Abstract
This 2004 Article IV Consultation highlights that economic activity in Mexico accelerated to 3.8 percent in the first half of 2004 over the previous year. This recovery is partly attributable to strengthening U.S. industrial production, as reflected in growth in Mexican manufactured exports of 10½ percent (seasonally adjusted) in the first seven months of 2004 over the same period in 2003. The government has made significant progress in strengthening the structure of public debt. Several liability management operations have helped to improve the efficiency of the yield curve.
October 18, 2004
The following information has become available since the staff report was issued to Executive Directors. The thrust of the staff appraisal remains unchanged.
1. Recent indicators are consistent with continuing economic recovery. The index of overall economic activity rose by 3.5 percent in July over the previous year, while gross fixed investment increased by 8.6 percent over the same period, and retail sales grew by 4.8 percent. Industrial production rose by 4.7 percent in August over the previous year.
2. Headline CPI inflation increased to 5.1 percent in September (12-month basis), while core inflation edged up to 3.8 percent. Contractual wage settlements rose to 4.8 percent in September after averaging 4½ percent in the first eight months of the year. In mid-October, Mexico’s social security institute (IMSS) and its unions agreed on a 3 percent wage increase plus 1 percent in benefits for the next twelve months. Inflation expectations for end-2004 climbed further to 4.6 percent in the September survey.
3. The Bank of Mexico (BOM) increased the corto for the sixth time this year on September 24. This tightening action came soon after an increase in domestic short-term interest rates associated with the tightening in U.S. monetary policy on September 21. As a result, short-term rates have risen by close to 50 basis points since the beginning of September. The peso has strengthened as interest rates have risen, appreciating by about 2% percent against the U.S. dollar since early September.
4. Trade data for August showed a smaller-than-expected deficit. Imports increased by 20.7 percent from the year-ago level, while exports increased by 27.3 percent reflecting higher oil exports and non-oil export volumes. Net international reserves stood at US$57.6 billion end-September, compared with US$57.2 billion at end-August.
5. The price of Mexican crude oil could exceed the staff’s estimate for 2004. The price of the Mexican mix has averaged US$30.1 per barrel for the year through mid-October, compared with staff assumption of U$31.4 per barrel for the year as a whole. The current spot price stands near US$40 per barrel, suggesting that the average price for the year could modestly exceed the staff–s assumption.
6. On September 22, the government issued US$1 billion of 30-year bonds to pre-fund 2005 financing requirements. The bond was issued with a yield of 6.9 percent, implying a spread of 210 basis points over U.S. treasuries. High demand for the bond allowed the amount issued to increase from US$1 to US$1.5 billion. Pemex also recently issued a US$1.75 billion perpetual bond with a coupon of 7.75 percent in Asian markets. Mexico continues to include collective action clauses (CACs) in bond issues.