The economy is beginning to lengthen its stride. Growth this year is certain to be the best of President Vicente Fox's presidency so far and, for the first time, respectable. It is likely to be at least 4%, although this is still some way from the 7% Fox promised during the 2000 election campaign.
The latest economic figures point to 4% growth in the second quarter of this year, following the surprisingly decent 3.7% in the first quarter. The only threat to this is the US economy. The weak collection of US economic data published in mid July vindicates our long-standing view that the problems of the US economy are likely to need a new approach if they are to be resolved.
Trade
So far Mexico has been benefiting from the recovery in the US. In May the country's trade surplus hit US$33m. This compares with a deficit of US$480m in April and a deficit of US$355m in May 2003.
Export revenues in May were 20.8% higher, year-on-year, at US$16.09bn. This was due to a 42% increase in oil export revenues (to a record US$2.02bn) and an 18.4% increase in non-oil exports. Maquiladora exports were up by 21.8% and non-maquiladora manufactured exports were up by 14%. Overall, manufactured exports were up by 18%. Interestingly, car exports were down by 1.3% year-on-year, indicating that all was not well with the US economy. For the first five months of the year exports in May were up by 12.6% at US$74.3bn. Non-oil exports are up by 12%, while oil exports are up by 16.7%.
Oil exports
The average export price of a barrel of Mexican oil was US$31.5 a barrel. This was US$1.58 up on the previous month and US$8.47 up on May 2003. The price in May 2004 was the highest in nominal terms since January 1982, before the debt crisis hit Latin America.
The international price of oil was volatile in June, but has been high in the first half of July as worries about what will happen in the Middle East mount. Although high oil prices help the Mexican government, they make life more difficult for exporters because they depress demand in the US. The Mexican government is beginning to spend the oil windfall: money has been found for anti-crime initiatives and President Fox is promising to
double anti-crime spending in 2005.
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Stronger from maquiladoras
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| As the number of people employed in maquiladoras, the assembly plants
located mostly along the Mexican side of the border with the US, rose by
2.5% (year-on-year) in April, the prospects for higher Mexican exports to
the US are encouraging. Jobs in maquiladoras are highly dependent on the
state of the US economy. In April the number of people employed in maquiladoras
was 1% up on March 2004. This was the biggest pick-up for four years. Maquiladora
employment has been badly hit by the slowdown in the US economy. At the
end of April 1.09m people worked in maquiladoras. At the peak of the US
boom in February 2001, 1.27m people worked in maquiladoras. Official figures
from Inegi show that in the first four months of the year employment in
maquiladoras rose by 0.5% while pay went up by 2%. This indicates that the
labour market around maquiladoras is tightening. Interestingly, the number
of unskilled employees is rising (by 3.5% so far this year) while the number
of skilled workers is falling (down 2%). The chemicals industry is the biggest
hirer this year. Traditional maquiladora industries such as clothing, shoes
and toys are all still laying off staff. |
The Fox government will draw up two more budgets. So far both the budgets proposed to congress and those emerging from congress have been prudent. The fear amongst investors is that as the 2006 presidential election draws near both government and congress will be tempted to start
spending heavily to attract support.
The cetes conundrum
Some economists argue that these fears are already being reflected in the financial markets. These markets appear to becoming concerned about the long-term outlook for inflation. The difference between the yields on
long-term and short term government paper has doubled in the past four months. Long-term (10 year) government paper yields about four
percentage points more than the benchmark short-term cetes.
This difference should indicate that investors are doubtful about the country's long-term inflation outlook. It may mean this but some traders claim that in fact the gap means that some banks have large long-term bond positions, funded short-term, which would produce major losses if interest rates rose.
The jump in the difference in the yields on short-term and long-term paper looks extremely odd, given the decent recent data on inflation. Inflation in May was negative: prices fell by 0.25%. In June inflation was positive, but only very slightly at 0.16%. The lagging 12-month rate, however, is still well above the unofficial target of 3.5%. In the 12 months to May the rate was 4.21%.
Encouraged by this data, the central bank claims that the underlying inflation rate is pretty much on target, at 3.46%, for the 12 months to June. In 2003, Mexico's inflation was 3.98%. Officially, the government is aiming for 3% inflation in 2004 with a margin of one percentage point either way. The central bank, however, wants to lower inflation from last year's level.
The main reason for the drop in the inflation rate in May was the introduction of summer electricity prices. Another contributing reason for the better inflation in the past couple of months has been the inflow of beef from the US. In the first part of this year, Mexico barred US beef on
fito-sanitary grounds.
This allowed domestic producers to push up their prices. These two benefits have outweighed the drag created by higher fuel prices, cooking gas and tomato prices.
The question is, why, if prices are stable or falling, are the markets so apparently concerned about inflation? Financial market economists argue that the markets are not really concerned about inflation but fear that the central bank's monetary policy has been hi-jacked by a couple of big banks in Mexico which have large loss-making positions in longer term bonds.
Given that credit demand for the past four years has been weak, despite the record low level of interest rates, commercial banks have become used to making easy money by buying and holding long-term government bonds. The government itself has encouraged this trade by issuing a far greater range of its own bonds (from three-year bonds to 20-year bonds). It has also allowed private sector borrowers to issue a greater range of debt.
The problem seems to be that, as usual, the banks believed that this happy state of affairs would last for ever. In essence, the banks are the most likely casualties of the likely rise in US interest rates and the end of the era of cheap money.
Details
The issue for the central bank is whether its monetary policy is working well enough in these circumstances. The Mexican central bank operates in a way that is the inverse of the US Federal Reserve Board's open market
operations. The US Fed sets a price at which it will supply cash to the money markets, but lets the market determine how much cash it will supply at that price. The Banco de México fixes the quantity of money it will supply, but lets the markets decide the price at which it will sell. When the Banco de México raises the corto, it cuts the amount of money it supplies to the
market and thus forces interest rates higher.
Economists are wondering if the Mexican system is still appropriate, given the growing complexity of Mexican financial and money markets. The
problem in Mexico is that there are far fewer banks in Mexico than there are in the US. Effectively, there are only two big banks in Mexico: Banamex and Bancomer. These two banks, some economists argue, now have such weight in the money markets that they are effectively setting the price for money in the economy. The other banks are, effectively, price-takers, rather than
making a contribution to the price-setting mechanism.
What the banks with big bond positions want is low short-term interest rates, so that their longer-term bond positions do not slide underwater. The banks are generally funding their bond positions with short-term liabilities. The more prudent banks have issued their own long-term debt which they can use to fund their bond positions.
As the central bank wants to nudge Mexican rates higher to ensure that the currency does not collapse in the face of a higher-yielding dollar, the money markets have become something of a battleground. This is clear from the abrupt and often inexplicable jerks in yields at the weekly cetes auction. On the other hand, the two most recent auctions 6 and 13 July showed no change in the crucial yield on 28-day
cetes.
What is odd is that yields on the different maturities rarely move upwards or downwards together. The result of this is that 28-day cetes yields have been stuck in a narrow range either side of 6.5% for most of the past four months.
Luckily for the banks with their long-bond positions, the latest employment data from the US (published at the beginning of July) was not as strong as had been expected. This may mean that the upward rise in US rates will not be as quick as the US financial markets had expected. This reprieve should give the Mexican banks the chance to square their bond positions. The banks should also be encouraged by the recovery in domestic demand which is likely to lead to more demand for credit.
On the up
Decent output statistics in March and April were capped by a drop in the unemployment rate to 3.48% in May. All this points to a vigorous domestic economy. Indeed on 23 June, the finance minister, Francisco Gil Díaz, raised his forecast for growth this year from between 3% and 3.5% to at least 4%. In the first quarter of 2004, the economy grew by 3.7% compared with the same quarter of 2003.
The economy is clearly on the up. Over the first four months of the year the economy's output was 3.4% higher than for the same period of 2003. Encouragingly for the government, growth is accelerating. In April 2004
output was 4% up on April 2003. This was well above the consensus forecast that output would be 3.5% higher.
The recovery is being led by the supply-side. The domestic-demand side of the economy is still sluggish. Although the Asociación Nacional de Tiendas de Autoservicios y Departmentales, which represents most of the country's major retailers (but not the biggest; Wal-Mart de México) reported that like-for-like sales were up by 2.8% in May on May 2003, this does not point to strong consumer demand. Consumer confidence indicators have been weak for most of this year, though they began to steady in April.
Economists expect consumer sales to start to pick up in the second half of the year. This is because the unemployment position is improving and
consumers are being tempted by low interest rates to buy more goods on credit. In May the jobless rate was 3.48%. At the beginning of the year the unemployment rate had been around 4%. The May rate was the lowest rate for five months. Even so, the rate is still considerably higher than the rate 12 months ago when it stood at 2.74%.
- As remittances from Mexicans working in the US are rising strongly, either the number of migrants has increased or they are doing better. In the first five months of this year, the official figure for remittances from the US to Mexico increased by 26% to US$6.34bn, according to figures from the Banco de México. The central bank is forecasting that remittances this year will come to US$15bn. In 2003 they were a record US$13.3bn. For the first time ever, remittances were more than foreign direct investment. In the first five months of this year almost US$5.5bn was remitted electronically. The rest of the money came in the form of postal orders and cash. The four states which received most of the remittances were Michoacán, Zacatecas, Guanajuato and
Jalisco.
- Although most Mexicans migrating to the US enter the bottom end of the labour market, the US is using the provisions of Nafta to attract Mexican
professionals. Under Nafta the limit on the number of visas the US can offer to Mexicans who have qualified in 57 specified professions has ended. Under Nafta, Mexicans qualified in these professions do not need to have a second approval from the US Labor Department before being allowed into the US.
Research by the University of Calfornia in Los Angeles found that Mexican-trained doctors and dentists were most in demand. The UCLA researchers found that of the 25,000 registered dentists in California, 1,161 were Latinos. A Democratic Party state congressman in California, Marco Antonio Firebaugh, tabled a bill which would give Mexican dentists visas to practice in rural parts of California. There are also moves to import Mexican-qualified Certified Public Accountants to meet a shortage of such folk in California. Accountants say that the Mexicans would have to learn the particular
wrinkles of the Californian tax code.
- From 1994, when Nafta came into force, the US offered 5,500 visas a year to qualified Mexican professionals. From 1 January this year, the quota ended, so the US can import as many Mexican professionals as it wants. Besides doctors and dentists, the US can take computer engineers, economists,
engineers, hotel managers and graphic designers. It has also taken foresters, librarians and scientists. For most of these professions a first degree is
sufficient to prove a professional qualification.
