Mexico - Economic Briefing June 2004

First Step in Recovery Taken (continued)

Consensus more optimistic about economic prospects
The improved international setting and the recent uptick in economic activity could translate into a revival of the domestic economy.   In May, consumer confidence increased by 3.4 percentage points over last month.  Moreover, for the first time in a year, all five subcategories that poll opinions about personal and national economic assessments surveyed by INEGI, increased over the previous month.  Consensus Forecast panellists have reflected the recent positive developments by raising their forecasts for economic growth this year by 0.3 percentage points over last month to 3.5%.  Growth prospects for next year remained unchanged at 3.4%.

Current account deficit shrinks in first quarter amid increased transfers from Mexicans abroad
In the first quarter, the current account balance recorded a deficit of US$ 1.9 billion, equivalent to 1.1% of GDP.  The deficit was below the US$ 3.4 billion registered in the preceding quarter and below the US$ 2.1 billion deficit (1.4% of GDP) observed in the first quarter last year.  The decline over last year was the result of a higher surplus in the transfers balance.  The transfers surplus increased from US$ 2.9 billion in the first quarter 2003 to US$ 3.5 billion in the first quarter 2004.  The increase mainly reflects higher transfers from Mexicans living abroad, which grew by 21.8%.  In the recent past, these transfers have become an increasingly important source of funding for Mexico and in the first quarter, the amount was equivalent to almost three quarters of oil exports.  The deficits in the trade and the service balances, in contrast, increased.  The first quarter trade deficit of US$ 423 million exceeded last year’s virtual balanced account despite a 10.7% increase in exports.  Rather than being the result of higher oil prices, the increase in exports is the result of higher external demand, particularly from the United States.  As a result, non-oil exports rose by 11.7% over the first quarter 2003, the highest increase in the last three years.  Oil exports, in contrast, increased by only 3.4%, as the benefits of high oil prices have been concentrated mostly in the second quarter.  In the first quarter, West Texas Intermediate (WTI) oil prices were only 3.5% above the same period last year.  Imports increased 11.6% over the first quarter last year.  The increase was concentrated in intermediate goods, which mainly serve as input for the export-oriented manufacturing industry (+13.6% year-on-year).  Imports of consumer and capital goods, on the other hand, expanded by only 4.6% and 5.9% respectively. 

Capital account surplus drops despite inflows from bank sale
The capital account registered a surplus of US$ 4.1 billion in the first quarter.  This was sufficient to cover the current account gap but was well below the US$ 6.2 billion surplus recorded in the first quarter last year.  The surplus dropped in spite of a massive inflow of foreign direct investment related to the purchase of outstanding shares in BBVA-Bancomer by Spanish bank BBVA.  In fact, the transaction resulted in an inflow of US$ 4.2 billion and thus accounted for the entire capital account surplus.  However, the transaction also triggered a US$ 2.5 billion outflow in portfolio investment as foreigners sold their shares in BBVA-Bancomer.   The main constituent of the declining capital account surplus were increasing assets of Mexicans abroad.  According to the Central Bank, the increase mainly reflects higher assets from both the private and public non-banking sector.