Peso on the move...

Yesterday, the fix exchange rate was $13.34, close to the $13.40 a dollar cost on June 21. Leaving aside the last week of June, a dollar has cost more in the last few days than at any other time in a year. The previous high was on August 20, 2012 when the fix rate was $13.42.

Movements in the second quarter capital account suggest why the peso weakened so dramatically in June and the probable cause of its most recent fall.

Portfolio investment did not pour into Mexico in the second quarter as it had in prior quarters. In fact, it left: the US$3.20 billion outflow of portfolio investment in the second quarter cut portfolio investment in the first half of 2013 to US$6.17 billion. That the last quarter in which portfolio investment fell was in the final quarter of 2008 gives pause.

"Assets held abroad" declined US$1.50 billion in the second quarter, a sharp contrast to the US$18.91 billion increase registered in the first three months of 2013. Direct foreign investment (DFI) abroad by Mexican firms doesn’t explain the repatriation of funds to the country: Mexican DFI totaled just US$1.78 billion in the second quarter, a third of its level a year earlier. In fact, Mexican DFI has been quite restrained this year. At US$3.73 billion in six months, it is only 28.6% of its level in the first half of 2012.  

Neither do Mexican deposits in foreign bank accounts explain the repatriation of assets held abroad: those rose US$5.07 billion.

What does explain the inflow in the assets held abroad account is the repatriation of US$8.35 billion in its “other” component. It is the largest inflow we’ve seen in this account since the fourth quarter of 2008, when US$18.09 billion came back into Mexico. Governmental treasury management decisions are probably reflected in this account.

Here's some food for thought: both portfolio investment flows and the reason for the inflow of capital in the assets held abroad account in the second quarter of this year are similar in direction to what we saw in the last quarter of 2008.

Mexican growth: oops...

Whenever someone starts out by saying it will be next year when the economy really takes off, you can bet that this year's growth is disappointing. So it is with Mexico: the 1.0% registered in the first half of 2013 makes it a sure bet that the projections of 3%+ growth in 2013 made a year ago won't materialize. We'll be lucky to see 2% growth this year.

Mexico's GDP rose 1.5% in the second quarter (measured against the same quarter of 2012) - and that included the beneficial effect of Semana Santa having fallen in the second quarter last year. Measured using the US methodology (versus the prior quarter, annualized), Mexico's GDP contracted 3.0% in the second quarter. (US GDP rose 1.7% in the second quarter.) Using the US methodology, both the industrial (secondary)  and the services (tertiary) sectors contracted: the former dropped 4.3% while the latter fell 1.7%.

The base year against which growth is calculated was updated from 2003 to 2008. Prior years' growth figures were restated back to 1994. There were a few significant changes. Neither the 1995 nor the 2009 recessions were as steep as had been reported. Instead of plunging 6.2% in 1995, the drop was 5.7%. In 2009, the economy is now reported to have fallen 4.7% instead of the 6.1% we'd thought. The recovery in 1996 was stronger than we'd thought - 5.9% instead of the 5.2% reported using the 2003 base year - but the recovery in 2010 was weaker - only 5.1% instead of 5.5%. It also seems that growth was 0.4 - 1.3 percentage points weaker between 1999 and 2002.

The Peña Administration's ambitious reform agenda certainly has the potential to boost Mexico's growth rate. The economy's poor performance in the first half of 2013 reminds us that potential must be realized and that, of necessity, takes time.

Energy reform: is success dependent on its accounting treatment?

How accountants treat ownership of reserves could make the difference between success and failure for President Peña's energy reform, providing Congress approves it as proposed.

Oil companies want to tell their investors they've acquired reserves for future production. Depending on how agreements are negotiated, companies just might be allowed to record any oil and gas they find or produce in conjunction with Pemex as reserve holdings -- even though under Mexican law, the state will still own the reserves. (The argument is found in a Citibank report cited in the August 14, 2013 New York Times.) 

Will the US Securities and Exchange Commission (SEC) decide that  its accounting rules allow the reserves a firm finds or develops with Pemex to be included in the firm's financials? (The rule is that the reserves can be booked as such if the reserves equal the value of the cost recovery and revenue earned, per the above cited article.) If firms can report the reserves and the reform is approved,  "the results will be revolutionary for the country", according to the Citi report.

What's the income of the "average" Mexican household?

In 2012, monthly household income in Mexico averaged $12,708 in 2012 (US$980 a month using the average annual exchange rate). Half (51%) of income went to the top 20% of households. The bottom half of households had a fifth of income. Income ranged from $2,332 for the poorest tenth of households to $44,344 for the top tenth. 

The average Mexican household in 2012 had 3.7 members, 1.8 of whom were “economically active” and 2.4 of whom received income of some sort (perceptores por hogar). The head of the household was 48.6 years old and 2.5 people in the household were 14-65 years old. 

Focus on unemployment...

“Explicit state-contingent forward guidance” doesn't sound very radical but it is. With it, the UK's central bank quietly adopted the Fed's approach to setting interest rates. The Bank of England's Monetary Policy Committee (MPC) announced that, in effect, British monetary policy will depend on the unemployment rate. Until the unemployment rate falls below 7%, the Bank rate will stay at 0.50% and its quantitative easing (QE) program, at a minimum of 375 billion pounds sterling. Unemployment stood at 7.8% in the three months ending in May. Per the MPC, “unemployment is as likely to reach the 7% threshold beyond its three year forecast horizon as before”. There are three caveats, two of which have to do with inflation. The third is so long as the accommodative policy doesn't pose a significant threat to financial stability.

No central bank can afford to ignore growth, even banks with the sole mandate of controlling inflation. The decisions of the Fed and the Bank of England make it clear that unemployment comes under their umbrellas as well. Banco de Mexico has yet to be so explicit, but its statements and presentations leave no doubt that growth is very much on the minds of Mexico's central bankers. 

Inequality in the US...

Here's the link to a fascinating look at the likelihood that children starting life in families in the bottom fifth of the income distribution in the US will make it to the top fifth, along with an analysis as to why. In which city you live makes a big difference.

http://www.equality-of-opportunity.org/