for US bonds has increased since the
start of the eurozone crisis, but they also returned to the European stock markets last year. In particular,
they invested in countries at the core of the eurozone, such as France, the Netherlands and Germany,
while limiting sales in peripheral securities. This trend with respect to peripherals has recently shifted. In
this context, we expect demand for assets in euros to increase, provided that the euro-convertibility risk
does not emerge again.
Page 7
Mexico Economic Outlook
Second quarter 203
Monetary easing in deve|oped economies favors risk taking, pushes
|ongterm rates down and the appreciation of emerging market
currencies
Financial markets are still dominated by the flow of liquidity from central banks, inflation below targets
in the eurozone, the U.S. and Japan, a neutral balance of risks to growth in the U.S., biased downward in
the eurozone, and waiting for improvements in real activity indicators o be reflected in improvements
in confidence indicators.
Against that backdrop, long-term rates on US bonds and, in particular German bonds, have gone
down in recent months. The ensuing dash for yield in a less risk-averse environment (partly because
of the ECB actions) has also prompt a sharp fall in yields on government bonds in the periphery of the
eurozone to levels not seen since 2010. In this context, there have been capital inflows to emerging
fixed- income markets, especially the most liquid (Turkey, Brazil, Mexico), anticipating capital outflows
from Japan after its QE program was announced, which includes purchases of public debt by the
Central Bank of Japan.
As a result, the euro has shown great resilience to cyclical weakness in the area. The lower probability
of high-risk scenarios and a monetary policy in Europe less accommodative vis--vis other central
banks have contributed to strengthen the euro. In the absence of major risk events in Europe and
as long as no surprises in the QE exit strategy by the Fed occur, the euro could continue trading
in its current range of 1.30 to 1.32 dollars per euro until the end of this year. This does not rule out
episodes of dollar appreciation as a result of changes in the cyclical-risk balance and the reaction
of the respective central banks, putting the downward and accommodative bias more in Europe
than the US.
Page 8
Mexico Economic Outlook
Second quarter 203
3 Thanks to its stability and outlook for
reforms, Mexico is benefiting from global
liquidity, which fuels growth
3.1 Growth prospects of more than 3.0% continue,
underpinned by favorable financing conditions and
outlook for improvement in foreign demand
In the first quarter of the year, the pace of economic activity was slower than was expected three
months ago. Both external and domestic drivers ran out of steam. However, the outlook of improved
foreign demand for the second half of the year helps to maintain the outlook of growth in GDP for this
year in the region of 3.1%.
The rate of growth in Mexicos exports has slowed, from 6.1% y/y in 2012 to 0.0% y/y on average in 1Q13.
Both manufacturing exports (82.0% of the total) and oil exports (14.2% of the total) have slowed, in the
first case from 8.3% in 2012 to 2.1% in 1Q13, while in the second case the slowdown continues with the
decline observed since 2012 (-5.5% in 2012, -9.4% in 1Q13).
Mexicos oil export revenues have been declining consistently since 2012, given that although the
exported volume has remained relatively constant (1,256 tbd (thousands of barrels per day) on average
in 2012, 1,204 tbd in 1Q13), the average price per barrel has tended to fall since mid-2012, from its highest
level of 112.8 dpb (dollars per barrel) in March 2012 to 104 dpb in 1Q13.
Graph 11
Mexican exports
Cy/y % change and contribution to growth)
Graph 12
Oi| exports
Cy/y % change and contribution to growth)
-10
0
10
20
30
Mar
11
Jul
11
Nov
11
Mar
12
Jul
12
Nov
12
Mar
13
Oil Exports Manufacturing Exports Totals Exports
-40
-20
0
20
40
60
80
100
Mar
11
Jul
11
Nov
11
Mar
12
Jul
12
Nov
12
Mar
13
Amount Price
Source: BBVA Research and INEGI Source: BBVA Research and INEGI
Revenue from manufacturing exports showed lower growth in foreign demand, which means that
both the US and the Mexican manufacturing production indices have registered lower rates of growth
compared to one year ago. Revenue from manufacturing exports amounted to USD 370,892 million
in 2012 and in the first three months of 2013 it has amounted to USD 92,848 million, a figure very
similar to that for the same period last year. It is important to note that the automobile industry plays a
Page 9
Mexico Economic Outlook
Second quarter 203
particularly relevant role in manufacturing output for exports; vehicle exports account for around 30%
of the total, and their growth has remained strong over the first three months of the year: 8.3% higher
than one year before. Other branches of exports declined slightly during the first three months of the
year, equivalent to (-)0.3% y/y, so that total manufacturing exports in terms of dollars were 2.1% higher
in 1Q13 than one year before, positive but a long way of the average growth of 8.3% in manufacturing
exports in 2012.
Graph 13
Manufacturing exports
Cy/y % change and contribution to growth)
Graph 14
Remittances
CMi||ions of do||ars)
-5
0
5
10
15
20
25
30
Mar
11
Jul
11
Nov
11
Mar
12
Jul
12
Nov
12
Mar
13
Rest Automotive Manufacturing Exports
0
1000
2000
3000
Mar
03
Mar
05
Mar
07
Mar
09
Mar
11
Mar
13
Remittances, unadjusted Remittances, adjusted
Source: BBVA Research and INEGI Source: BBVA Research and INEGI
The slowing in exports growth throughout 2012 and in the first months of 2013 is caused by exports
for the US market, and also, more importantly, by the exports to the rest of the world, in light of the
weakness of several economies.
Furthermore, since 2012 there has been a downward trend in the inflow of currency from remittances
by Mexican workers abroad, and the level registered in March was the lowest since January 2010,
in fact one of the heaviest declines in the series (-14.7%), accumulating 9 months of falls in year-on-
year terms. This has been influenced mainly by the employment situation in sectors which receive
Mexican labor, with an average unemployment rate of 7.7% for Mexican migrants during the first three
months of the year.
Graph 15
Wage bi|| in the private forma| sector
Cy/y % change and contribution to growth)
Graph 16
Annua| emp|oyment created in the private
forma| sector Cthousands of peop|e)
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Feb
11
May
11
Aug
11
Nov
11
Feb
12
May
12
Aug
12
Nov
12
Feb
13
Average
Salary Quote
Employment Wage Mass
400
500
600
700
800
Mar
11
Jul
11
Nov
11
Mar
12
Jul
12
Nov
12
Mar
13
Source: BBVA Research and INEGI Source: BBVA Research and INEGI
Page 10
Mexico Economic Outlook
Second quarter 203
The slowing foreign demand was also evident in slowing imports, as might have been expected,
particularly in intermediate goods (more linked to manufacturing exports). The other components
of imports, consumer and capital goods, have had mixed performances: growth in consumer goods
imports contrasts with imports of capital goods, linked to companies investment in equipment and
machinery.
Key components of domestic demand such as employment and real wages registered slower growth in
the first months of 2013 then they did in the preceding quarter. Although the rate of growth in the wage
bill remained relatively stable, in the region of 5.0% in annual terms, it is important to note the slowing
rate of employment creation in recent months, which has gone from average real growth of 4.5% in 2012
to 4.1% in the first three months of 2013. A particularly sharp fall in employment has been reported by
the construction sector, which over the last nine months has consistently reduced the number of jobs
created. The lower external demand has also been evident in the manufacturing sector, although the fall
in employment has been less than proportional to demand (4.5% y/y in 1Q13, vs 4.7% in 2012).
Graph 17
ICAL
Cy/y % change)
Graph 18
US indicators. emp|oyment and industry
Cthousands of peop|e and m/m % change)
0
1
2
3
4
5
6
7
Feb
11
Jun
11
Oct
11
Feb
12
Jun
12
Oct
12
Feb
13
Manufactures Services Total IGAE
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
0
50
100
150
200
250
300
350
Mar
11
Jul
11
Nov
11
Mar
12
Jul
12
Nov
12
Mar
13
Nonfarm Employment (left) Industrial Production
Source: BBVA Research and INEGI Source: BBVA Research and INEGI
The retail sales indicator has been adjusted to a greater degree in recent months, while the dynamics
in other services has partially ofset the loss of drive in industry. This is shown by the fact that the IGAE
(Global Economic Activity Indicator) has slowed only slightly, and that the IGAE for the services sector
continues to grow at levels of around 3.0%. In the first months of the year, bank financing has continued
to prop up growth in its three components: consumer, housing and SME.
Meanwhile, the most relevant indicators for foreign demand show improvement. In particular, the US
economy has continued to create employment at favorable rates, and industrial output continues to
rise. This, combined with the reduction in global financial tensions and the agreement to avoid the fiscal
clif, suggests that economic activity will rebound in the US, thus creating greater demand for Mexican
products. In other words, the slowdown is expected to be temporary, and the situation should improve
significantly towards the second half of 2013.
Thanks to its sound economic fundamentals and the outlook for reforms, Mexico has also been able
to benefit from abundant global liquidity. Mexico compares favorably with other emerging countries
in macroeconomic terms. It has also started to apply reforms in sectors where relatively speaking it
had lagged behind, such as in the education, telecommunications and public security sectors, among
others (see Box 2 for further details of Mexicos weaknesses and strengths in relation to emerging
countries). Consequently, the amount of sovereign debt held by foreigners has increased, and interest
Page 11
Mexico Economic Outlook
Second quarter 203
Graph 19
Foreign ownership of sovereign debt and rate
of return on 0year bonds
CMi||ions of do||ars and percentage, respective|y)
Graph 20
Dierence between corporate and sovereign
debt interest rate, and tota| investment
Cbasis points and y/y % change)
4
5
6
7
8
9
10
11
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Mar
05
Mar
06
Mar
07
Mar
08
Mar
09
Mar
10
Mar
11
Mar
12
Mar
13
Tenure foreign sovereign debt Rate M10 (right)
-20
-15
-10
-5
0
5
10
15 0
50
100
150
200
250
Jan
08
Jun
08
Nov
08
Abr
09
Sep
09
Feb
10
Jul
10
Dic
10
May
11
Oct
11
Mar
12
Ago
12
Jan
13
Diference between the rate of corporate and
sovereign debt (basis points, reverse axis, left)
Investment (% change y / y)
Source: BBVA Research, Banxico and Bloomberg Source: BBVA Research, INEGI and Bloomberg
rates for financing medium and long-term debt have fallen considerably. This improvement in terms
of financing the economy has also extended to conditions of corporate debt, which in turn props up
private investment. The approval and gradual implementation of structural reforms will also help to
brighten the outlook for business opportunities in Mexico, which should promote higher investment
and consumption.
In short, although growth has slowed in the first quarter, this slowdown is expected to be temporary, so
the outlook of growth slightly above 3.0% for 2013 is maintained.
Page 12
Mexico Economic Outlook
Second quarter 203
8ox . 1he approva| of the te|ecommunications reform wi|| he|p boost the sector and economic growth
It has been said in a number of circles that Mexico is lagging
behind in telecommunications, resulting in high prices and
low penetration in various telecommunications services, such
as in broadband, for example (see charts below). In response,
authorities have gradually applied measures, though this
process has taken some time. On March 11, 2013, with the
object of progressing more quickly in this sector, the federal
government, together with the three major political parties
and as part of the Pact for Mexico undertakings, presented a
telecommunications and economic competition reform bill
which was subsequently approved with slight amendments
by Congress. The day the reform bill was presented, the
share prices of the leading telecommunications companies
slumped given the perception that the reform would
promote greater competition and regulation. The most
important aspects of the reform are as follows:
i) Constitutional autonomy for the Federal Economic Competition
Commission (CFCE) and the new telecommunications
regulator, the Federal Telecommunications Institute (IFT).
These institutions are also empowered to remove barriers to
competition and to divest assets.
ii) More strict regulation regarding dominant companies, which
are defined as those with a share of more than 50% by number
of users, by network trafic or by network capacity used.
ii) Entry of new companies through the granting of new
licenses and allowing greater access for foreign direct
investment. In particular, foreign investors will be able to own
100% of a telecommunications and satellite communication
company, and 49% of a broadcasting company. Licenses for
two new private television channels will be granted, with an
investment in the region of 0.2% of GDP.
iii) Specialized competition and telecommunications
tribunals are created. The creation of these tribunals can
represent an important step forward in the law enforcement
process, and should help to ensure that legal rulings
concerning these matters are handed down with in-depth
knowledge of the sector.
iv) The government will provide a new central dark fiber
network which will provide a service at competitive rates,
helping to promote the creation of telecommunications
retailers and operators.
v) Given that the provisions of the new Act have the
status of constitutional law and define the terms for use of
infringements of fundamental rights and freedoms claims,
there will be less of an incentive for litigation within the
sector. In particular, the general rules and actions of the
regulators can only be challenged by means of the indirect
infringements of fundamental rights claims and shall not be
suspended, meaning that they will be applied immediately.
Only in cases in which fines or divestment of assets are
imposed, rulings will be executed until the infringements of
fundamental rights and freedoms claim is resolved, should
it be brought.
The reform is expected to have beneficial efects in the
coming years in terms of new operators, investments and
prices in the sector, eventually giving rise to increased rates
of potential growth in the economy and lower and more
stable medium-term inflation.
Graph 21
Prices of "2 8aja" 8asket of the OLCD.
6 C8, 2.b Mbit/s and higher, September 20
Graph 22
Ce|| phone subscriptions
per 00 inhabitants
0
10
20
30
40
50
60
H
u
n
g
a
r
y
S
l
o
v
a
k
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a
I
s
r
a
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a
K
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R
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l
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d
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x
i
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o
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p
a
i
n
G
r
e
e
c
e
M
e
x
i
c
o
C
h
i
l
e
Nonrecurring charges Recurring Charges
0
40
80
120
160
U
r
u
g
u
a
y
A
r
g
e
n
t
i
n
a
C
h
i
l
e
B
r
a
z
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l
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p
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i
n
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e
r
u
S
o
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K
o
r
e
a
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S
A
C
o
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b
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a
V
e
n
e
z
u
e
l
a
M
e
x
i
c
o
Source: OECD Source: Cofetel
Page 13
Mexico Economic Outlook
Second quarter 203
8ox 2. 1he recent reform proposa|s are appropriate|y focused on a number of sectors where Mexico has fa||en
behind other emerging countries
Graph 23
Mexico and Latam, Vu|nerabi|ity radar visavis emerging economies
Cthe |ower the va|ue, the better the re|ative position)
Ranking in the WB Doing Business
Enforcing Contracts
(No. of procedures)
Informal economy (% GDP)
Gini Index
Homicide rate
Workforce
Investment (% of GDP)
Bancarizacin (counts per capita)
Tertiary education (% of students)
Credit to private sector (% GDP)
Internet (broadband subscriptions, per capita)
Innovation (patents per capita)
FDI (% GDP)
inflation
Government debt (% GDP)
GDP Growth
Index bank capitalization
LatAm Mexico
Availability
of resources
Business
Environment
Economic
policy
0.2
0.8
1.0
0.6
0.0
0.4
Current account (% of GDP)
Fuente: BBVA Research
The purpose here is to assess Mexicos relative economic
position compared with emerging countries, a relevant exercise
in an environment where reforms are to be instrumented. If we
examine an economy from a supply perspective, estimating
its capacity to expand by the appropriate interaction of
production factors and eficiency, there are three major
groups of variables to consider: economic policy, business
environment and availability of resources. As shown in the
chart, 18 representative variables have been chosen for these
three aspects, in such a way that their level with regard to a
reference group of emerging economies is indicated.
1

As far as availability of resources are concerned, the
demographic bonus is higher in Mexico than in Latam, with
a higher participation of the population in the labor market,
but lower than the average for the group of emerging
economies analyzed. Investment, banking penetration and
banking credit: Mexico has an advantage in investment, does
not stand out in banking penetration and is at a considerable
disadvantage in terms of banking credit (credit to the private
sector in Mexico is 26.1%, compared with an average of 40.2%
for the Latam countries considered, and 59.7% on average for
all the countries considered). The key to potential growth lies
in how eficiently the available production factors are used.
Measuring productivity, the ability to produce more with less,
is problematic since it is not a directly observable variable.
Productivity is usually calculated as the part of output not
resulting from the amount of resources used and, therefore, it
would be a result of how eficiently they are combined. In the
radar chart, as part of the variables selected as representative
of productivity, Mexico is at a relative disadvantage, both in
its comparison with Latam and the emerging economies,
in particular in the variable representing the percentage of
pupils in tertiary education. In terms of telecommunications
infrastructure (per capita subscriptions to broadband Internet)
and innovation (patents per capita), Mexicos relative position
is in line with the average for emerging countries and slightly
better than the Latam average.
Improving the business environment is one of Mexicos
major challenges. Although Mexico has a favorable relative
position in the World Banks Doing Business ranking, Mexico is
clearly at a disadvantage in terms of insecurity (murder rate),
legal challenges (enforcement of contracts) and inequality
(Gini index). Although the size of the informal economy is
smaller in Mexico, the country still needs to find a way of
reducing it. Lastly, Mexico does not show clear advantages
or disadvantages in items relating to economic policy, except
for price stability -which is better in Mexico- and foreign direct
investment (as a percentage of GDP), where Mexico is at a
disadvantage. But in fact this latter variable could turn out
to be one of the first in which Mexico improves its relative
position, in light of the capacity it is beginning to show to carry
out reforms in order to address its weak points. The labor and
telecommunications reforms already enacted, the proposed
financial reform, and the energy and fiscal reforms which are
planned to be presented in the second half of the year tackle
Mexicos areas of vulnerability. So if they are approved and
eficiently implemented, then the countrys structural outlook
-and with it Mexicos relative position vis--vis other economies-
could improve considerably.
1
Reference emerging economies are: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela, China, India, Indonesia, Malaysia, the Philippines, Thailand, Bulgaria, Croatia,
Czech Republic, Hungary, Poland, Romania, Russia and Turkey. The lowest value, 0, would be the most favorable position in the variables for all countries reviewed; 1 would be
the least favorable; meanwhile, 0.5 would represent the average for emerging economies.
Page 14
Mexico Economic Outlook
Second quarter 203
Graph 24
In|ation breakdown
Cy/y % change)
Graph 25
In|ation. rest of goods and imports
Cy/y % change)
1.5
2.5
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
Jan
10
Jul
10
Jan
11
Jul
11
Jan
12
Jul
12
Jan
13
NCPI Core No core
-20
-10
0
10
20
30
40
0
1
2
3
4
5
6
7
Jan
07
Jul
07
Jan
08
Jul
08
Jan
09
Jul
09
Jan
10
Jul
10
Jan
11
Jul
11
Jan
12
Jul
12
Jan
13
Rest of goods Price of imports
Source: BBVA Research with INEGI data Source: BBVA Research with INEGI data
3.2 New supply shocks once again push inflation above
4.0%, while core inflation is at its lowest level in recent
history
2013 began optimistically as far as inflation is concerned; in January the general index reached
3.25% y/y, a favorable result in a context in which inflation was above 4.0% between June and
November 2012, reaching a high of 4.77% y/y in September of that year. The sharp fall in inflation
occurred because the many supply shocks which dramatically increased non-core inflation in
2012 (e.g. outbreak of avian flu in Jalisco) began to fade, while international commodity prices fell
away and the peso strengthened. The latter factor prompted a slowing of the goods sub-index of
core inflation. Furthermore, mobile telephony prices fell sharply at the end of the year due to the
aggressive offers made by suppliers, triggering a fall in services inflation of 2.5% y/y in July to 1.2%
y/y in December, bringing core inflation to 2.9% in January 2013.
Despite the considerable improvement in the balance of risks at the start of this year, the appearance
of new supply shocks in agricultural and livestock markets, combined with sharp adjustments in
the prices of tariffs set by local governments, meant that inflation was much higher than was
initially estimated in February and March, in fact it reached 4.3% in the latter month. Despite this
new wave of supply shocks, core inflation remained at around 3.0% in the quarter due to 1) a heavy
reduction in the inflation of goods, which went from 5.0% in December to 3.8% in March, offsetting
the rise in inflation of services due to the end of the year-end special offers in telephony prices, y
2) the lack of contagion of the supply shocks to services prices (second-round effects). Thus the
services sub-index and core inflation continue to react to the fundamentals of the economy, which
does not yet grow with sufficient force as to be able to put upward pressure on inflation given the
wide availability of productive resources.
Core inflation reached its lowest quarterly average in recent history, 3.0% in the first quarter of this year.
Therefore it is necessary to analyze the performance of its two components, goods and services.
Inflation in the goods component fell from 5.0% in December to 3.8% in March (average of 4.0% 1Q13)
due to reductions in both inflation of processed foods and in the rest of goods. Annual inflation for
processed foods went from 6.1% y/y in December to 4.6% in March, while other goods fell from 4.1%
y/y to 3.2% in the same period. The main reasons for the fall in inflation of processed foods were lower
Page 15
Mexico Economic Outlook
Second quarter 203
global grain prices and the appreciation of the peso. The main reasons for the lower inflation in the rest
of goods are the appreciation of the currency and the fact that there have not been demand pressures.
Graph 26
Change in core in|ation and urban
unemp|oyment gap
Graph 27
In|ation of mobi|e te|ephony and its
contribution to core in|ation
Cy/y % change and percentage contribution)
-1.0
-0.6
-0.2
0.2
0.6
1.0 -2.0
-1.0
0.0
1.0
2.0
Sep
03
Jan
05
May
06
Sep
07
Jan
09
May
10
Sep
11
Jan
13
Changing the annual
core inflation, left.
Urban
unemployment gap
-2.0
-1.6
-1.2
-0.8
-0.4
0.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
Jan
12
Mar
12
May
12
Jul
12
Sep
12
Nov
12
Jan
13
Mar
13
Mobile Phones contribution
to inflation, right
Mobile Var.
% Y / Y, left.
Source: BBVA Research with INEGI data Source: BBVA Research with INEGI data
Inflation in the services component rose from 1.2% in December to 2.4% in March, a sharp increase
over a relatively brief period. Analysis of the components of the services inflation shows, however, that
the factor which had the most impact was the end of the year-end special ofers in mobile telephony.
Housing inflation increased from an average 2.03% in 4Q12 to 2.08% in 1Q13, while education inflation
did so from an average 4.47% to 4.55% in the same period; this meant that these two sectors had a
marginal efect on the rise in service prices. In contrast, mobile telephony prices rose 60% between
December and March, and were thus largely responsible for the rise in inflation of services.
The improvement in key components of core inflation such as the appreciation of the peso and
the lower international grain prices played a very valuable role in keeping core inflation at historical
low levels. It is important to note, however, that the persistent slack in the economy, which is shown
by levels of unemployment being still above pre-crisis levels, has been the main factor for the
convergence of core inflation at 3.0% (see chart 26).
Non-core inflation stood at 4.5% y/y in January of this year, its lowest level since April 2012. In February
and March, however, it rose sharply due to various pressures in its components. First, agricultural and
livestock prices rose from 5.5% in January to 14.3% in March. This was the result of a strong surge in
agricultural prices from -2.2 in January to 19.9% in March, due to pressures on products such as green
tomatoes, zucchini, string beans and lemons, and an unfavorable base efect vs. 2012. Furthermore,
inflation of livestock products remains high, 11.0% in March, given that the new outbreak of avian flu
on this occasion in the state of Guanajuato once again put upward pressure on egg and chicken
prices. Public prices rose from 3.9% y/y in January to 5.0% in March thanks to a slight increase in
energy prices from 5.6% to 5.9% and to a sharp rise in tarifs set by local authorities from 0.6% to
3.4% in the same period. The hike in energy prices was largely due to stronger gasoline upturns,
while the increase in tarifs set by local authorities was prompted by a reduction in the subsidy on
car ownership tax in certain states, and the rise in the cost of the water service and public transport.
Although this increase in the prices set by sub-national governments was widely anticipated, it has
proved to be higher than expected, and there might even be further hikes given that many of these
governments have weak public finances.
Page 16
Mexico Economic Outlook
Second quarter 203
Graph 28
Noncore in|ation and components
Cy/y % change and breakdown)
Graph 29
88VA Research in|ation scenario
Cy/y % change)
Rates set by local governments
-1
1
3
5
7
9
11
Jan
11
Apr
11
Jul
11
oct
11
Jan
12
Jul
12
oct
12
Apr
12
Jan
13
mar
13
Energy
Non-core Agricultural
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan
10
Jun
10
Nov
10
Apr
11
Sep
11
Feb
12
Jul
12
Dec
12
May
13
Oct
13
General Core
General prognosis Core prognosis
Source: BBVA Research with INEGI data Source: BBVA Research
To sum up, the recent rise in inflation has largely been prompted by supply-side shocks within non-
core inflation, shocks which are expected to fade in the short term, and which are very relevant
given that they are one of the main factors for forming consumer expectations (see Box: Inflation
expectations of consumers and determining factors). Taking the above factors into account, we expect
that inflation will begin to fall from May onward and that by the end of the year it should be below the
4.0% threshold. However, there are certain risks in this scenario. An upward risk is the possibility of
new hikes in local and global commodity prices, and of tarifs set by sub-national authorities in light of
continuing weaknesses in their finances. A downward risk would be a further slowdown in the global
economy which could increase the slack in the Mexican economy and put downward pressure on
commodity prices, or a sharp appreciation of the peso.
Page 17
Mexico Economic Outlook
Second quarter 203
nflation expectations are an extremely important input for
carrying out monetary policy. This is particularly true for
central banks which use target inflation schemes because
they are basically forward-looking. Berk and Hebbink (2010)
identify three possible goals or uses of inflation expectations:
a) as a factor to be taken into account for determining
the monetary policy which helps the inflation target to be
reached, b) as a tool for continuously monitoring the central
banks credibility by comparing its measurements with the
inflation target set, and c) as a variable of interest in carrying
out the central banks forecasts.
Inflation expectations are obtained in two ways: first,
by extracting implicit inflation expectations in financial
instruments, and second, by carrying out surveys among
specialists or consumers. In Mexico, a number of surveys
are carried out on economic and financial analysts, which
are used as a reference both by the central bank and by the
various agents taking part in the markets. Consumer inflation
expectations are monitored less closely, however, because
less data is available. In this section, we shall summarize the
analysis and main results obtained by BBVA Research in the
Consumer inflation expectations: determining factors and
reaction levels document 1, which will be used to analyze
the nature and the relevant variables for consumers inflation
expectations.
The information on Mexican consumers inflation
expectations was taken from the qualitative responses
to question 12 of the basic questionnaire of the National
Consumer Confidence Survey (Encuesta Nacional sobre
Confianza del Consumidor, ENCO), which is formulated as
follows:
Compared with the last 12 months, how do you think prices
will perform in the country over the next 12 months?
1. They will decrease a lot
2. They will decrease a little
3. They will remain unchanged
4. They will increase a little
5. They will increase in the same measure
6. They will increase a lot
7. Doesnt know
In order to have an aggregate measure of Mexican
consumers inflation expectations, a monthly difusion index
was built. 2 Data from October 2010 to January 2013 were
used. Difusion indices by gender were also built in order
to take into account only responses by women or by men.
In Chart 30, it is evident that pessimism periods (difusion
index higher than 50) are relatively infrequent in the sample
period. In other words, the pessimism threshold was only
exceeded in 10.7%, 32.1% and 3.6% of the months for the total
indices, for the women and men, respectively.
In order to find and classify the importance of the most
relevant inflation components for forming consumer
expectations, the Regression Trees methodology was used. It
was chosen mainly for two reasons: (i) it is appropriate in view
of the relatively high number of inflation components which
were tested and the relatively low number of observations
over time within the estimation sample; and (ii) it also allows
us to classify the importance of the components in forming
inflation expectations, and to obtain levels from which
consumers react in order to fit the aforesaid expectations.
As far as the explanatory factors explored are concerned,
the annual rates of growth in the following indices (together
with their first two lags) were used: headline, core, goods,
processed foods, other goods, services, housing, education,
other services, non-core, agricultural, farm, public (utilities
and public sector tarifs), energy and public sector tarifs.
Two ad-hoc indices were also built: one containing all the
energy and food components, and another containing all
products other than energy and food.
3

8ox 3. Consumer in|ation expectations and their determining factors
1
Document available at: [Link]
2
The difusion index was calculated as follows: (1) the Doesnt know response was prorated amongst the other response options to question 12; (2) the proportions of response
to these options were calculated over total responses without considering expansion factors for households; (3) the weights of 0.0, 0.0, 0.0, 0.0, 0.5 and 1.0 were used for the
They will decrease a lot, They will decrease a little, They will remain unchanged, They will increase a little, They will increase in the same measure and They will increase
a lot options respectively; (4) each proportion was multiplied by its corresponding weight; and (5) the products of the last step were added together. Zero weight is allocated to
the first 4 options so that the level of 50 will reflect neutral inflation expectations. In other words, expectation of the same inflation for the next 12 months.
3
An index taking in all energy and food prices has been included because these products make up an important part of the consumer basket (40% of total spending), and also
because of the high sensitivity of their prices to local or global supply shocks.
Page 18
Mexico Economic Outlook
Second quarter 203
4
The model is outlined in Lpez Marmolejo (2006), Barriers to work, underground economy and aggregate fluctuations. UAB mimeo. This exercise does not consider the
additional benefit of social security for the informal sector, as it assumes that this is neutralized through a tighter control of this sector.
5
Source: World Energy Outlook 2010
The regression trees are read as follows: any branch which
grows to the right of a node implies an increase in the average
dispersion index in the event of the explanatory variable in
that node exceeding the specified level. Thus, if after the
conditions specified in each node are met the average level
of the remaining observations is higher than 50, we can be
certain that in those periods consumers expect inflation to
increase over the next 12 months. Similarly, branches to the
left of a node imply that if the explanatory variable does
not exceed the expected level in that node, the average
dispersion index will be reduced, so that if the average is
lower than 50 in the end node, consumers expect that
there will be less inflation over the next 12 months. Thus,
we can see in the tree built for all consumers that if inflation
of processed foods (alimproc) equals or exceeds the level
of 4.43% y/y, the dispersion index will increase its average
from 46 to 47. In addition, if the energy lag (energarez1)
is higher than or equal to 7.92%, the index average in the
periods in which that condition is met will increase from 47
to 50.1, so that in the 5 periods in which we may conclude
that both conditions are met, consumers expected higher
inflation for the next 12 months.
Graph 32
Regression tree for in|ationary expectations of a|| consumers
procfood< 4.43
energylag1< 7.925
publicprices< 3.864
procfood>=4.43
energylag1>=7.925
publicprices>=3.864
38
n=3
47.1
n=14
50.1
n=5
46
n=28
47
n=25
46.2
n=20
44.3
n=6
Source: BBVA Research
Graph 30
Consumer in|ation
expectations
Cdiusion index)
Graph 31
In|ationary expectations of a|| consumers and
misce||aneous in|ationary components
CDiusion index and y/y % change)
30
35
40
45
50
55
60
Oct
10
Jan
11
Abr
11
Jul
11
Oct
11
Jan
12
Abr
12
Jul
12
Oct
12
Jan
13
Total Male Females
0.0
1.5
3.0
4.5
6.0
7.5
9.0
30
40
50
60
Oct
10
Jan
11
Apr
11
Jul
11
Oct
11
Jan
12
Apr
12
Jul
12
Oct
12
Jan
13
Index total left. processed foods Energy Public
Source: BBVA Research with INEGI data Source: BBVA Research and INEGI
Page 19
Mexico Economic Outlook
Second quarter 203
For women, it is evident in chart 33 that the most relevant
factors are: the second lag of energy and food, utilities and
the first lag of processed foods. The difusion index shows
inflationary pessimism when the level of these factors is
higher than or equal to 4.59%, 3.81% and 6.67%, respectively.
Lastly, for men, Chart 34 shows that the most important
components are: processed foods and the first lag of utilities,
although in the observed period the level of 50 is never
exceeded, so that during the entire analysis period men
expect inflation to be lower over the next 12 months.
The following conclusions can be drawn from these
results: i) generally speaking, inflation expectations of
people interviewed are predominantly optimistic, which
is consistent with the good performance of average
headline inflation in the period (3.8%); ii) the diagrams
of the regression trees indicate that consumers react (in
descending order of importance) to the following inflation
components: processed foods, energy and utilities; iii) if
we separate the sample into women and men we observe
that although women are more optimistic for most of the
sample, they are more pessimistic than men; iv) lastly,
consumers react to the prices of the products which
they consume on a daily basis, such as food, utilities and
energy prices.
References
Berk, J.M. and Hebbink, G. (2010). The European consumer
and monetary policy. In Sinclair, P. (editor). Inflation
Expectations. Routledge, London and New York.
Graph 33
Regression tree for women's in|ationary expectations
Graph 34
Regression tree for men's in|ationary expectations
energyandfoodlag2< 4.589 energyandfoodlag2>=4.589
48.5
n=11
51.5
n=9
48
n=28
49.1
n=24
41.3
n=4
49.8
n=20
45.6
n=4
43.4
n=2
39.3
n=2
procfoodlag1
< 6.674
procfoodlag1
>=6.674
goods< 3.758 goods>=3.758 public
prices< 3.813
public
prices>=3.813
procfood< 4.43
publicpriceslag1< 5.175
procfood>=4.43
publicpriceslag1>=5.175
43.2
n=28
44.2
n=25 35
n=3
43
n=17
46.8
n=8
Source: BBVA Research Source: BBVA Research
Page 20
Mexico Economic Outlook
Second quarter 203
3.3 Accommodative monetary policy insofar as inflation
stands within the target inflation variability range
In a setting where central banks continue to relax their monetary stance, the tone of the minutes from
Banxicos last monetary policy meeting and recent activity and inflation data lead us to expect that a cut
in the lending rate in the second half of the year is very likely. Specifically, for the following reasons.
First, according to the minutes most members of the Board believe that inflation has been allowed to
converge towards the target. This would be the result of core inflation having remained in the region of
3.0%, despite headline inflation having risen above 4.0% due to the recent supply-side shocks. In particular,
the majority argue that once the shocks are separated into those [prices] where monetary policy has a
direct or indirect efect, convergence to 3% is occurring. In this sense, the latest inflation figures and the
prices on wholesale markets point to supply shocks seemingly falling quicker than expected, meaning
inflation is expected to possibly come in below 4% from July on.
Second, even with Banxico not changing its growth forecasts in its most recent inflation report, most of
the members of the Board are pessimistic about domestic output, as well as agreeing that downward
risks remain. This line of argument points to the monthly fall of 0.3% in industrial output in March, and the
recent manufacturing export and employment figures indicating weaker growth in the second quarter.
See Radar of financial macro conditions at the end of the chapter.
Graph 35
Industria| output,
Cm/m and y/y % change)
Graph 36
Changes in the monetary po|icy
rate from Apri| on Cbasis points)
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Jan
11
Mar
11
May
11
Jul
11
Sep
11
Nov
11
Jan
12
Mar
12
May
12
Jul
12
Sep
12
Nov
12
Jan
13
Mar
13
m/m% Adjusted y/y% Not adjusted y/y%
-50
-25
0
25
C
o
l
o
m
b
i
a
T
u
r
k
e
y
I
n
d
i
a
E
C
B
A
u
s
t
r
a
l
i
a
H
u
n
g
a
r
y
K
o
r
e
a
P
o
l
a
n
d
I
s
r
a
e
l
M
e
x
i
c
o
C
h
i
l
e
I
n
d
o
n
e
s
i
a
M
a
l
a
y
s
i
a
P
h
i
l
i
p
p
i
n
e
s
T
h
a
i
l
a
n
d
B
r
a
z
i
l
Source: BBVA Research with INEGI data Source: BBVA Research with data from Bloomberg
Third, the Board has assigned a relevant weight to the evolution of Mexicos relative monetary position
vis--vis other countries, and over the last two months a number of central banks worldwide have cut
their monetary rates. The weight of the relative monetary position has been highlighted in the minutes,
as several paragraphs are given over to the revision of monetary easing measures around the world
and some members directly associate it with a marginal tightening of monetary conditions in emerging
economies. Furthermore, the argument about the tightening of monetary conditions has not only been
repeated in the Banxico statement, but in the most recent monetary policy statement it was stressed as
a relevant factor in determining its monetary policy.
Lastly, it is important to note that the balance of opinions within the Board is tipped towards a more
relaxed tone, similar to the situation in March, when the majority decision was taken to implement a 50
bp cut under unusual circumstances (inflation and growth).
Page 21
Mexico Economic Outlook
Second quarter 203
Based on the above, we believe that the conditions will be in place for a 50 basis points cut in the policy
rate in September once inflation is in the range around the inflation target. It should be stated that the
timing of a cut is strongly influenced by when inflation is on a sustained downward trend and below 4%.
1he increase in g|oba| |iquidity and the bright out|ook for Mexico
heighten investors' demand for Mexican assets
The setting of a search for return created by the extraordinary monetary easing measures taken by
the central banks of developed countries have had a considerable impact on the increased demand
for Mexican financial assets, which in turn has prompted an appreciation of the exchange rate and a
fall in interest rates. Over the last year, foreign ownership of fixed nominal rate government bonds has
increased from 44% to 56% of the total, the exchange rate has strengthened by 7.24%, and the yield
on the 10-year government bond has fallen 170 basis points. Against the background of slow recovery
in world growth, in which emerging countries account for most of this growth, the higher demand
for Mexican assets can be explained by competitive risk-adjusted returns, bolstered by the favorable
comparison with Mexicos economic fundamentals and its outlook compared to other countries. For
example, the expected yield in dollars on the 1-year Mexican sovereign bond for each 100 basis points
of credit risk (measured using credit default swaps, CDS) is in the region of 5.5%, while that of Colombia
stands at around 4.2%. The yields in dollars of the fixed-income government bonds have remained
at attractive levels largely due to the rise in the exchange rate, a rise which is expected to continue
given the prospects of Mexico implementing reforms to boost its productivity. What is more, Mexicos
credit risk indicators have also fallen, bringing it currently at the level of countries with a sovereign
debt rating three places above. No doubt this is underpinned by the healthy fundamentals of the
Mexican economy, such as a fiscal deficit of only 2.0% of GDP, considering PEMEX investment, a debt/
GDP ratio in the region of 40%, reserves of 14% of GDP and on the rise, inflation under control, and, on
average, within the inflation target range. An additional factor is the prospect of fiscal resources being
increased through reforms, thus reducing the countrys dependence on oil revenue, which in turn
might bring about an improvement in Mexicos sovereign debt rating. In this regard, it is important
to note that a number of rating agencies have pointed out that the possible improvement in rating
would depend on the reforms being correctly instrumented, and it would not sufice merely with
approval by Congress.
Given the compelling yield in risk-adjusted dollars of Mexican assets, foreign investors have
significantly increased their positions in fixed-rate government bonds. Since March 2010, the flows of
foreign investors towards M bonds has increased by an average of USD 4.8 billion by quarter, mainly
in the medium and long part of the curve, and reaching USD 8.3 billion in the first quarter of 2013.
In the case of the CETES, after an inflow of around USD 9.3 billion was registered in December 2012,
a fall in foreign-owned bonds was reported in the first quarter of the year, which might have been
influenced by the cut in the monetary policy rate. It is important to note that given the fall in the yields
of CETES, the outlook for increases in the exchange rate may account for a significant part of the yield
in carry trade strategies.
1

Over the year so far, the medium and long part of the curve has fallen by 90 and 98 basis points on
average respectively, and even fell 40 and 55 average basis points following the cut in the monetary
policy rate. In the short term, the CETES rates for terms equal to or shorter than 182 days already stand
below the lending rate, a situation which has been maintained practically since the last quarter of 2010,
partly due to abundant liquidity. As far as exchange rates are concerned, the peso has appreciated by
5.9% during the first four months of 2013, underpinned by Japans new monetary stimulation package,
outlook for the approval of reforms, and the prospects of the acquisition of assets by the US Federal
1
A carry trade strategy involves taking a short position in an instrument which pays a short-term rate in foreign currency (e.g. one-month Libor)
and a long position in an instrument which pays a short-term rate in domestic currency (e.g. TIIE at 28 days)
Page 22
Mexico Economic Outlook
Second quarter 203
Reserve remaining in force.
2
The peso has remained within a range of between 12.0 and 12.3 pesos per
dollar in recent weeks, levels which appear to suggest higher appreciation of the exchange rate in the
long term after structural reforms are implemented in an environment of global liquidity.
3
In the short
term, the exchange rate will be particularly sensitive to global cycle indicators, especially in the US,
insofar as markets try to anticipate forthcoming steps to be taken by central banks.
2
In recent weeks, the lower-than-expected economic activity indicators in the US have prompted markets to believe that the Federal Reserve may
maintain its monetary stimulation measures for longer, and the peso has even appreciated in reaction to these figures. For example, the exchange
rate appreciated 0.81% even after the lower- than-expected job creation figure for February in the US was released.
3
For an estimate of the long-term level of the exchange rate due to structural reforms refer to the box entitled Impact of possible instrumentation
of structural reforms on the long-term exchange rate level in this report.
4
For a review of recent intervention measures see: Room for accumulating reserves in view of the strength of the exchange rate. Mexico Econo-
mic Flash. Available at: [Link]
Graph 37
Risk premium for credit defau|t swaps
Cbasis points) as of Apri| 203
Graph 38
Pub|ic debt
C% CDP)
0
50
100
150
200
250
300
Mexico Brazil Peru France Italy
BBB+
AAA
BBB
BBB
BBB
0
20
40
60
80
100
120
90 92 94 96 98 00 02 04 06 08 10 12
Mexico Brazil Spain USA Germany
Source: Bloomberg, Fitch and BBVA Research Source: International Monetary Fund
In recent weeks, the rise in the exchange rate has been related to a possible oficial intervention in the
foreign-exchange market. Especially after Banxico referred to the unnecessary toughening of monetary
conditions, resulting from the significant increase in capital flows, as an additional element for supporting
the cut in the lending rate. If we look back over the interventions in the foreign-exchange market over
the last five years, it is evident that these interventions have focused on restoring liquidity in the event
of episodes of high-volatility in the financial markets. In fact, during recent episodes of exchange
rate appreciation there have been no one-of interventions in the market. 4 Even in 2008, when the
exchange rate reached levels below 10 pesos per dollar, the only measure taken was to increase the
amount of international reserves after the federal government acquired USD 8 billion to cover currency
operating needs in advance. Therefore, although an intervention cannot be ruled out, there is evidently
room to accumulate reserves owing to two factors. First, Mexicos international reserves account for
around 14% of GDP, a lower level than in several emerging economies, particularly if we consider the
emerging countries with the most liquid currencies, such as South Korea and Singapore. The peso is
the third most liquid currency among emerging economies, with daily exchange transactions of around
50 billion dollars. In addition, Mexico has been granted a flexible credit facility by the IMF of up to USD
73 billion that gives it unrestricted access to funds at low cost. Second, foreign ownership of Mexican
fixed-income bonds as a percentage of international reserves has increased from 30% to 72% in only 3
years, which could imply a risk of volatility in the event of a sudden withdrawal prompted by an episode
of global aversion to risk. However, a potential withdrawal of flows would not pose a risk for the economy
given that the required financing in foreign currency is low, as shown by the current account deficit of
only 0.8% of GDP in 2012.
Page 23
Mexico Economic Outlook
Second quarter 203
Graph 39
Interest rates curve
C%)
Graph 40
Lxchange rate
Cpeso/do||ar)
3.5
4.5
5.5
6.5
1Y 3Y 5Y 7Y 15Y 30Y
Dec 31 2012 Apr 25 Mar 8
12.0
12.3
12.5
12.8
13.0
1
Jan
16
Jan
31
Jan
15
Feb
2
Mar
17
Mar
1
Apr
16
Apr
Telecommunications
Reform
Bank of
Japan
monetary
stimulus
China
Q1 GDP
Source: BBVA Research and Bloomberg Source: BBVA Research and Bloomberg
In short, the better relative position in terms of the risk and return of Mexican instruments compared
to other countries has benefited Mexico, with foreign capital inflows exerting an impact on the fall of
interest rates to historically low levels together with exchange rate levels similar to 2011. If the structural
reforms are implemented adequately against a background in which global liquidity is maintained,
Mexico would be able to achieve lower interest rates and a stronger exchange rate in the medium
term (see box 4). However, should any of these prospects not materialize, then we do not rule out new
episodes of high volatility.
Graph 41
Mexico. Radar of inancia| macro conditions
C1he |ower the va|ue, the better the re|ative position)
Inflation
M10
Private issues
Over-undervaluation of weight (%)
Industrial production
Retail Sales Employment
Foreign Tenure (%)
Current account (% of GDP)
CDS
International Reserves (% GDP)
Apr-12 Apr-13
Risk reversal of flows
Macro-financial environment
Credit Risk
0.0
0.2
0.4
0.6
0.8
1.0
Source: BBVA Research.
Page 24
Mexico Economic Outlook
Second quarter 203
The new administration in Mexico has brought new interest
in approving reforms and also fresh optimism among
investors with regard to the countrys growth outlook.
Expectations center mainly around a fiscal reform and
an energy reform, and have caused a new debate about
the growth potential of the Mexican economy and the
additional efects this would have on other macroeconomic
variables. One of these variables is the exchange rate. In the
first four months of the year, the peso has strengthened by
over 5.0% against the dollar, making it the currency which
appreciated most in Latam during the period. Although
this increased strength of the peso has been underpinned
by a global backdrop of abundant liquidity and dash for
return, market agents attribute part of this appreciation to
the stability of the economy, the outlook of higher growth
in the medium term, and possible further improvements in
the sovereign debt rating which might materialize once the
reforms are implemented. With the object of assessing the
efect of higher economic growth on the exchange rate,
the impact of an increase in potential GDP on the long-term
exchange rate level will be analyzed.
The analysis of the long-term exchange rate level is based
on the arbitrage condition of Purchasing Power Parity,
considering the Balassa-Samuelson efect, whereby it is
thought possible to estimate the long-term exchange rate
using prices in relation to the trading partners of the country
in question and the relative productivity of its tradable goods
sector.
1
However, it is important to note that in the short
term there are other relevant factors, such as expectations
and the perception of risk, among others. According to this
approach, an increase in potential output would be based
on an increase in productivity, which would be consistent
with an appreciation of the long-term level. In order to
identify the statistical relationship between the exchange
rate and the aforementioned economic fundamentals, a
cointegration model capable of incorporating short and
long-term exchange rate determining factors is used.
2

If we assume an increase in potential GDP of 1.0% in Mexico
due to the reforms, and we also assume the following: 1)
that the US economy reports average growth of 2.3%
y/y over the next five years, and 2) that annual average
inflation in the US and Mexico during the next five years
will stand at 2.3% and 3.6%, respectively, then we can state
that gains in relative productivity of the labor force in
Mexico against the US equivalent could cause appreciation
in the long-term level of the peso against the dollar of
8ox 4. Impact of possib|e imp|ementation of structura| reforms on the |ongterm exchange rate |eve|
Graph 42
Lxchange rate
Cpesos per do||ar)
Graph 43
Longterm exchange rate
Cpesos per do||ar)
11.9
1
Jan
16
Jan
31
Jan
15
Feb
2
Mar
17
Mar
1
Apr
16
Apr
1
May
12.2
12.4
12.7
12.9
13.2
Telecommunications
Reform
Japan Bank
monetary
stimulus
China Q1
GDP
Increase
rating
Fitch
11.0
11.3
11.5
11.8
12.0
12.3
12.5
12.8
13.0
Base Scenario Scenario Base + Reforms
Source: BBVA Research and Bloomberg Source: BBVA Research
1
According to the arbitrage condition of the Purchasing Power Parity (PPP), if two similar goods have a diferent price in diferent countries, then there will be greater demand
for the cheaper good. Under arbitrage, supply and demand will be adjusted in order to make the prices equal. The Balassa-Samuelson efect considers the diferences in the
productivities of the tradable goods sectors between countries to explain deviations in PPP.
2
For an in-depth review of the models methodology and estimation, see Lpez Arnoldo and Ivn Martnez (2011).
3
For an in-depth review of the models estimation and the hypothetical measures that each reform involves, refer to Impact of possible reforms on Mexicos potential GDP in
Revista Situacin Mxico, first quarter of 2013. [Link]
Page 25
Mexico Economic Outlook
Second quarter 203
around 30 cents. In other words, the long-term level which
is presently estimated to be between 12.2 and 12.6 pesos
per dollar could fall to levels of between 11.9 and 12.3 pesos
per dollar. It is important to note that i) the long-term level
refers to a trend with a quarterly frequency, and ii) that the
aforementioned anchoring would not occur immediately.
This result suggests that part of the appreciation which has
been observed to date could be due to the markets having
factored in expectations of possible reforms to current
exchange rate levels
References
Driver Rebecca and Peter F Westaway (2004). Concepts of
equilibrium Exchange rates. Working paper No. 248, Bank
of England.
Lpez Arnoldo and Ivn Martnez (2011), Tipo de cambio,
nivel fundamental e impacto de la volatilidad global,
Economic Watch, BBVA Research.
Page 26
Mexico Economic Outlook
Second quarter 203
4. Indicators and forecasts
Chart 1
Macroeconomic forecasts. Cross Domestic Product
CYoY growth rate) 200 20 202 203 204
United States 2.4 .8 2.2 1.8 2.3
EMU .9 .b 0.b -0.1 1.0
Germany 4.0 3. 0.9 0.8 1.8
France .6 .7 0.0 0.0 1.1
Italy .7 0.b 2.4 -1.3 0.8
Spain 0.3 0.4 .4 -1.4 1.1
UK .8 .0 0.3 1.0 1.9
Latin America * 6.2 4.3 2.8 3.4 3.6
Mexico b.3 3.9 3.9 3.1 3.1
Brazil 7.6 2.7 0.9 3.4 3.8
EAGLES ** 8.4 6.6 b. 5.6 6.0
Turkey 9.2 8.b 2.3 4.0 5.5
Asia-Pacfico 8.2 b.7 b.3 5.4 5.8
Japn 4.7 0.6 2. 1.7 1.7
China 0.4 9.2 7.8 8.0 8.0
Asia (exc. China) 6.7 3.4 3.6 3.8 4.3
World b. 3.9 3.2 3.3 3.9
* Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
** Brazil, Corea, China, India, Indonesia, Mexico, Russia, Taiwan, Turkey
Closing date: May 7, 2013
Source: BBVA Research
Chart 2
Macroeconomic forecasts. in|ation CAvg.)
CYoY growth rate) 200 20 202 203 204
United States .6 3. 2. 2.1 2.2
EMU .6 2.7 2.b 1.6 1.5
Germany .2 2.0 2.0 1.7 1.8
France .b 2. 2.0 1.4 1.5
Italy .b 2.8 3.0 2.0 1.7
Spain .8 3.2 2.4 1.7 1.2
UK 3.3 4.b 2.8 2.7 2.2
Latin America * 6.4 8.0 7.b 8.4 8.4
Mexico 4.2 3.4 4. 3.9 3.5
Brazil b.0 6.6 b.4 6.2 5.4
EAGLES ** b.3 6.0 4.2 4.4 4.6
Turkey 8.6 6.2 8.b 6.9 5.9
Asia-Pacfico 3.6 4.7 3.0 3.1 3.6
Japn 0.7 0.3 0.0 0.1 0.7
China 3.3 b.4 2.6 3.0 4.0
Asia (exc. China) 3.7 4.3 3.3 3.2 3.4
World 3.7 b. 4. 3.9 4.0
* Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
** Brazil, Corea, China, India, Indonesia, Mexico, Russia, Taiwan, Turkey
Closing date: May 7, 2013
Source: BBVA Research
Page 27
Mexico Economic Outlook
Second quarter 203
Chart 3
United States indicators and forecasts
2011 2012 2013 2014 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Macroeconomic Indicators
GDP (real % change) .8 2.2 1.8 2.3 2.0 .3 3. 0.4 2.b 1.1 2.0 2.2
Personal consumption (real % change) 2.b .9 1.9 1.8 2.4 .b .6 .8 3.2 0.8 1.6 1.6
Gov. consumption (real % change) 3. .7 -2.2 0.3 3.0 0.7 3.9 7.0 4. -2.0 0.4 0.4
Gross fixed investment (real % change) 6.6 8.7 6.9 7.3 9.8 4.b 0.9 4.0 4. 9.0 6.8 7.0
Construction .4 2. 11.5 6.6 20.6 8.4 3.6 7.b 2.6 8.2 8.2 6.6
Industrial prod. (real annual % change) 3.4 3.6 3.7 5.1 4.0 4.b 3.3 2.7 2.6 3.3 4.0 4.8
Current account balance (% of GDP) 3. 3. -3.0 -3.4 3.b 3.0 2.8 2.8 3.6 -2.9 -2.7 -3.0
Final annual inflation 3.0 .7 2.7 1.6 2.7 .7 2.0 .7 .b 2.4 1.9 2.7
Average annual inflation 3.2 2. 2.1 2.2 2.8 .9 .7 .9 .7 2.2 2.2 2.3
Primary fiscal balance (% of GDP) 8.7 7.0 -5.4 -3.8 7.0 -5.4
Note: Bold figures are forecast
Source: BBVA Research
Chart 4
Indicadores y Pronosticos Mexico
2010 2011 2012 2013 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Lconomic Activity
CDP Cseasona||yadjusted series)
Real annual % change b.3 3.9 3.9 3.1 4.9 4.4 3.3 3.3 2.2 2.7 3.5 3.9
Per inhabitant (US dollars) 9,bb7.b 0,443.2 0,872.4 12,420.5 0,648.7 0,29.4 0,874.4 ,b33.2 11,693.9 12,173.8 12,761.1 13,102.8
US$ billions ,032.b ,39.4 ,92.8 1,372.3 ,7b.0 ,39.9 ,92. ,264.3 1,286.1 1,343.1 1,410.7 1,449.3
In|ation Caverage, %)
Headline 4.2 3.4 4. 3.9 3.9 3.9 4.6 4. 3.7 4.4 3.8 3.6
Core 3.9 3.2 3.4 2.9 3.3 3.b 3.6 3.3 3.0 2.9 2.9 3.0
Financia| Markets Ceop, %)
Interest rates
Bank funding 4.b 4.5 4.b 3.5 4.b 4.b 4.b 4.b 4.0 4.0 3.5 3.5
28-day Cetes 4.4 4.4 3.9 3.3 4.3 4.4 4.2 3.9 4.2 3.7 3.3 3.3
28-day TIIE 4.9 4.8 4.8 3.8 4.8 4.8 4.8 4.8 4.4 4.3 3.9 3.8
10-year Bond (%, average) 6.9 6.8 b.7 4.7 6.2 b.9 b.3 b.4 5.1 4.6 4.6 4.7
Lxchange rate Caverage)
Pesos per dollar 2.7 2.b 3. 12.2 2.9 3.6 3. 3.0 12.6 12.2 11.9 12.0
Pub|ic Finances
*FRPS (% of GDP) 3.4 2.6 3. -2.4 3. -2.4
Lxterna| Sector
3
Trade balance (US$ billions) 2.9 .2 0.b -6.4 .9 .6 . 2.0 0.6 -0.8 -2.1 -4.1
Current account (US$ billions) .9 9.7 9.2 -16.4 .4 0.b 0.9 6.b -4.5 -2.4 -3.6 -5.9
Current account (% of GDP) 0.2 -0.9 .0 -1.2 0.b 0.2 .3 2. -1.4 -0.7 -1.0 -1.6
Oil (Mexican mix, dpb, eop) 72.3 0. 0.8 99.7 0.b 00.6 99.7 96.6 104.3 98.5 97.9 98.1
Lmp|oyment
Formal Private (annual % change) 3.8 4.3 4.6 3.9 4.b 4.6 4.7 4.7 4.1 3.8 3.8 3.9
Open Unemployment Rate
(% active pop.) b.4 b.2 b.0 4.8 b.0 b.0 4.8 b.0 5.0 4.8 4.7 4.6
Continues on next page
Page 28
Mexico Economic Outlook
Second quarter 203
Mexico indicators and forecasts
2010 2011 2012 2013 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Aggregate Demand
4
Cannua| % change, seasona||yadjusted)
Total 8.6 4.7 4.0 3.3 b.2 4.3 2.7 3.8 2.6 3.1 4.1 3.5
Domestic Demand 4.9 3.9 3.8 3.2 b.0 4.2 2.7 3.2 2.5 3.2 3.6 3.4
Consumption 4.6 4. 3. 3.0 4.0 3.6 .9 3.0 2.6 3.4 3.1 2.7
Private b.0 4.4 3.4 3.3 4.2 3.8 2. 3.b 3.2 3.7 3.3 2.8
Public 2.3 2. .b 1.0 3. 2.3 0.4 0.2 -0.8 0.9 1.8 2.0
Investment 0.3 8.3 b.8 2.7 8.2 6. b.6 3.b 1.3 1.9 2.8 4.8
Private 0.3 3.9 b.3 4.0 9.3 4.8 2.4 4.8 2.4 4.4 5.0 4.4
Public 2.6 7.4 7.8 -1.0 4.3 9.6 4.7 2.8 2.0 -4.7 -3.5 2.5
External Demand 2.7 7.6 4.6 3.6 b.7 b.0 2.8 4.9 2.0 2.4 5.6 4.4
Imports 9.7 7. 4. 3.9 b.9 4.2 . b.2 3.5 4.0 5.8 2.3
CDP by sectors Cannua| % change, seasona||yadjusted)
Primary 2.9 2.4 6.b 2.9 6.6 . .b 7. 5.6 2.1 1.4 2.7
Secondary 6. 4.0 3.6 2.5 4.9 4. 3.b .9 0.5 2.6 3.0 3.7
Mining .2 .0 .2 2.1 0.9 0. 2.3 .8 2.1 2.1 1.9 2.4
Electricity 0.2 6.b 2.3 1.0 4.0 2.3 2. 0.8 -0.7 1.1 1.0 2.7
Construction 0.6 4.6 3.3 2.2 b.b 4.9 3.7 0.8 -2.2 2.8 3.3 4.8
Manufacturing 9.9 b.0 4.0 2.8 4.7 4.9 3.9 2.7 0.9 2.8 3.4 3.7
Tertiary b.2 4.7 3.8 3.4 4.b 4.7 3.0 3.0 3.2 2.9 3.7 3.9
Retail .7 9.4 b.2 4.0 7.b b.4 2.4 b.b 4.0 3.8 4.0 4.3
Transportation, mail and warehouse 7.b 3.2 4.3 3.9 b.3 4.2 3.7 4.0 3.8 3.3 4.3 4.4
Massive media information .6 b. 8.b 9.1 7.7 0.2 9.7 6.6 10.7 8.8 8.7 8.2
Financial and insurance 3. 0. 8. 6.7 2.7 .6 b.2 3.b 4.3 5.3 8.1 9.1
Real-estate and rent .9 2.4 2.4 1.7 2.b 2.3 3.0 .9 1.5 0.8 2.1 2.3
Prof., scientific and technical servs. 0.7 4.8 0.7 2.0 b.2 0.8 0. 3.0 2.0 1.9 2.0 2.0
Company and corporate management 4.9 2. 4.0 4.2 4.8 3.8 4.b 3. 5.2 3.7 4.0 3.9
Business support services .b b. 4.0 3.0 3.0 b. 3.3 4.7 3.0 2.8 2.9 3.1
Education 0.2 .8 . 0.7 .9 0.9 0.b 0.9 0.9 0.6 0.6 0.5
Health and social security 0.7 .8 2. 1.6 2. .7 2.2 2.b 1.9 1.4 1.5 1.6
Cultural and sport b.9 2.b 4.0 2.8 0.2 3.b 6.0 6.7 4.4 2.2 2.3 2.3
Temporary stay 3.2 2.b 4.9 3.4 4.6 4.2 b.7 b.3 4.8 3.6 2.7 2.7
Other services, except government activities 0.9 2.9 4. 3.1 3.4 4.b 4.3 4.4 3.2 3.1 3.1 3.1
Government activities 3. 2.3 0.6 0.3 2.0 2.2 .4 0.2 -2.0 -1.4 2.4 2.4
1: Residential investment
2: Fiscal balance (% GDP)
3: Accumulated, last 12 months
4: Base 1993=100; GDP by sector base 2003=100. The observed data of the primary sector, secondary and tertiary seasonally-adjusted by INEGI, the rest own seasonally-adjusted
bd: billions of dollars
dpb: dollars per barrel
*FRPS: Financial Requirements of the Public Sector
na: not available
Note: Bold figures are forecast
Source: BBVA Research with Federal Reserve, Bureau of Labor Statistics, Banco de Mexico, INEGI and SHCP data
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Mexico Economic Outlook
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