Jorge Sicilia - Outlook on Mexico

Outlook on Mexico

So far, a tale of macro stability but still moderate growth: what is the outlook?

Jorge Sicilia, BBVA Research GIC Meeting Monterrey, 1 February 2016

Global Economic Scenario / 28 January 2016

Contents 1. A structural outlook of the Mexican economy: a journey trough strength and weaknesses 2. Recent developments: growth, markets, vulnerabilities 3. Second generation of economic reforms

Page 2

Global Economic Scenario / 28 January 2016

The long and winding road 10.0 8.0 6.0 4.0 2.0 0.0 - 2.0 - 4.0 - 6.0 - 8.0

Structural Reforms

NAFTA

Debt crisis

Oil crisis

USD at an alltime high

Lehman crisis

Tequila crisis

Inflation at an alltime low

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

1986

Mexico joins GATT

1993

Central bank autonomy

1994-95

Flexible exchange rate

1997

2000

Ruling party loses presidency

Ruling party loses lower house majority

2013

Structural reforms: Telecom, Labor Financial, Antitrust, Education Page 3

Global Economic Scenario / 28 January 2016

Strengths: (i) highly integrated to the US economy Manufacturing

Exports by destination in 2014

Source: BBVA Research

Source: BBVA Research

(Annual percentage change, sa)

(structure, %)

7

100

6

90 80

5

80.2

70

4

60

3

50

2

40 30

1

20

U.S.

Jan-15

Sep-14

Nov-14

Jul-14

Mar-14

May-14

Jan-14

Nov-13

Jul-13

Sep-13

May-13

Jan-13

Mar-13

Nov-12

Jul-12

Sep-12

May-12

Jan-12

Mar-12

Nov-11

Jul-11

Sep-11

0

May-11

-1

Jan-11

10 Mar-11

0

9.1

USA

Rest of America

5.1

4.4

Europea Union

Asia

1.1 Rest of Countries

Mexico

Page 4

Global Economic Scenario / 28 January 2016

Strengths: (ii) with an export structure relying less on petroleum and more on manufacturing Mexican exports

Mexican manufactured exports

Source: BBVA Research with INEGI data.

Source: BBVA Research with INEGI data.

(% share in total exports)

10

10

0

0

Petroleum exports

Non-petroleum exports

2014

20

2012

20

2010

30

2008

30

2006

40

2004

40

2002

50

2000

50

1998

60

1996

60

1994

70

1992

70

1990

80

1988

80

1986

90

1984

90

1982

100

1980

100

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(% share in total exports)

Automotive

Non-automotive

Page 5

Global Economic Scenario / 28 January 2016

Strengths: (iii) A very open economy (with free trade agreements with more than 50 countries) Openness index and trade balance

Exports of light vehicles

Source: BBVA Research with INEGI data.

Source: BBVA Research with AMIA data.

(% share in GDP)

(units in millions, 12mma)

70

10

60

8 6

50

4

40

2.5

2

1.5

2 30

0

20

1

-2

Trade balance - right axis

2014

2012

2010

2008

2006

2004

2002

2000

Imports share in GDP

0.5

0

Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Exports share in GDP

1998

1996

1994

1992

1990

1988

1986

-6

1984

0

1982

-4

1980

10

Exports of light vehicles

Page 6

Global Economic Scenario / 28 January 2016

Strengths: (iv) A sound and solvent banking system Bank's Capital Adequacy Ratio, %

Non-performing loans (NPL) and Provision coverage (PC) ratios

Source: CNBV

15,0

15,8

15,5

15,9

10 15,7

16,9

16,5

15,3

16,0

16,1 14,3

14,1

14,2

15,4

Source: CNBV

300 250

8 PC

200

6

150

Basel III minimum: 10.5%

140,5

2

2,6

Non-Performing Loans

Dec-15

Dec-14

Dec-13

Dec-12

Dec-11

Dec-10

Dec-09

Dec-08

Dec-07

Dec-06

Dec-05

Dec-04

Dec-03

NPL Dec-02

nov-15

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

0

Dec-01

BIS minimum: 8%

4

Dec-00

CNBV minimum to avoid "early-warnings�: 10%

100 50 0

Provision Coverage (PC) 7

Global Economic Scenario / 28 January 2016

Weaknesses: (i) Low GDP per capita (stable relative with the US) with no contribution from TFP Potential GDP growth (%) Source: own estimation

7

7

6

6

5

5

4

4

3

3

2

2

1

1

0

0

-1

-1

-2

-2 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Labor

Total Factor Productivity

Capital

Potential GDP Page 8

Global Economic Scenario / 28 January 2016

Weaknesses: (ii) relatively high informality and an improvable legal environment…

Total and formal private employment (figures in millions of workers)

Informal economy and legal environment (% of GDP and Index)

Source: BBVA Research with data of INEGI

Source: Schneider (2009) and Property Rights Alliance with World Bank data

55

70

50

Perú

60

3Q15 Diference :Total IMSS = 35.4 million persons

40

1Q05

35

Diference: Total -

30

IMSS = 30.3 million persons

25

Informal economy (% of GDP)

45

20 15 10 5

50 Brasil 40 México

30 20

España China

10

IMSS Employment

EEUU

III

I-15

III

III

Labor Force

I-14

I-13

III

I-12

III

III

I-11

I-10

III

I-09

III

I-08

III

I-07

III

I-06

III

I-05

0

0 2

3

4

5

6

7

Index of legal environment (max=10)

8

9 Page 9

Global Economic Scenario / 28 January 2016

Weaknesses: (ii) ‌ keeps productivity and investment down Informal economy (% of GDP) and ‌ Capital

Productivity

Source: Schneider (2009) and Hall and Jones (1998)

Source: Schneider (2009) and Hall and Jones (1998)

70

Informal economy (% of GDP)

70 Peru

60

Peru

60 50

50 Brazil

40

20

20

Spain

China

US

0 0.4

0.6

0.8

Spain

10

10

0.2

Mexico

30

Mexico

30

Brazil

40

1

Capital (relative to the US)

China US

0 1.2

1.4

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Productivity (relative to the US) Page 10

Global Economic Scenario / 28 January 2016

Weaknesses: (iii) ‌ and prevents wages from growing. At the same time, inequality is high Quarterly monetary current income by decile (% of total income) Source: BBVA Research with data from INEGI

Income Inequality, Gini Index. OECD countries Gini coefficient, 0 = complete equality; 1 = complete inequality, Source: OECD, 2012 0,50

0,45

35.3

37.2

37.4

0,40

0,35

0,30

16.6

16.4

16.1 0,25

12.1

11.8

11.4

0,20

9.4

9.0

9.1

0,15

7.5

7.2

7.2

0,10

6.1

6.0

5.9

4.9

4.7

4.8

3.7

3.8

3.9

2.8

1.4

2010 Income deciles:

2.6

1.4

II

III

IV

2.8

1.5

2012 I

0,05

0,00

Den Slov Slvk Nor Cze Ice Fin Bel Swe Austr Neth Swit Ger Hung Pol Lux Ire Fra SKor Can Austr Ita NZa Spa Est Por Gree UK Isr US Tur MEXICO

100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

2014 V

VI

VII

VIII

IX

X Page 11

Global Economic Scenario / 28 January 2016

Weaknesses: (iv) Traditional and total public sector balance has remained high as proportion of GDP Traditional and total public sector balance (% of GDP)

Total public sector gross debt (% of GDP)

Source: BBVA Research with data of Ministry of Finance (SHCP)

Source: BBVA Research with data of Ministry of Finance (SHCP) 5.0

48

4.5

45.7

46

4.0

44

3.5

42

41.0

3.0

40

2.5

38.8

38

2.0

36

1.5 1.0

34

0.5

32

0.0 2009

2010

2011

Traditional Balance

2012

2013

2014

2015

36.4 34.6

34.9

35.3

2009

2010

2011

30 2012

2013

2014

2015

Total Balance

Page 12

Global Economic Scenario / 28 January 2016

High heterogeneity Regional and national economic activity over 2010-15e (2010=100) p/preliminary data; e/in-house estimates

Regional and national GDP per capita (Compounded annual growth rate %) Source: BBVA Research with INEGI data

Source: BBVA Research with INEGI data 3

125

2.5 120 2 115

1.5

110

1 0.5

105

Touristic

National

Low Development

2015e

2013p

2014e

Industrial Medium Development National

Medium Development

Touristic High Development Low Development

2012

2011

2010

95

Industrial

100

High Development

0

GDP per capita compounded annual growth rate 2003-2014 (%)

Regions are divided by economic vocation and level of development: High Development: DF; Touristic: BCS and Q Roo; Industrial: Ags, BC, Coah, Chih, Jal, MĂŠx, NL, Qro, Son, Tamps; Medium Development: Camp, Col, Dgo, Gto, Hgo, Mich, Mor, Nay, Pue, SLP, Sin, Tab, Tlax, Ver, Yuc, Zac; Low Development: Chis, Gro and Oax. Page 13

Global Economic Scenario / 28 January 2016

Contents 1. A structural outlook of the Mexican economy: a journey trough strength and weaknesses 2. Recent developments: growth, markets, vulnerabilities 3. Second generation of economic reforms

Page 14

Global Economic Scenario / 28 January 2016

In this recovery, GDP growth has been lower than expected and relied mainly on consumption GDP’s contribution to growth by component (percentage points of total growth Source: BBVA Research with data of INEGI)

8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 - 1.0 - 2.0 - 3.0 - 4.0 - 5.0 - 6.0 - 7.0 - 8.0 - 9.0 - 10.0 - 11.0 - 12.0

7.0 4.7

5.9

4.7

2.7

5.3

4.3

0.1

5.0 3.0

3.1

5.1 1.4

4.0

4.0

2.5 1.3

1.4

2.3

- 0.6 Consumption has been the main driver of GDP growth

- 4.7

- 5.8 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Avg Qs15 Consumption Fixed Investment Net Exports GDP Page 15

Global Economic Scenario / 28 January 2016

Recent developments in financial markets: higher financial stress in EM BBVA Research Financial Stress Index (normalized index) Source: BBVA Research

BBVA Research Financial Stress Index regional map for EM.

3,0 Focus on

1,5

Jan-16

Jan-15

Emerging

Jan-14

Jan-13

Developed

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

-1,5

Jan-16

Dec-15

Nov-15

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

US

#

# # # # # # #

EMU

#

# # # # # # #

Latam

#

# # # # # # #

Brazil

#

# # # # # # #

Chile

#

# # # # # # #

Colombia

#

# # # # # # #

Mexico

#

# # # # # # #

Peru

#

# # # # # # #

EMEA

#

# # # # # # #

Czech Republic

#

# # # # # # #

Hungary

#

# # # # # # #

Poland

#

# # # # # # #

Russia

#

# # # # # # #

Turkey

#

# # # # # # #

#

# # # # # # #

China

#

# # # # # # #

India

#

# # # # # # #

Indonesia

#

# # # # # # #

Korea

#

# # # # # # #

Malaysia

#

# # # # # # #

Philippines

#

# # # # # # #

Taiwan

#

# # # # # # #

Thailand

#

# # # # # # #

Asia

0,0

Feb-15

4,5

Jan-15

Dec-14

Source: BBVA Research

Very high

Low

High

Very low

Neutral

No data

Page 16

Global Economic Scenario / 28 January 2016

Recent developments in financial markets: evolving like other “crisis” EM BBVA footprint FX performance vs USD (Base 100 January 2015) Source: Bloomberg and BBVA Research

BBVA Research Volatility Index: by assets Source: BBVA Research

110

Fixed income

105 100 95 90

Equity

85

Credit

80 75 70 65 60 Jan-15

Depreciation vs. USD

Mar-15

May-15

Jul-15

Sep-15

Nov-15

Jan-16

FX August 2013, 2nd taperging talks August 2015 episode

ARS

CLP

COP

MXN

PEN

BRL

Current Page 17

Global Economic Scenario / 28 January 2016

Recent developments in financial markets: pressure on ratings not focused on Mexico Agencies’ rating downgrade pressure gap (January 2016)

(difference between CDS-implied rating and actual sovereign rating, in notches) Source: BBVA Research

3 2 1 0 -1 -2 -3 -4

This Quarter

1 Qu arter ag o

Philippines

Malaysia

Indones ia

Thailand

China

Korea

Arg entina

Peru

Colombia

Chile

Brazil

Mexico

Croatia

Romania

Bulg aria

Hung ary

Cz ech Rep

Poland

Russia

Turkey

Ireland

Portug al

Greece

Belg ium

Spain

Italy

France

Netherlands

-6

Germ any

-5 Austria

Strong downgrade pressure

4

Sweden

Downgrade pressure

5

Norway

Neutral

6

UK

Upgrade pressure

-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0

USA

Strong upgrade pressure

1 Year ago

Page 18

Global Economic Scenario / 28 January 2016

But risk perception is starting to rise Emerging-markets CDS

Emeging markets CDS change

bp

Year-to-date, bp

Source: BBVA Research, Bloomberg

Source: BBVA Research, Bloomberg

500

60

450

50

400 350

40

300 215

250 200 150 100 50

30 20 10

Brz (Baa3 )

S Kor (Aa3 )

Chil (Aa3 )

Tur (Baa3 )

Thai (Baa1 )

Mal (A3 )

Per (A3 )

Mx (A3 )

S Kor (Aa3 )

Chil (Aa3 )

Thai (Baa1 )

Mx (A3 )

Mal (A3 )

Per (A3 )

Tur (Baa3 )

Col (Baa2 )

Brz (Baa3 )

Col (Baa2 )

0

0

Page 19

Global Economic Scenario / 28 January 2016

Very recent developments show little impact on long term rates also at the start of the year M10 and 10yT yields %

M10 and 10yT yields

Source: BBVA Research, Bloomberg

Last two months, % Source: BBVA Research, Bloomberg

6 .4 0

5 .5

1 .9

5 .3

1 .7

6 .1 5

5 .1

1 .5

6 .1 0

M1 0 , lhs

1 0 y T, rhs

2 .3 5 2 .3 0

6 .3 5

2 .2 5 2 .2 0

2 .1 5 2 .1 0

6 .2 0

2 .0 5

2 .0 0 1 .9 5

1 -Dec 4 -Dec 7 -Dec 10 -Dec 13 -Dec 16 -Dec 19 -Dec 22 -Dec 25 -Dec 28 -Dec 31 -Dec 3 -Jan 6 -Jan 9 -Jan 12 -Jan 15 -Jan 18 -Jan 21 -Jan

Jan-16

2 .1

Nov-15

5 .7

Sep-15

6 .2 5

Jul-15

2 .3

May-15

5 .9

Mar-15

2 .5

Jan-15

6 .1

6 .3 0

Nov-14

2 .7

Sep-14

6 .3

Jul-14

2 .9

May-14

6 .5

Mar-14

3 .1

Jan-14

6 .7

M1 0 , lhs

1 0 y T, rhs

Page 20

Global Economic Scenario / 28 January 2016

Very recent developments show too high volatility in the MXN depreciation: no fear of floating?

Exchange rate and Mexican oil price (ppd and USD per barrel)

Source: BBVA Research and Bloomberg

High liquidity currencies. Currencies from oil-exporting countries and MXN * (Index 12/1/2015 = 100) Source: BBVA Research and Bloomberg

18.0

FED-led uncertainty

17.5 17.0

114

Concerns over China's cycle

112 110

FED-led uncertainty

16.5

108

16.0 OPEP denies oil production cut

15.5

106

104

15.0

102

14.5

100 Dec-15

Nov-15

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

Feb-15

Jan-15

14.0

98 1-Dec

8-Dec 15-Dec 22-Dec 29-Dec 5-Jan OilExporting

HighLiquidity

12-Jan 19-Jan MXN

* Oil exporting countries: Brazil, Colombia, Russia, Norway, Canada. High liquidity currencies: South Korean Won, Singapore dollar, Taiwan dollar and Hong Kong dollar.

Page 21

Global Economic Scenario / 28 January 2016

So far, so good: as opposed to peers, inflation in Mexico is likely to remain comfortably on target Inflation in inflation-targeting (IT) countries

Inflation in IT countries

%YoY

%YoY

Source: BBVA Research, Bloomberg, Central Banks

Source: BBVA Research, Bloomberg, Central Banks

12

12

10

10

8

8

6 4

6

2

4 Jun-1 5 Dec-1 5 Jun-1 6 Dec-1 6 Jun-1 7 Dec-1 7

Jun-1 5 Dec-1 5 Jun-1 6 Dec-1 6 Jun-1 7 Dec-1 7

Jun-1 5 Dec-1 5 Jun-1 6 Dec-1 6 Jun-1 7 Dec-1 7

Brasil

Chile

Colombia

Perú

Jun-1 5 Dec-1 5 Jun-1 6 Dec-1 6 Jun-1 7 Dec-1 7

Jun-1 5 Dec-1 5 Jun-1 6 Dec-1 6 Jun-1 7 Dec-1 7

0

2

México

0 Inflation targ et

BRA

CHI

COL

PER

MEX

Forecast

CB's target range

Current inflation (Jan -16)

Forecast (Dec -16)

Page 22

Global Economic Scenario / 28 January 2016

In Mexico the pass-through is limited and the peso seems to have overreacted compared to fair value Pass through to inflation from a 1% depreciation of the exchange rate to the USD

Exchange rate vs USD: overundervaluation (%) Source: BBVA Research

Source: BBVA Research 0.40 overvaluation

30

0.35 0.30 0.25 0.20

20

10

0

undervaluation

0.15 0.10 0.05 0.00

BRA

may-15

may-14

CHI

COL

MEX

PER

URU

-10

-20

-30 ARG

BRA

CHI Jan-16

COL

MEX

PER

Oct-15

Page 23

Global Economic Scenario / 28 January 2016

Financial markets: What can we read from recent developments and if so, how does Mexico fare? belated IsIsit ita abelated re-pricing ofFed´s the re-pricing of the Fed´s liftoff? liftoff?

Is it the threat of risk scenarios going forward in this new world?

Unlikely!

Is it a downward revision of the baseline global outlook?

Not likely yet!

Probably! Uncertainty about China (growth, rebalancing and FX policy) and persistently low oil prices raise the risk of second round effects (higher vulnerabilities in corporates affecting banks and sovereigns, especially in the oil sector) that could become self-fulfilling.

Page 24

Global Economic Scenario / 28 January 2016

Financial markets: Are they pricing a 2nd round of tail risks on corporates, sovereign & quasi-sovereign?

EM Corporate debt index

EM Corporate bond index

Source: JP Morgan BBVA Research,

Source: JP Morgan, BBVA Research

(spread bp)

(spread bp)

US: estimated probability of default in the Oil and Gas sector Source: Bloomberg and BBVA Research

2.000

1.200,0

1.800 1.600 1.400

1.000,0

100%

800,0

80%

600,0

60%

400,0

40%

200,0

20%

+ 29%

1.200 1.000 800 600 400

+ 36%

+ 32%

+ 10% + 5%

+ 7%

200

0% Jan-09

Jan-11

CEMBI Mexico

CEMBI Brazil

CEMBI Chile

CEMBI Peru

Jan-13

Jan-15

CEMBI Colombia

Current porbability of default

Integrated

CEMBI EM Europe

0,0 Jan-07

Equip. & Serv.

May-15

Refining & M.

CEMBI Latam

May-13

Stor. & Transp.

CEMBI Asia

May-11

Expl. & Prod.

May-09

Drilling

0 May-07

01/07/2015

(*) S&P 500 subsector default probability (weigthed average of default probability implied in CDS of S&P500 enery companies). Assumning rate of recovery of 70% Page 25

Global Economic Scenario / 28 January 2016

The direct impact of China’s slowdown on Mexico should be quite small Mexico, exports of goods to its partners

FDI to Mexico by country

(Top 10 trade partners, millions, US dollars)

(% of total, 2014)

US

US

Canada

Spain

China

Canada

Spain

Germany

Brazil

Netherlands

Colombia

Japan

Germany

France

India

Other

Japan

China

Netherlands

Source: BBVA Research, WEO

Source: BBVA Research, SE

Page 26

Global Economic Scenario / 28 January 2016

Is Mexico too dependent on oil?‌ a deficit in oil trade balance, a higher current account deficit Monthly oil trade balance

Current account balance

Source: BBVA Research with data of INEGI

Source: BBVA Research with data of INEGI and Bank of Mexico

(figures in USD millions) 2,500

(% of GDP)

0.0

2,000

-0.5

1,500

-0.4

-1.0

-0.8

-0.8

1,000

-0.9

-1.1

-1.1

-1.1

-1.5

500 -2.0

-2.5

-2.4

-2.4

-2.4

-2.7

-3.0

-1,000

-1.9

-1.9

-2.0

0 -500

-1.3

-1.4

-3.1 2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

1998

-3.5

-1,500

-3.2

Page 27

Global Economic Scenario / 28 January 2016

Is Mexico too dependent on oil?‌ importance in fiscal revenues Fiscal revenues (% GDP)

Source: BBVA Research with data from the Ministry of Finance 24 22 20 18 16 14 12 10 8 6 4 2 0 2009

2010

2011

2012

2013

Total Revenues

Total Oil Revenues

Federal Government Oil Revenues

Pemex Oil Revenues

2014

2015

Page 28

Global Economic Scenario / 28 January 2016

How vulnerable are emerging countries?

Emerging countries: vulnerability radar 2015

(Relative position for the emerging developed countries. Max risk=1, Min risk=0) Source: BBVA Research

Emerging Europe 1

Mac

1

2

21

0 .9

3

0 .8 0 .7

19

4

0 .6

5

Assets

6

5

0 .4

18

0 .0

16

7

15 14

0 .0

7

8 14

9 13

10

External

External debt is the most worrisome vulnerability together with corporate debt

0 .2 0 .1

17

6

0 .0

16

7

15

8 14

9 13

10 12

11

Risk to monitor

6

15

9 13

0 .1

16

8

5

0 .3

0 .2

17

4

0 .6 0 .5

10

12

11

External

Assets

0 .7

0 .3

0 .1

3

0 .8

19

0 .4

18

0 .2

High risk

0 .9

0 .5

0 .3

12

4

0 .6

2

1 .0

20

0 .7

19

0 .4

17

3

0 .8

0 .5

18

21

0 .9

ro

1

2

1 .0

20

Mac

ro

Assets

20

Mac

ro

1 .0

Emerging Asia

11

External

21

LatAm

Current account balances and Public debt at high vulnerability levels

Fiscal balances and public debt levels have increased fiscal vulnerability. Corporate and household debt at risk levels

Safe

Macro: (1) GDP (%YoY) (2) Prices (% YoY) (3) Unemployment (% LF) Fiscal: (4) Structural balance (%) (5) Interest rate – GDP % YoY (6) Public debt (% GDP) Liquidity: (7) Debt by non-residents (% total) (8) Financial needs (% GDP) (9) Financial pressure (% GDP) External: (10) External debt (%GDP) (11) RER appreciation (%YoY) (12) CAC balance (% GDP)

Credit: (13) Household (% YoY) (14) Corporate (% YoY) (15) Credit-to-deposit (%) Assets: (16) Private credit to GDP (% YoY) (17) Housing prices (% YoY) (18) Equity (%) Institutional: (19) Political stability (20) Corruption (21) Rule of law

Page 29

Global Economic Scenario / 28 January 2016

How vulnerable is Mexico?

Emerging countries: vulnerability radar 2015

(Relative position for the emerging developed countries. Max risk=1, Min risk=0) Source: BBVA Research

Mexico

Brazil

Mac ro

ro

1 21

1

2

1 .0

21

0 .9

20

3

0 .8

4

0 .6

0 .9

0 .7

19

5

0 .4

18

0 .1

6

0 .0

16

7

15

8 14

9 13

10

0 .2 0 .1

17

6

0 .0

16

7

15

8 14

9

13

11

10 12

External Risk to monitor

Assets

0 .2

High risk

5

0 .3

11

External

Assets

0 .3

12

4

0 .6 0 .5

0 .4

17

3

0 .8

0 .5

18

2

1 .0

20

0 .7

19

Mac

Safe

Macro: (1) GDP (%YoY) (2) Prices (% YoY) (3) Unemployment (% LF) Fiscal: (4) Structural balance (%) (5) Interest rate – GDP % YoY (6) Public debt (% GDP) Liquidity: (7) Debt by non-residents (% total) (8) Financial needs (% GDP) (9) Financial pressure (% GDP) External: (10) External debt (%GDP) (11) RER appreciation (%YoY) (12) CAC balance (% GDP)

Credit: (13) Household (% YoY) (14) Corporate (% YoY) (15) Credit-to-deposit (%) Assets: (16) Private credit to GDP (% YoY) (17) Housing prices (% YoY) (18) Equity (%) Institutional: (19) Political stability (20) Corruption (21) Rule of law

Page 30

Global Economic Scenario / 28 January 2016

Foreign currency debt by Mexican firms

Corporte vulnerability is limited Bank loans in foreign currency by term to maturity (3Q15)

Pass due loans (IMOR) of corporates for local and foreign currencuy loans (%)

Thousand million real and % of total

23.7%

400 20.0%

350 18.5% 300

15.3% 12.2%

10.2%

4.0

3.5 20.0%

250

15.0%

3.1

2.5 2.0

10.0%

150

3.0

1.5 1.0

100

5.0%

50 0

0.0%

Menos Hasta Hasta Hasta Hasta 5 años Total de 1 1 año 2 años 3 años 4 años o más año

Nacional

Fuente: BBVA Research

Extranjera

Porcentaje del total

0.6

0.5 0.0

ene-08 jul-08 ene-09 jul-09 ene-10 jul-10 ene-11 jul-11 ene-12 jul-12 ene-13 jul-13 ene-14 jul-14 ene-15 jul-15

200

25.0%

IMOR ME

IMOR total (MN + ME)

31

Global Economic Scenario / 28 January 2016

Contents 1. A structural outlook of the Mexican economy: a journey trough strength and weaknesses 2. Recent developments: growth, markets, vulnerabilities 3. Second generation of economic reforms

Page 32

Global Economic Scenario / 28 January 2016

A few comments on the reforms Telecommunications and competition reform

New entrants and new benefits

Energy reform

It is more than petroleum

Education

Key but so many things to fix

What is missing?

Page 33

Global Economic Scenario / 28 January 2016

The ease of doing business has improved with structural reforms Ease of doing business in Mexico

(0-100 scale, 0= worst performance, 100 = the frontier) Source: BBVA Research with WB data.

Ease of doing business in various countries

(0-100 scale, 0= worst performance, 100 = the frontier) Source: BBVA Research with WB data.

74.0

80 70

73.5

60

73.0

50 40

72.5

30

72.0

20

69.5 2014

2015 Distance to Frontier

2016

India

Argentina

Brazil

Regional average (LA and Caribbean)

70.0

China

70.5

Chile

Mexico

0 71.0

Colombia

10

71.5

Distance to Frontier (2016)

Page 34

Global Economic Scenario / 28 January 2016

Where are we?

Mexico has built a solid framework for macroeconomic stability in the past 20 years. It has helped to differentiate the country form other EM´s in these times of global turbulence, which does not mean that it is immune to the volatility.

However, the growth track-record has been poor. This is a consequence of stagnant productivity

Recent reforms will help with this, but‌

Other reforms are needed, especially on Rule of Law, for the country to exploit its full potential Page 35

Outlook on Mexico

So far, a tale of macro stability but still moderate growth: what is the outlook?

Jorge Sicilia, BBVA Research GIC Meeting Monterrey, 1 February 2016