Mexico - Economic Briefing December 2004

Slowdown Ahead Amid Tighter Monetary Policy (continued)

Current account deficit unchanged in third quarter as increased transfers from Mexicans abroad compensate for higher trade deficit
In the third quarter, the current account balance recorded a deficit of US$ 2.1 billion, equivalent to 1.3% of GDP.  The deficit was significantly above the US$ 392 million deficit registered in the preceding quarter but in line with US$ 2.0 billion deficit (1.3% of GDP) observed in the third quarter last year.  With the services balance virtually unchanged over last year, a higher surplus in the transfers balance compensated for a higher deficit in the trade balance.  The transfers surplus increased from US$ 3.9 billion in the third quarter of 2003 to US$ 4.7 billion in the third quarter this year.  The increase mainly reflects higher transfers from Mexicans living abroad.  These transfers grew by 20.3% to US$ 4.5 billion in the third quarter compared to the same quarter last year.  In the recent past, remittances have become an increasingly important source of funding for Mexico and in the first nine months of the year amounted to US$ 12.4 billion, equivalent to 81% of oil exports or 2.6% of GDP.  The annual current account deficit increased from US$ 7.3 billion in the second quarter to US$ 8.4 billion in the third.  Reflecting increased transfers and healthy export growth, Consensus Forecast panellists have continued to lower their forecast for this year’s current account deficit from last month’s US$ 8.9 billion to the current US$ 8.2 billion.

Trade deficit rises as import growth accelerates
The deficit in the trade balance increased from US$ 1.5 billion in the third quarter 2003 to US$ 2.0 billion in the third quarter this year, as imports increased at a quicker pace (+16.8% yoy) than exports (+16.3% yoy). The growth in exports, in part, reflects higher oil prices, which boosted oil exports by 35.5% over the same quarter last year.  In the third quarter, the price for the Mexican mix of crude oils was 35.1% above the same period last year.  However, non-oil exports also increased a very strong 13.9% over the third quarter last year.  The rise in non-oil exports is the result of higher external demand, particularly from the United States.  Import growth was concentrated in intermediate goods, which mainly serve as input for the export-oriented manufacturing industry (+16.5% yoy).  Imports of consumer goods also grew at a fast 21.1% pace, while capital goods purchases expanded by 14.7%.

Headline inflation stabilizes in November
In November, consumer prices increased 0.85%.  The actual rate was well above the 0.69% registered in October and also significantly exceeded market expectations, which had prices growing by 0.65%, according to last month’s Consensus Forecast.  Higher prices for housing as well as for food, beverages and tobacco constituted the main drivers behind the November increase.  However, despite the November price spike, annual headline inflation remained unchanged at 5.4%.  The majority of the November price increase was concentrated in the price categories that experience more erratic shifts and are not included in the core inflation index.  Thus, the core inflation index increased by only 0.27% in November and annual core inflation also remained unchanged at 3.8%.  Even though headline inflation remains far above the upper limit of the Central Bank’s one percentage point tolerance around a 3.0% target rate, the core inflation rate is still within the established tolerance limits.  Central Bank president Guillermo Ortiz claimed in early November that the Bank does not expect core inflation to exceed the 4% threshold and sees core inflation dropping as early as the first quarter of 2005.  Consensus Forecast panellists expect headline inflation to overshoot the Central Bank’s target significantly this year and to remain considerably above target in 2005, with a year-end rate reaching 4.2%.