Mexico - Economic Briefing March 2004

Outlook Begins to Improve (continued)

Outlook beginning to improve
The fourth quarter reading indicates that the Mexican economy is on the way to a tentative recovery.  However, while the external setting is clearly favourable for the Mexican economy – the U.S. economy is anticipated to grow 4.6% this year - it is still too early to see the economy on the safe side.  Downside risks remain.  Rising inflationary expectations could prompt monetary authorities to tighten the reins further, potentially choking off the incipient recovery of consumption and delaying the rebound of investment.  On the external side of the economy, Mexico continues to face the threat of low-cost competition, most notably but not alone, from China.  While more of a medium-term threat, continued loss of market share in the United States can have a notable impact even in the short term.  Nevertheless, Consensus Forecast panellists are beginning to see a silver lining on the horizon and have lifted their forecast for economic growth this year to 3.2%.  While this is just a notch above last month’s forecast its ends a string of downward revisions and could mark the beginning of a period of increased optimism.  The Consensus Forecast is in line with the Central Bank that expects growth to range between 3.0% and 3.5%.  The Consensus expects economic growth to accelerate continuously from 3.0% in the first quarter to 3.5% and 3.7% in the middle of the year and 3.9% in the final quarter.   However, growth is not likely to return to past exuberance quickly.  Even next year, the Consensus estimates that economic growth will remain contained at 3.4%. 

Current account deficit drops amid robust oil exports and strong inflows from family transfers
In the fourth quarter, the current account balance incurred a deficit of US$ 3.3 billion.  This was below the US$ 2.1 billion deficit registered in the third quarter and below the US$ 4.8 billion deficit recorded in the same period the year before.  As a result, the current account deficit for the full year dropped from US$ 14.0 billion in 2002 to US$ 9.2 billion in 2003.  The declining deficit was driven by a lower deficit in the trade balance and a higher surplus in the transfer balance.  The trade deficit dropped, as exports, favoured by an increase in the value of oil exports, grew at a quicker pace than imports, which were contained by subdued domestic demand.  The higher surplus in the transfer balance reflected an important increase of family remittances from abroad.  Transfers from family members are becoming an increasingly important source of external funds for Mexico.  In 2003, inflows under this concept amounted to US$ 13.3 billion, a 35.2% increase over 2002.  Thus, family transfers are even more important source of funds than foreign direct investment or income from tourism.  The importance of this growing source of income is also reflected by the fact that family transfers accounted for 2.1% of GDP in 2003. 

Capital account surplus declines as foreign direct investment drops to seven-year low
In the fourth quarter, the capital account balance incurred a surplus of US$ 7.9 billion, following on a virtually balanced capital account in the third quarter and above the US$ 7.1 billion recorded in the same period the year before.  For the full year, the capital account surplus reached US$ 17.5 billion.  Thus, both, quarterly and annual capital account surpluses were well sufficient to cover the respective current account shortfalls.  However, the 2003 surplus fell short of the US$ 22.2 billion surplus recorded in 2002. The decline in the capital account surplus reflects lower inflows of foreign direct investment (FDI).  FDI dropped from US$ 14.4 billion in 2002 to US$ 10.7 billion in 2003, the lowest level registered in the past seven years.  The Central Bank attributed the decline to the stalled structural reforms, which has negatively affected the business climate and has reduced the number of profitable projects in the country.