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Mexico Business Forecast Report Q2 2010

Published by: Business Monitor International

Published: Feb. 5, 2010 - 70 Pages


Table of Contents


Executive Summary
New Decade, Same Problems
Chapter 1: Political Outlook
Domestic Politics
Little Hope For Political Overhaul
By addressing the issue of legislative re-election, President Felipe Calderón is again showing his desire to
remove political taboos that are preventing Mexico from becoming a major EM player.
Table: Political Overview
Regional Outlook
Drug Problems Building South Of The Border
Central America is likely to experience spiralling levels of drug-related crime in 2010, with regional governments
relatively powerless to counter the growing influence of Mexico’s cartels.
Chapter 2: Economic Outlook
Economic Activity ll
On The Ground In Mexico: Reinforcing Our Concerns
After a recent visit to Mexico we see little to change our key concerns for the country’s medium- and longer-term
economic outlook.
Economic Activity l
Long Road To Recovery
A breakdown of Mexico’s Q309 GDP data supports our long-held view that there will be no strong uptick in either
private consumption or fixed investment levels in 2010.
table: ECONOMIC AC TIVITY
Balance Of Payments
Trade Up, But Outlook Still Weak
Although Mexico’s rising trade volumes suggest the economic recovery is underway, we do not yet see enough
evidence to alter our subdued economic growth outlook.
table: CURRENT ACCO UNT
Fiscal Policy
Carstens Leaves Debt Headache For Successor
The first duty facing Mexico’s new finance minister will be to steer the economy out of a recession without
causing a further deterioration in the government’s debt profile.
table: FISCA L POLICY
Monetary Policy
Budget To Have Inflationary Impact In 2010
We believe the 2010 budget will add some inflationary pressure to Mexico’s economy this year, despite our
outlook for still-low levels of economic activity.
table: monetary POLICY
Key Sector Outlook
No Oil Privatisation Before 2012
While we believe President Felipe Calderón will do everything in his power to attract greater investment and
technology into Mexico’s oil and gas sector, political opposition and constitutional restraints are likely to stifle
his efforts.
Chapter 3: 10-Year Forecast
The Mexican Economy To 2019
Structural Barriers To Keep Growth Subdued
Sound macro-economic policies should help Mexico register sustained levels of economic activity going forward,
averaging 2.5% real GDP growth between 2012 and 2019 according to our forecasts.
table: MEXICO Long-Term Macroeconomic Forecasts
Chapter 4: Special Report
Political Risk In The Next Decade
What To Expect In 2010-2019
Table: Countries Facing Major Leadership Succession In 2010-2019
Table: Countries At Risk Of Major Political Upheaval
Table: Countries At Risk Of Interst ate Conflict Or Heightened Bilateral Tension
Table: Count ries Facing Secess ionist Or Aut onomy Movements , Insu rgencies, Or Civil Wars
Table: Pivotal States
Chapter 5: Business Environment
Business Environment Outlook
TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
Institutions
TABLE: BMI LEGAL FRAMEWOR K RATINGS
Infrastructure
TABLE: LATIN AMERICA , ANNUAL FDI INFLOW S
Market Orientation
TABLE: BMI TRADE RATINGS
TABLE: TOP EXPORT DESTINATIONS
Chapter 6: Key Sectors
Defence
Table: Mexico’s Defence Expenditure, 2004-2014
Food & Drink
Table: Mass Grocery Retail — Valu e Sales by Format — Hist orical Data & Forecasts
Chapter 7: BMI Global Assumptions
Global Outlook
2010 Looking Rosier
TABLE: GLOBAL AND REGIONAL REAL GDP GROW TH
TABLE: developed market exchange rates
Table: Emerging Market Exchange Rates
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES
TABLE: EMERGING MARKETS

Abstract

A recent visit to Mexico has served to reinforce our concerns regarding the extent of the challengesfacing the country. We have long emphasised the economy’s over-dependence on the US consumer,and our subdued outlook for the latter implies that the Mexican recovery will not be rapid. On thepolitical front, we reiterate our concerns that President Felipe Calderón faces an uphill battle toget any major reforms passed through congress, leaving fiscal weakness a key issue in 2010.

A breakdown of Mexico’s Q309 GDP data supports our long-held view that there will be no stronguptick in either private consumption or fixed investment levels in 2010. Tax hikes and lack of incentivesto save will prevent real GDP growth exceeding 3.2% this year, which itself is more a result ofbase effects from last year’s record contraction than a vote of confidence in the country’s growthstory. The main factor driving our bleak prognosis is the poor health of the domestic consumer,confirmed by Q309 GDP data, although we are also fairly pessimistic on the fixed investment frontover the next 12 months. The only near-term hope for a more robust recovery, in our view, is arapid economic rebound north of the border.

N evertheless, despite our outlook for economic activity to remain sluggish we still believe the2010 budget will add some inflationary pressure to Mexico’s economy this year, although mainlythrough lack of competitiveness in key sectors and the removal of subsidies. As a result, we seelittle chance that policymakers will opt for a rate hike in H110, and choose to hold to our end-2010interest rate projection of 4.75%, a 25 basis point increase from end-2009 levels. This is furthersupported by the appointment of former-Economy Minister Augustín Carstens as the new headof the central bank, who will no doubt be cogniscant of the problems that an early rate hike couldcause for the Mexican economy.

The first duty facing Mexico’s new economy minister, on the other hand, will be to deal with hispredecessor’s legacy, and steer the economy out of a recession without causing a further deteriorationin the government’s debt profile. However, the fiscal burden he has to grapple with and lack ofpolitical manoeuvrability means we anticipate Mexico’s sovereign credit risk to rise in 2010, whichwhen combined with a benign inflationary environment, will likely spell bad news for the country’sdebt markets in the months ahead.

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