Downgrade and Slowdown Ahead

MEXICO - Report 08 Apr 2016 by Mauricio Gonzalez, Ernesto Cervera, Guillermo Valdes and Esteban Manteca

Moderate industrial growth, plus service sector and consumption trends, were the main economic growth drivers in March. A positive monthly report from Antad showed that retailers expanded sales in February at their fastest pace in four months. But the broader indicators (IGAE and industrial activity) lagged. More recent and forward-looking indicators were more downbeat, beginning with the leading economic activity indicator for January, which fell 0.16 points from December, its most pronounced sequential decline in 16 months.
But there are plenty of signs that the authorities, analysts and business owners have grown more bullish in recent weeks. In Banco de México’s monthly survey for late February, private sector economists cut their economic growth estimates for 2016 and 2017, as did the Central Bank. And Moody’s has lowered its outlook on Mexico’s credit rating to negative, likely foreshadowing a ratings downgrade later this year.
Mexico reported a $4.166 billion dollar trade deficit for the first two months of 2016, 56% greater than of the first two months of 2015. Should trade performance continue to deteriorate this year, we can expect the 2016 CAD to surpass our $31.2 billion forecast. That would generate additional pressures on the currency, especially if FDI fails to match our $20 billion estimate for 2016.
Though Mexico’s June 18th presidential election is still more than two years away, the latest polling data already points to some shifts in voter preferences. The incumbent PRI remains by far the strongest political force, with support of 34% of the public, more than the next three parties (PAN, PRD and Morena) combined. The PAN is a distant second at 14%, followed by the PRD and Morena with 7% and 6%. All five other parties lag in the low single digits, with four barely reaching 1%. Party preferences don’t tell the whole story. The leading candidate so far is Morena’s Andrés Manuel López Obrador, who enjoys both the strongest positives and the highest negatives. The election may be the first time independents appear on the presidential ballot. Among the three top PAN hopefuls, National Chairman Ricardo Anaya is gaining ground on former first lady Margarita Zavala. For the PRI, only Minister of the Interior Miguel Ángel Osorio and State of Mexico Governor Eruviel Ávila seem to have made any impression on voters.

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