Mexico & Nafta - 14 September 2004

Mexican policymakers are facing a range of problems. Their fears about the damage high oil prices would do to the US economy appear to be justified. In June and July, Mexico's non-oil exports to the US fell, year-on-year. The US accounts for 85% of Mexico's exports.

The fall in exports occurred despite a decent increase (5.3%) in industrial output, year-on-year. Month-on-month, the output figures point to an economy that is beginning to struggle. In June, the index of leading indicators used by Inegi, the official statistical agency, pointed down for the first time in 11 months. July's indicator confirmed the direction of the trend.

The car industry is a good indicator of what is happening to manufactured exports. Exports of cars in August were 110,070, the car manufacturers association Amia reported. Although this was 10.3% up on the same month of 2003, the industry did not hail the result. It noted that exports had fallen in every month (year-on-year) this year with the exception of March. This means that for the first eight months of 2004, exports at 742,639, are 7.3% down on the same period of 2003. For the first eight months of 2004, vehicle production was 1.009m units. This is 4% less than for the same period of 2003.  

The difficulties that the uncertain direction of the US economy poses for economic policymakers in Mexico is compounded by the central bank's pre-occupation with inflation. At the end of August the central bank tightened monetary policy again, raising the corto, which drains money from the money market, to M$45m a day.

The central bank is right to be bothered by inflation. In August the inflation rate was 0.62%, well above what analysts had been expecting. The rate was the highest for any August since 1998. The figure bought the lagging 12 month rate to 4.82%. The central bank is hoping for a rate of around 3.5% this year. Technically, the 2004 target is 3% with a one-point margin of error either way. In 2003 the inflation rate was 3.98%.

The central bank blamed jumps in fresh food prices (principally tomatoes, eggs and avocados) for the disappointing August figure. There were also jumps in the prices of higher education, cooking gas and electricity. The bank points out that its sub-index of non-underlying prices (ie, its index of goods and services whose prices are the most volatile) jumped by 1.48% in August. This brought this subindex (of the most volatile prices) to 7.4%. The bank pointed out that underlying inflation index (which is weighted with less volatile goods and services) rose by 0.22% in August bringing the 12 month rate to 3.66%.  

The central bank's decision to tighten monetary policy came before the August inflation figures were published. The bank did not tighten policy again after the inflation figure came out, but it may well do so later this month (September). The effect of the tightening of policy in August has been to drive benchmark interest rates (28 day cetes) up to 7.38% a year. This is the highest rates have been for over a year.

• The current account deficit in the first half of 2004 was US$2.27bn, 0.7% of GDP. In the first half of 2003, the deficit was 1.1% of GDP.
• Foreign direct investment is picking up. In the first half of the year it was 10.3bn. This was 64% more than for the same period of 2003.