Itaú BBA - Evening Edition – Lower-than-expected fixed investment in Mexico

Latam Talking Points

< Back

Evening Edition – Lower-than-expected fixed investment in Mexico

June 6, 2019

According to calendar adjusted figures, gross fixed investment fell sharply in March.

Talk of the Day


Gross fixed investment came in below market expectations in March. The monthly gross fixed investment (GFI) decreased 2.4% yoy in March, above our forecast (-3.1%), but below market expectations of -1.7%. According to calendar adjusted figures, GFI fell sharply in the month, -6.2% yoy (from -2.0% in February), resulting in a contraction of 2.3% yoy in 1Q19 (from -2.5% in 4Q18). Uncertainty over the direction of domestic policy and over trade relations with the US (approval of the USMCA by the U.S. Congress and a potential increase in tariffs) will continue to weigh on investment in the short-term. Moreover, weak public investment, associated to a transition effect between administrations, will probably affect construction investment in the short-term. ** Full story here.

Yesterday, two agencies worsened their assessment on Mexico’s sovereign rating. Moody's decision to change the outlook to negative on Mexico's A3 ratings reflects the rating agency's concern that the policy framework is weakening in two key respects, with potential negative implications for growth and debt. Firstly, unpredictable policymaking is undermining investor confidence and medium-term economic prospects. Secondly, lower growth, together with changes to energy policy and the role of PEMEX, introduce risks to Mexico's medium-term fiscal outlook, notwithstanding the government's near-term commitment to prudent fiscal policy. Although a rating upgrade is unlikely in the near future, a return to a stable outlook could result from regained confidence in the government's ability to lay out and implement predictable policies.

Fitch downgraded Mexico to BBB, with the outlook revised to stable. In Fitch's view, meeting fiscal targets will become more difficult heading into 2020 and could result in tighter policy that creates a further headwind to growth. The president has pledged not to raise taxes before 2021. In 2020, the fiscal rule demands a further tightening of the public sector primary balance to 1.3% of GDP. Growth continues to underperform, and downside risks are magnified by threats by U.S. President Trump to impose tariffs on Mexico from June 10 (starting at 5% and rising by a further 5% per month up to a potential 25%) to compel it to stop the flow of migrants across its territory into the U.S., amid a pattern of trade uncertainty. The downgrade of Mexico's IDRs reflects a combination of the increased risk to the sovereign's public finances from Pemex's deteriorating credit profile together with ongoing weakness in the macroeconomic outlook, which is exacerbated by external threats from trade tensions, some domestic policy uncertainty and ongoing fiscal constraints.

Tomorrow’s Agenda: At 10:00 AM, INEGI will publish CPI inflation for the full month of May, which we expect to fall by 0.22% mom (from -0.16% a year ago). Assuming our forecast is correct, headline CPI would decelerate slightly to 4.35% yoy (from 4.41% in April).


According to Anfavea, auto production reached 275.7k in May, broadly in line with our forecast of 273.3k. According to our seasonally adjusted series, production decreased 4.9% in May. Exports increased 12.9% while domestic sales remained virtually stable, displaying a strong reading from a demand standpoint. Our preliminary forecast for May’s industrial production increased to -1.7% mom/sa from -2.0% previously.

Tomorrow’s Agenda: May’s IPCA inflation will be released at 9:00 AM. We forecast a 0.20% monthly increase, leading the 12-month reading to 4.74% (from 4.94% in April).


Wage growth remained solid in April. Nominal wages grew 5.1% yoy (4.7% previously), resulting in a real wage expansion of 2.6% (2.3% in March). In the quarter ended in April, nominal wages expanded 4.7% (4.0 in the 4Q18; the highest since May 2018), while real wages ticked up to 2.3% (1.2% in 4Q18) aided by low inflationary prints. The real wage bill (considering only salaried employment), expanded 3.3% in the quarter ended in April (2.5% in 4Q18). As long as the labor market continues to benefit from the recent activity recovery, wage growth may endure ahead.

Disappointed consumers in May. The GFK consumer confidence index moved further into pessimistic territory in May to 40.7 points, from 51.2 one year earlier (43.2 in April; 50 = neutral). Of its five sub-indexes, only the one asking whether it is the appropriate time to buy household goods remains in optimistic territory (53.5, down from 59.9 one year earlier), while all of them deteriorated over 12 months. Consumers have been pessimistic for ten months, with the main drag comes from the 5-year perspective for the economy, which recorded 22.0 points (a marked drop from 37.4 one year ago and close to historical minimum levels). The twelve-month economic perspective also fell 13.9 points to 47.5 (61.4 in May 2018), with the current economic situation retreating to 42.3 (from 51.2). Meanwhile the personal situation dropped 8.2 points to 38.0, the lowest reading since August 2017. Consumer pessimism highlights risks to consumption evolvement despite low inflation and interest rates.

Tomorrow’s Agenda: At 9:00 AM, inflation for the month of May will be released. High frequency price tracking points to consumer prices rising 0.5% from March (0.3% last year). As a result, annual inflation would edge up to 2.3%. On external accounts, the central bank will publish May’s trade balance at 9:30 AM, which we expect to come in at USD 500 million (USD 415 million one year earlier). Finally, at 7:00 PM, the central bank will announce its final monetary policy rate decision before publishing the 2Q19 Inflation Report (IPoM) next week. With the IPoM set to communicate any potential change in the baseline scenario for the policy rate trajectory, we expect a unanimous decision to hold the policy rate at 3%.


In May, inflation came in at 0.31% mom, slightly below our 0.34% forecast and in line with market expectations. Housing (+0.43%) and food (+0.65%) divisions were the main contributors to price gains in the month. Meanwhile, communications (-0.06%) was a drag. On an annual basis, consumer price inflation picked up to 3.31% (3.25% in April), lifted by energy prices. Inflation excluding food and energy prices inched up to 3.00% (2.95% in the previous month). Within this group, durable goods, which include an important tradable component, remain a drag to inflation, as they fell 0.08% from last year (-0.17% previously). Meanwhile, non-durable goods inflation accelerated to 4.08%, from 3.89%. For 2019, we believe the rising negative output gap along with controlled inflation expectations will likely keep pressures contained and result in inflation of 3.2% (3.18% in 2018). However, we note that some acceleration of inflation at the margin, alongside the depreciation of the COP, constitute upside risks to our forecast. ** Full story here.

< Back