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3. Drying
up of capital flows limited threat to Mexico but potential downward
pressure on the Peso. The flight to capital triggered
by the US attacks is bound to affect all emerging markets, including
Mexico. However, as much as Mexico’s strong dependence on the US impacts
the country’s real sector it also shields its capital markets from typical
emerging market contagion. As a result, bond spreads and domestic
interest rates have remained contained and the Peso has kept most of the
value built up since January. However, just prior to the attacks the Peso
depreciated on concerns about fiscal reform. In addition, spreads widened
as Standard and Poor’s announced that the cherished investment grade
ratings upgrade was postponed, as economic growth concerns were likely to
overshadow any advancements in fiscal reform. The S & P decision, coupled
with the new threat of lower oil prices, has begun exerting pressure on
the Peso. Consequently, panellists have revised their year-end exchange
rate forecasts to an average 9.6 Pesos per US$ and expect an accelerated
weakening in 2002, with a year-end rate of 10.1. A substantially weaker
Peso could endanger the Central Bank’s pledge to lower inflation. This
year’s 6.5% target seems secured – currently annual headline inflation
stands at 5.9%. Additionally, next year’s ambitions to make further
inroads to lower inflation seem increasingly plausible under a scenario of
weaker domestic demand. Panellists expect inflation to fall
further by the end of the year.
4. Tourism
industry to take blow in the short-term but may profit from US proximity
in the medium-term. While the entire tourism industry
accounts 8.9% of GDP, receipts from international travellers, the most
affected category within tourism, represent only 1.5% of GDP, according to
data from the World Tourism Organization. Nevertheless, the large share
of US American visitors – in 2000 US Americans accounted for almost 92% of
total international visitors to Mexico -- poses a serious threat to
Mexico’s tourism sector. According to anecdotal evidence, occupancy rates
have fallen as much as 70% and Mexico's government-controlled airline
Aeromexico has already announced cuts in its flights by 10% to 20% as
demand plummeted. To stem the adverse effects to the tourism industry,
the government announced an emergency package, including tax breaks for
hotels and may destine up to US$ 40 million in extra advertising funds to
promote the country in other markets. Despite the adverse impact on the
tourism industry in the short-term, Mexico may profit in the medium-term,
since the country’s status as a neighbour to the US could be an advantage,
as many US travellers are likely to substitute trips to countries in the
Middle East or Asia for destinations of closer proximity.
Recession seen in second half this
year.
The dropout in economic activity resulting from the 11 September attacks
catches Mexico in the middle of a severe growth slowdown prompted by lower
demand from the US. In July, the global economic activity indicator
contracted 0.9% in real terms compared to the same month last year, the
third consecutive monthly decline in economic activity. Moreover, the
speed of contraction is accelerating and the annual average variation of
the leading indicator points to a further deceleration in economic
activity. Additional data also unequivocally indicate that the Mexican
consumer, who remained the only offsetting pillar in the external sector
induced slide, is finally loosing its resilience. Consequently, growth in
the third quarter is likely to have contracted according to the
Consensus. Projections for the fourth quarter have also dropped
dramatically from an expected expansion to a contraction , with further
downside risks, according to the minimum forecast. Consequently, average
expectations for this year’s growth dropped another 0.8 percentage points.
The adjustment to the 2002 forecast was even more dramatic. Panellists
lowered their GDP growth projections by 1.3 percentage points.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Mexico. For more details please click here.
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