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Inflationary pressures prompt tighter monetary policy
In the first half of November, consumer prices increased by 0.61%, more
than double the rate anticipated by the market and it is now evident that
monetary authorities will not meet their 4.5% year-end headline inflation
target. Measured by the less volatile core inflation index (at an annual
3.8% in October), the Central Bank’s policy was more successful in 2002.
Nevertheless, on 6 December, the Central Bank decided to raise the
so-called short (corto) from 400 million pesos to 475 million pesos a day.
The short regulates liquidity in the money market and is the central
monetary policy tool of the Central Bank. The Central Bank is concerned
about next year’s ambitious 3.0% inflation target and fears that the
current higher inflation would "contaminate" the inflation outlook for
2003. Indeed, inflationary expectations are rising quickly. The forecast
for this year was hiked 0.2 percentage points since last month to the
current 5.2% and the 2003 outlook was raised a notch from 3.9% last month
to 4.0%.
Current account deficit easily covered by capital account surplus
In the third quarter, the current account of the balance of payments
registered a deficit of US$ 3.2 billion and thus was below the US$ 3.4
billion expected by the Consensus. The third quarter deficit was above the
US$ 2.9 billion recorded in the second quarter of this year but below the
US$ 3.5 billion deficit registered in the third quarter of 2001. The
improvement over last year’s deficit is mainly due to a lower deficit in
the trade balance and a higher surplus in the transfers balance whereas
the service balance incurred a higher deficit. The trade deficit dropped
as exports grew at a faster pace (+6.2% year-on-year) than imports (+5.2%
yoy). Exports profited mostly from a pickup in the oil price. According to
data from the Ministry of Energy, the average price for the Mexican mix of
crude oils was 18.2% above the level in the third quarter last year, which
boosted oil exports and in combination with a slight increase of export
volumes provided for oil export growth of 23.8% over the same quarter last
year. Non-oil exports increased by a much more moderate 4.5% compared to
the third quarter last year. The increase of imports was most pronounced
in consumer goods, which added 9.4%. Intermediate goods grew at a more
moderate pace (+6.7% yoy), while capital goods declined 7.0%.
With a surplus of US$ 5.6 billion in the third quarter, the capital
account balance was more than sufficient to cover the current account gap.
The third quarter figure was considerably above the surplus recorded in
the preceding quarter (US$ 3.1 billion) and in the same quarter last year
(US$ 3.6 billion). The improvement over last year’s surplus is
particularly remarkable since last year the bulk of the Banamex-Citigroup
deal was disbursed in the third quarter. Consequently, the US$ 14.4
billion in net foreign direct investment (FDI) flows in Q3 2001 shrivelled
to just US$ 1.0 billion in Q3 2002. However, the FDI shortfall was
compensated for by a healthy development in the country’s assets abroad,
which reverted from a US$ 8.9 billion deficit last year to a US$ 4.4
billion surplus this year, the lion share of which occurred in assets at
banks abroad.
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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