Mexico - Economic Briefing March 2002

Poised to Leave the Valley Behind (continued)

Consumer prices drop in February and expectations come in line with Central Bank target

In February, consumer prices fell 0.06% over the previous month.  As a result, annual headline inflation remained unchanged from the 4.8% recorded in January.  The February price decline was mainly due to declines in vegetable and domestic gas prices.  The downward movement was partially compensated by higher electricity tariffs and, to a lesser extent, by higher prices for housing, tortillas and urban transport.  Core inflation, which excludes the more volatile items such as vegetables and domestic gas, rose by 0.75% in February.  As a result, the annual core inflation rate dropped from 4.8% in January to 4.7%, continuing the steady downward trend observed in the past years.  Panellists have adjusted their year-end inflation forecast to the ever more benign inflationary environment.  The Consensus is now almost in line with the Central Bank target of 4.5%, which should provide the monetary institute with additional maneuvering room to stimulate the economy with a more accommodating monetary policy. 

Current account deteriorates amid lower oil exports

In the fourth quarter last year, the current account balance registered a deficit of US$ 5.8 billion, better than the US$ 6.3 billion Consensus Forecast figure.  Furthermore, the data was better than the US$ 6.2 billion deficit registered in the same quarter 2000 but considerably above the US$ 3.3 billion deficit recorded in the third quarter.  The deterioration compared to the third quarter is mainly due to a higher trade deficit, which increased from US$ 1.7 billion to US$ 4.0 billion, as the decline in exports (-11.7% year-on-year) was more pronounced than the drop in imports (-10.0% yoy).  Next to lower global demand, in particular from the United States, exports also had to cope with a sharp drop in oil prices.  In addition, Mexico reduced the oil production in accordance with an Organization of the Petroleum Exporting Countries (OPEC) agreement.  As a result, oil exports, which in 2001 accounted for 7.8% of total exports, shriveled by more than a third compared to the same quarter the year before.  Non-oil exports dropped by 9.5% in the fourth quarter.  The annual current account deficit reached US$ 17.5 billion, equivalent to 2.8% of GDP.  For this year, the Consensus expects the current account deficit to widen.

Capital account surplus improves over third quarter and is sufficient to cover current account gap

The capital account balance incurred a surplus of US$ 6.2 billion and was, thus, more than sufficient to cover the gap in current account balance.  The surplus was higher than the US$ 5.6 billion recorded in the same quarter the year before and even exceeded the US$ 3.7 billion third quarter surplus , which was inflated by capital inflows in the wake of Citigroup’s acquisition of Banamex.  Owing to these one-time capital inflows, foreign direct investment dropped almost 90%, from US$ 14.9 billion in the third quarter to US$ 2.0 billion in the last quarter.  However, the movement was compensated for by a reversion in the active position of the balance of payments, which reverted from a US$ 8.9 billion deficit in the third quarter (mainly in banks abroad and in Mexican direct investment abroad) to a US$ 3.1 billion surplus in the final quarter last year.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Mexico.  For more details please click here.

For five-year forecasts, please click here.