Mexico Retail Report Q4 2012

The Mexico Retail Report examines the long-term potential of the local consumer market, but flags shorttermconcerns about the impact on Mexico's economic outlook of a weaker external environmentweighing on demand for Mexican exports and starting to sap consumer confidence.

The report examines how best to maximise returns in the Mexican retail market while minimisinginvestment risk, and also explores the impact of a eurozone crisis or rapid slowdown in Chinese growthon the Mexican consumer and on the ability of producers and exporters to realise returns in the short term.The report also analyses the growth and risk management strategies being employed by the leadingplayers in the Mexican retail sector as they seek to maximise the growth opportunities offered by the localmarket.

Mexican per capita consumer spending is forecast to increase by a respectable 28% to 2016, comparedwith a regional growth average of 17%. The country comes second out of seven in BMI's LatAm retailrisk/reward ratings, although it underperforms slightly in the 'reward' category.

Among all retail categories, over-the-counter pharmaceuticals will be the outperformer through to 2016 ingrowth terms, with sales expected to rise by 55.2% throughout the forecast period, from US$1.80bn toUS$2.79bn.

In the competitive arena, BMI sees upside potential in President Felipe Calderón having signed a decreeto amend the regulation of health supplies, which should strengthen Mexico's business environment andencourage domestic industry growth.

Over the last quarter, BMI has revised the following forecasts/views:

BMI is revising up its 2012 real GDP growth forecast, from 3.4% to 3.8%, as the victory ofbusiness-friendly Enrique Peña Nieto bolsters investment. However, in 2013 we expect thatMexico's weaker manufacturing sector will begin to weigh on consumer confidence to the extentthat, even with a stronger investment picture, we expect growth will slow to 3.4% (revised upfrom 3.0% due to the stronger investment outlook).

After private consumption recorded 5.3% year-on-year (y-o-y) growth in Q112 – the largestexpansion since before the start of the 2008/09 global financial crisis – BMI sees potential forsome moderation towards the end of 2012 and into 2013. We forecast growth of 4.5% in 2012and 3.7% in 2013, contributing 3.1 percentage points (pp) and 2.6pp to real GDP growthrespectively.

BMI's forecast for strong private consumption has been reinforced by recent retail sales data,which showed a rise of 1.8% month-on-month (m-o-m) in July. This was above the estimated0.9% increase in a Reuters poll. Compared with June 2011, sales were up by 5.6%, beatingexpectations of a rise of 4.13%.