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Mexico Country Risk Report Q2 2016

Mexico Country Risk Report Q2 2016

Core Views

We remain optimistic toward Mexico's long-term growth outlook onthe back of a booming manufacturing sector, an increasingly strongprivate consumer and favourable demographics.

The passage of energy sector reform will bolster sentiment towardsMexican assets and contribute to stronger real GDP growth in thecoming years.

Major Forecast Changes

We have revised down our 2016 real GDP growth estimate from3.1% to 2.8% as weak oil exports weigh on trade dynamics andthe impact of rates hikes coupled with elevated inflation eat intoconsumer spending.

We have revised down our 2016 forecast for the Mexican peso, fromMXN16.20/USD to MXN17.70/USD. Increased global risk aversiongiven tighter global liquidity conditions and rising market fears of adisorderly slowdown in China will weigh on the peso. Coupled witha sharper than expected drop in oil prices – which will cool exportgrowth and undermine investor sentiment toward the oil producingeconomy – this underpins our view that the peso will be vulnerableto sharp sell-offs in the months ahead.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Oil Production Drop Will Temper Growth Rebound
Mexican real GDP growth will accelerate modestly in 2016. The country will benefit from strong fixed investment and labour market
dynamics, but deteriorating hydrocarbon sector activity will undermine exports.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
Fiscal And Public Debt Outlook
Structural Reforms Will Narrow Deficit
Mexico will narrow its fiscal deficit in 2016 on the back of government cuts to spending. Over a multiyear horizon, Mexico's fiscal deficits
will continue to shrink, benefiting from government efforts to widen the tax base and strengthen the fiscal responsibility law.
TABLE: NET EXPORTS FORECASTS
Structural Fiscal Position
TABLE: MAIN SOURCES OF FEDERAL REVENUE & EXPENDITURE
External Trade And Investment Outlook
FDI Will Provide External Account Stability
Weak oil prices and production will widen Mexico's current account deficit in 2016, and the country's heavy reliance on portfolio flows
to finance this shortfall will keep its external account position vulnerable to sudden outflows of capital. However, over a multiyear time
horizon, a narrowing current account shortfall and significant direct investment into the energy and manufacturing sectors will ensure
greater balance of payments stability.
Outlook On External Position
TABLE: TOP FIVE GOODS EXPORTS IN 2014
TABLE: TOP FIVE GOODS IMPORTS IN 2014
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
Monetary Policy
Tightening Will Continue In 2016
The Banco de México will continue hiking its benchmark policy rate in 2016 in an effort to maintain its interest rate differential with the
US. Despite relatively subdued inflation and growth, the bank will remain focused on buffering the peso against the risk of capital flight
as the US Federal Reserve gradually increases the fed funds rate.
Monetary Policy Framework
Currency Forecast
MXN: Bearish Market Sentiment Will Weigh On Peso
Increased market risk-off sentiment in the face of tightening global liquidity and market fears over a disorderly Chinese slowdown
will maintain downward pressure on the Mexican peso in the months ahead. The currency will strengthen modestly over a multiyear
timeframe, though Mexico's reliance on short-term capital flows will ensure the peso remains vulnerable to sharp sell-offs.
TABLE: BMI CURRENCY FORECAST
Chapter 2: 10-Year Forecast
The Mexican Economy To 2025
Stronger Growth Ahead Following The Passage Of Key Reforms
Mexico's booming manufacturing sector, increasingly strong private consumer and favourable demographics suggest that the country
is well placed to see solid economic expansion in the coming years, such that we forecast robust 4.1% average real GDP growth
over the coming decade. We expect Mexico's oil sector to become an increasingly important driver of growth following energy sector
liberalisation in December 2013.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Investor-Friendly Legislation Will Be Undeterred By Social Unrest
The Mexican government will continue to advance legislation that strengthens trade ties and streamlines the regulatory environment
in an effort to improve the country's business environment. However, persistent widespread social unrest will undermine some of the
government's efforts.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Security And Corruption To Remain Key Risks
The next decade looks set to be challenging for Mexico owing to a weak security situation, high levels of income inequality an d
endemic corruption. That said, our core view remains that the c ountry will end the decade in a better position than where it i s starting,
with potential for some economic reform and a modest improvement in the country's security situation which will strengthen Mexico's
political risk profile.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: EXPORT AND IMPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
TABLE: LATIN AMERICA – TRADE PROCEDURES AND GOVERNANCE
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MEXICO – MACROECONOMIC DATA & FORECASTS

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