Economic Outlook 2011

February 2011

Secretaría de Hacienda y Crédito Público

22

Discipline in public finances has led to a moderate deficit and a declining trend in public debt.

General Gov. Financial Deficit 2010(% of GDP)

* Observed 2010** Approved 2011Source: SHCP, S&P (May 2010) for the rest.

Public Sector Debt(% of GDP)

Source: SHCP

Discipline in Public Finances

0

2

4

6

8

10

12

Mex

ico

*M

exic

o**

BB

B M

edia

nIn

dia

Lit

hu

ania

So

uth

Afr

ica

Hu

ng

ary

Cro

atia

Tu

nis

iaR

uss

iaB

ulg

aria

Bra

zil

Per

u

Oth

ers

Med

ian

Irel

and

Sp

ain

Jap

anG

reec

eP

ort

ug

alR

um

ania

Ital

y30.9 30.7

30.129.5

28.8

28.2

35.2 35.134.8

34.333.7

33.0

27.0

28.0

29.0

30.0

31.0

32.0

33.0

34.0

35.0

36.0

2010 2011 2012 2013 2014 2015

Net Debt HBPSBR

8.36

8.57

8.96

9.34

9.96

9.52

10.00

10.36

8.0

8.5

9.0

9.5

10.0

10.5

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11e

13.8

16.8

25.0

28.9 29.631.3

34.1

38.9

10

15

20

25

30

35

40

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

3

There have been important efforts to substitute oil revenues and strengthen public finances.

Significant progress has been made in expanding the tax base and in increasing tax revenues in recent years.

Number of Tax Payers(millions)

Non-Oil Tax Revenues(% of GDP)

Source: SHCP Source: SAT

Tax Revenues

4

Oil Production(thousand barrels per day)

The oil production platform has stabilized in the last years.

The oil price was hedged for 2011.

Source: PEMEX

Oil Production

0

500

1,000

1,500

2,000

2,500

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11e

Cantarell Rest

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0 3 6 9

12

15

18

21

24

27

30

33

36

39

UMS 11UMS 12

UMS

UMS 14 N

UMS15

UMS 19

UMS 22

UMS 31

UMS 34

UMS 26

UMS 17

UMS 19N

UMS 14

UMS 20

UMS 40

UMS 110

Financing Transactions in the U.S. Dollar Market

External Debt(dollars)

Average Life in Years

100

5

Source: SHCP

Debt Management

Domestic Debt(pesos)

Source: SHCP

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10 20 30

Yie

ld (

%)

Maturity (years)

2005 2010

6

Inflation and Interest Rates

Even though inflation suffered a temporary increase at the end of last year due to an increase in agricultural product prices, it remains below the crisis.

Domestic interest rates are close to historical minimums, even with the recent increase due to market uncertainty associated with the European crisis and the events in Egypt.

Government Bonds(%)

Source: Banxico and SHCP

Inflation Forecast(%)

2011

Inflation 2010: 4.52%

2010

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

Fe

b-0

3

Oc

t-0

3

Ju

n-0

4

Fe

b-0

5

Oc

t-0

5

Ju

n-0

6

Fe

b-0

7

Oc

t-0

7

Ju

n-0

8

Fe

b-0

9

Oc

t-0

9

Ju

n-1

0

Fe

b-1

1

5 years 10 years 20 years 30 years

7

Sovereign Risk

Mexico’s sovereign risk and the differential between long term domestic and foreign rates are close their historical minimum.

Source: JP Morgan

EMBI Global(basis points)

Interest Spread Mexico and United States(local rates on Government bonds, %)

Source: SHCP

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Fe

b-0

9

Ap

r-0

9

Ju

n-0

9

Au

g-0

9

Oc

t-0

9

De

c-0

9

Fe

b-1

0

Ap

r-1

0

Ju

n-1

0

Au

g-1

0

Oc

t-1

0

De

c-1

0

Fe

b-1

1

5 years 10 years 30 years

100

200

300

400

500

600

700

800

900

1000

0200400600800

100012001400160018002000

De

c-0

8F

eb

-09

Ap

r-0

9J

un

-09

Au

g-0

9O

ct-

09

De

c-0

9F

eb

-10

Ap

r-1

0J

un

-10

Au

g-1

0O

ct-

10

De

c-1

0

Argentina Brazil Mexico Composite

8

With a capital level which is twice the regulatory minimum and a healthy portfolio, development banks are positioned to continue contributing to the expansion of bank credit to the productive and housing sectors.

Delinquency Rate and Capitalization Index (%)

Source: Banxico

Financial System

17.3

2.4

18.3

4.5

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0

CAPI

DR

2006 nov-10

CAPI: Regulatory Minimum%

9

International reserves amount to 119.5 thousand million dollars (February 18, 2011).

Additionally, Mexico requested the renewal of the Flexible Credit Line with the IMF for two more years and 72 thousand million dollars.

Source: Banxico

International Reserves(thousand million dollars)

Risk Management

The Mexican government contracted an oil price hedge for 2011.

The government has the budgetary and financial capacity to respond to natural disasters for up to 50 thousand million pesos.

Feb-08

Apr-08Jul-08

Sep-08

Dec-08

Feb-09

May-09Jul-09

Oct-09

Dec-09

Mar-10

May-10

Aug-10

Oct-10

Dec-10

70

75

80

85

90

95

100

105

110

115

120

10

The ranking measures the behavior in 183 countries of the following variables:

1. Starting a business2. Dealing with construction permits3. Registering property4. Getting credit5. Protecting investors6. Paying taxes7. Trading across borders8. Enforcing contracts 9. Closing a business

Mexico is ranked as the best country to establish a business in Latin America.

Source: World Bank.

Deregulation and Simplification

127

115

43

39

36

35

1

0 50 100 150

Brazil

Argentina

Chile

Colombia

Peru

Mexico

Singapore

Ranking 2011 Doing Business

11

United States

The United States economy is expected to accelerate during 2011. Expected growth for GDP and industrial production is 3.1 and 4.2%.

The new fiscal stimulus of 2.7% of GDP for 2011 implies upside opportunities for United States growth.

GDP Growth Forecasts(ann. quarterly growth %)

Source: Blue Chip.* Forecasts.

Industrial Production Growth Forecasts (ann. quarterly growth, %)

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

III-0

9

IV-0

9

I-1

0

II-1

0

III-1

0

IV-1

0

I-11

*

II-11

*

III-1

1*

IV-1

1*

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

9.5

III-0

9

IV-0

9

I-1

0

II-1

0

III-1

0

IV-1

0

I-11

*

II-11

*

III-1

1*

IV-1

1*

12

The high deficit and debt situation in Europe continues to cause stress.

2011 Expected Public Deficit(% of GDP)

Source: IMF and SHCP

Europe

*Without PEMEX investment.Source: IMF and SHCP

2011 Expected Public Debt(% of GDP)

0

2

4

6

8

10

12

Me

xic

o*

Me

xic

o

Ge

rma

ny

Au

str

ia

Ita

ly

Be

lgiu

m

Ne

the

rla

nd

s

Po

rtu

ga

l

Fra

nc

e

Sp

ain

Gre

ec

e

Ire

lan

d

20

30

40

50

60

70

80

90

100

110

120

Me

xic

o

Ne

the

rla

nd

s

Ge

rma

ny

Sp

ain

Au

str

ia

Fra

nc

e

Po

rtu

ga

l

Be

lgiu

m

Ita

ly

Ire

lan

d

Gre

ec

e

13

Private sector growth forecast for 2011 have been revised upwards.

Given the delay in the revisions, forecasts for 2011 do not consider the new fiscal stimulus in the U.S.

The income per capita is greater than other emerging economies.

Economic Growth

PIB 2011

[4 - 5%]

GDP per capita* (thousand dollars)PIB 2010

5.5 %

India China Brazil Mexico Russia 0

4

8

12

16

20

3.3

7.5

11.3

14.315.8

Source: IMF. *Based on purchasing power parity (PPP).** Observed 2010.

Source: SHCP

Source: INEGI

90

92

94

96

98

100

102

104

106

I 20

07

II 2

00

7III

20

07

IV 2

00

7I 2

00

8II

20

08

III 2

00

8IV

20

08

I 20

09

II 2

00

9III

20

09

IV 2

00

9I 2

01

0II

20

10

III 2

01

0

Recuperación Económica: Mercado Interno

14

Total private consumption has picked up significantly since the second semester of 2009.

Investment is gradually accelerating.

Private Consumption(index, I 2007=100)

Gross Fixed Investment(index, I 2007=100)

92

94

96

98

100

102

104

106

108

110

I 20

07

II 2

00

7

III 2

00

7

IV 2

00

7

I 20

08

II 2

00

8

III 2

00

8

IV 2

00

8

I 20

09

II 2

00

9

III 2

00

9

IV 2

00

9

I 20

10

II 2

01

0

III 2

01

0

Source: INEGI. Source: INEGI.

Domestic Driver

Employment(monthly growth, 3m mov. avg., adjusted,

thousands)

Unemployment Rate, 2010(%)

The expansion in employment has continued, and all jobs lost during the crisis have been recovered.

Source: IMSS

Recuperación Económica: Mercado Interno

-120

-100

-80

-60

-40

-20

0

20

40

60

80

100

Fe

b-0

8

Ap

r-0

8

Ju

n-0

8

Au

g-0

8

Oc

t-0

8

De

c-0

8

Fe

b-0

9

Ap

r-0

9

Ju

n-0

9

Au

g-0

9

Oc

t-0

9

De

c-0

9

Fe

b-1

0

Ap

r-1

0

Ju

n-1

0

Au

g-1

0

Oc

t-1

0

De

c-1

0

Source: The Economist

Domestic Driver

730,000 new jobs created in 2010

15

20.2

9.4 8.67.6 7.5 7.4 7.1

5.3 4.9

0

5

10

15

20

25

Sp

ain

Un

ite

d

Sta

tes

Ita

ly

Ca

na

da

Arg

en

tin

a

Ge

rma

ny

Ch

ile

Bra

zil

Me

xic

o

16

ANTAD Sales(index, jan-07 = 100, adjusted, 3m. moving avg.)

Wal-Mart Sales(index, jan-07 = 100, adjusted, 3m. moving avg.)

16

The recovery of the domestic market is observed in the increasing trend of retail sales.

Recuperación Económica: Mercado InternoDomestic Driver

Source: INEGI. Source: SHCP with information from Wal-Mart.

95

100

105

110

115

120

125

Ja

n-0

7

Ma

y-0

7

Se

p-0

7

Ja

n-0

8

Ju

n-0

8

Oc

t-0

8

Fe

b-0

9

Ju

n-0

9

No

v-0

9

Ma

r-1

0

Ju

l-1

0

De

c-1

0

95

100

105

110

115

120

125

Ja

n-0

7

Ma

y-0

7

Se

p-0

7

Ja

n-0

8

Ma

y-0

8

Se

p-0

8

Ja

n-0

9

Ma

y-0

9

Se

p-0

9

Ja

n-1

0

Ma

y-1

0

Se

p-1

0

Ja

n-1

1

17

Fundamentales de la Economía

From 2000 to 2006 average annual budgetary investment in infrastructure was 3.5% of GDP, from 2007 to 2011 it will be 4.5% of GDP.

Domestic Driver

Fostered Investment in Infrastructure2000 – 2011

(2011 thousand million dollars)

* Approved 2011

Investment Expenditure2002 – 2011(% of GDP)

Source: SHCP Source: SHCP

3.1

3.5 3.6

3.9 4.0 4.1 4

.3

4.8

4.8

4.8

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11e

41

.0

51

.9

30.0

35.0

40.0

45.0

50.0

55.0

Average 2000-2006 Average 2007-2011

* Approved 2011

The Mexican banking system is solid and since the second quarter of 2010 positive monthly growth in credit has been observed.

18

Commercial and Development Bank Credit to Private Sector (monthly change, 3m. moving avg., %)

Source: Banxico

Domestic Driver

-3

-2

-1

0

1

2

Jun

-09

Jul-

09

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-10

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Total Consumption Housing Firms

0.0

0.5

1.0

1.5

2.0

2.5

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

E

20

10

E

China Mexico

19

Besides from the recovery associated with the global industrial cycle, Mexican manufacturing will benefit from a more competitive exchange rate.

Real Exchange Rate(index, Jan-05=100)

Hourly Wage in Manufacturing(dollars)

Source: Central Banks. Source: International Labor Organization

237.9%

13.8%

External Driver

50

60

70

80

90

100

110

120

130

Ja

n-0

5

Ju

n-0

5

De

c-0

5

Ju

n-0

6

De

c-0

6

Ju

n-0

7

De

c-0

7

Ju

n-0

8

De

c-0

8

Ju

n-0

9

De

c-0

9

Ju

n-1

0

De

c-1

0

China Mexico Brazil

20

Non-oil exports have increased since 1993 as a result of Mexico’s comparative advantages.

Non-oil exports have recovered from the recent crisis.

Source: Banxico

 Mexico is the most competitive country in auto parts manufacturing (KPMG). One of every 7 cars circulating in the

U.S. is manufactured in Mexico.

The Mexican aerospace industry occupies the first place in

manufacturing investment in the world (Deloitte).

Mexico is the biggest producer of smart phones in the world and the

second greatest exporter of television sets.

Non-Oil Exports(monthly, adjusted, million dollars)

External Driver

0

5,000

10,000

15,000

20,000

25,000

De

c-9

2

De

c-9

4

De

c-9

6

De

c-9

8

De

c-0

0

De

c-0

2

De

c-0

4

De

c-0

6

De

c-0

8

De

c-1

0

21

Concluding Remarks

• 2011 will be a second year with a solid economic growth.

• Balanced growth between the export sector and the domestic market.

• The soundness of the development banking system and the active participation of commercial banks contributed to the recovery of construction and housing finance in 2010.

• In 2011, Government policies will focus on green and sustainable housing as well as reducing the housing deficit.

Human Development

The living standards of the Mexican population have improved. The Human Development Index measures education, health and per capita

income.

1990 1995 2000 2005 2006 2007 2008 2009 20100.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

HDI

Human Development Index

Chile, 0.78

Mexico, 0.75Russia, 0.72Brasil, 0.70China, 0.66

India, 0.52

Source: United Nations Development Program (UNDP)

22