Mexico - Economic Briefing December 2003

Economy Slumps Despite Record Growth in U.S. (continued)

Current account deficit drops as families abroad send more money back to Mexico
In the third quarter, the current account balance registered a deficit of US$ 2.1 billion. The deficit was well below expectations of a US$ 2.9 billion deficit and below the US$ 3.1 billion shortfall observed in the third quarter last year. In fact, it was the lowest third quarter deficit since 1997. The improvement over last year’s current account gap was almost entirely attributable to a higher surplus in the transfers balance, as Mexicans abroad sent more money home (Q3 2003: US$ 3.9 billion; Q3 2002: US$ 2.7 billion). These transfers are playing an increasingly important role in the Mexican economy. In the first nine months of the year, family members abroad sent home US$ 9.9 billion, 36% more than in the same period last year. Funds resulting from family transfers even exceeded direct investment flows and tourism income. In the first nine months, these inflows reached almost 80% of proceeds from oil exports and accounted for 2.2% of GDP.

Trade balance bolstered by higher oil exports
The deficit in the trade balance remained virtually unchanged over last year at US$ 1.4 billion and the deficit in the service balance even increased from US$ 4.3 billion last year to the current US$ 4.6 billion. The trade balance would have deteriorated more if it had not been for oil exports, which increased 12.9% over the third quarter last year amid higher volumes and prices. Non-oil exports, on the other hand, dropped 1.1%, reflecting continuous weak demand for Mexican manufactures and the weakening competitiveness of the Mexican economy.

Capital account in red for the first time since 1999
The capital account balance incurred a deficit of US$ 121 million and was thus unable to cover the current account gap. This is the first time the capital account is in negative territory since 1999. In the third quarter last year, the capital account balance had registered a US$ 5.7 billion surplus. The shortfall was mainly due to lower investment flows, which dropped from US$ 1.9 billion last year to US$ 229 million in the third quarter this year, reflecting both deteriorating direct and portfolio investment flows. As a result of the twin deficit in current and capital account, international reserves dropped US 1.3 billion in the third quarter to US$ 52.1 billion at the end of September. Nevertheless, Consensus Forecast panellists expect that reserves will rise to 53.5 billion by the end of the year. The annual current account deficit, which reached US$ 10.5 billion in the third quarter is seen to drop slightly to US$ 10.4 billion by the end of the year but is expected to rise again amid the general economic upswing to US$ 12.8 billion by the end of 2004.