Why Mexico's current account deficit is climbing...

In Mexico, the trade account deficit typically drives the growth of the current account deficit. That has not been the case for the last three years, years in which the current account deficit grew significantly.  Climbing factor services payments (principally interest payments and remitted or reinvested profits) explain the jump in the current account deficit. 

In 2013, the deficit in the factor services account was US$41.4 billion, 35.0% higher than in 2012. Between 2008 and 2010, outflows for factor service payments averaged US$15.8 billion annually. Between 2011 and 2013, the annual average jumped to US$24.8 billion. 

The upward trajectory of the current account deficit over the last three years serves as a reminder of how easily a jump in factor service payments, helped along by a reduction in oil export revenues and remittances, can transform a minimal current account deficit into a not so minimal one. 

While we expect Mexico’s current account deficit to rise from 1.8% of GDP last year to 2.2% this year and 2.5% next, foreign direct investment (FDI) should come close to covering the entire current account deficit – provided that the reforms passed last year are implemented in the ways we hope. Both this year and next, the projected deficit remains below the 3% of GDP that is the upper limit of what is considered to be a safe level for developing countries.

Government to taxpayers: don't pay me yet

Whether you call this year's tax package a fiscal reform or not, everyone can agree that there are a multitude of changes to take into account when calculating taxes due this year. January and the first part of February have been a nightmare for taxpayers scrambling to figure out how much they owe under the new fiscal provisions. That wasn't a surprise.

It was a surprise, though, when Hacienda told individual taxpayers that they should wait an extra month, until March, to pay their January taxes and then pay them along with their February tax payments. It's not out of concern for taxpayers that Hacienda isn't collecting January's taxes this month: Hacienda's platforms simply weren't up to the job.

Meanwhile, negotiations continue as to whether everything that, as of January 1, is no longer deductible will stay that way. The private sector is holding on to the hope that some benefits might be more deductible than others.

Security: the most important obstacle to Mexico's growth

According to the Banco de Mexico's January survey of private sector economists, security problems are the single most important limitation to Mexico's growth in the next six months.

Yes, but...

Each month,  the survey asks participating economists (of which I am one) to choose three factors from a list of 23 that will be the principal limitations on growth in the next six months. "Problemas de inseguridad publica" is always included on the list. It's not surprising that it headed the list in the January survey, given the Government's frontal attack on the security problems in Michoacan. Like everyone else, economists can be influenced by what's in the news. That the Government has chosen to address the challenges to state authority raised by druglords' control of parts of the state and the rise of the auto-defenses is a major policy decision.

All through 2013 (and before), problems of public security have been on the radar screen as limitations to growth. Over the last year, security has typically been in 3rd or 4th place. Until January, "weakness of the world economy" and of "weakness in foreign markets" have been considered the most important limits to growth. They have often been followed by "international financial instability". Security "beat out" those first two standards by 2 and 1 percentage points, respectively, in January. That's hardly a resounding lead. 

There's nothing new in the fact that economists from the private sector see security problems as a limitation to growth. That's been the case for some time, per the Banxico surveys. However, be careful about citing it as the most important limitation to growth on the basis of a single month's survey and the fact that it received 20% of responses instead of 19% or 18%.

Will Banco de Mexico raise the Reference Rate?

Between the unexpectedly high inflation rate in the first half of January and the market turmoil, the odds that Banco de Mexico will wait until 2015 to raise the Reference Rate are falling. The inflation rate alone would not cause Banxico to raise the Reference Rate since there’s hope that price increases will have been frontloaded more than had been anticipated. However, the contagion effect from the “Fragile Five” complicates the situation.

To combat the flight from their currencies, the Five have raised interest rates. Turkey has been the most aggressive, boosting its benchmark rate from 4.50% to 10.00% on January 28; the overnight lending rate the climbed from 7.75% to 12.00%. India’s central bank raised the country’s key interest rate from 7.75% to 8.00% the same day and also announced that it will adopt a monetary policy to target inflation (an objective of 6% by 2016) whether the government is in agreement or not. The South African and Brazilian central banks both raised interest rates half a percentage point in January. On the 15^th, Brazil set the rate at 10.50%. On the 29^th, South Africa’s rate moved up to 5.5%. Indonesia is the outlier. Although the central bank hasn’t raised rates this month, it did surprise the markets in November when it raised the rate from 7.25% to 7.50%.

In their January 29 monetary policy announcement, Banco de Mexico’s Board of Governors defied the trend in which emerging markets’ central banks have raised key interest rates. The Board left the Reference Rate at 3.50%, where it has been since October 25, 2013. However, the Governors cautioned that the balance of risks has deteriorated and are watching for signs that inflationary expectations are rising or that the depreciation we’ve seen is feeding through to inflation. If that happens, the only surprise would be if if they don't raise the Reference Rate this year.

Remittances slip in 2013

Remittances totaled US$21.60 billion in 2013, 3.8% below their 2012 level and back to their 2009-2010 levels. The number of operations was up 3.3% last year but the average remittance fell 15.1%, to US$737. Remittances translated into pesos were down 6.7%.