Manuel Sánchez: Mexico and Texas - Ties and mutual benefits
Remarks by Mr Manuel Sánchez, Deputy Governor of the Bank of Mexico, at The Centennial
Lecture Series, The University of Texas, El Paso, Texas, 10 September 2015.
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I would like to thank you for the opportunity to participate in the Centennial Lecture Series of
the University of Texas at El Paso. It is a great honor to speak in this distinguished academic
center, which has contributed considerably to closer relations between Mexico and the
United States. I congratulate those of you who have been an essential part of the success
story of this institution.
The University of Texas at El Paso has grown at an impressive pace during its first century.
After starting out as a small school specialized in mining and metallurgy in 1914, today it is a
full-fledged branch of the University of Texas, offering a wide range of degrees. El Paso now
leads in programs on border issues and the relationship between the United States and
Mexico. Enrollment has increased notably over the years, with the Hispanic community
accounting for a large majority of the student body.
Today, I would like to focus on Mexico and Texas as two increasingly integrated economies.
I will begin with a review of how their links have expanded over time, yielding significant
mutual benefits. I will then briefly describe recent developments in and the outlook for the
Mexican economy, in a context in which the United States and Texas play important roles.
Finally, I will discuss monetary policy and inflation in Mexico.
As usual, my remarks are entirely my own and do not necessarily reflect the views of the
Bank of Mexico or its Governing Board.
Mexico and Texas
Mexico and Texas have a deeply interconnected history of growth. The state of Texas can be
rightly viewed as one of the largest economies in the world, and its geographic proximity to
Mexico makes it all the more logical for the two to exploit mutually advantageous
opportunities. Their symbiosis is a natural consequence of a common cultural heritage, and,
in economic terms, includes trade, investment, human capital, and many other areas.
In particular, Texas is Mexico's main trading partner within the United States, and Mexico is
the state's main partner as well. In fact, Texas accounts for more than twice as much of total
Mexican trade volume as China. As with the United States as a whole, commercial linkages
were deepened by the North American Free Trade Agreement, perhaps the most profound
structural change ever undertaken by Mexico.1
Mexico purchases many goods from Texas, with computers and electronics, petroleum and
coal products, and transportation equipment making up the largest share. Gains for Mexico
have been seen in terms of competition and pressure for efficiency on domestic production
lines, as well as greater variety and lower prices for consumers.2
The role of Texas in U.S. and Mexican trade supersedes Texan borders, as it is the state
with the largest terrestrial ports of entry between the two countries. This is especially
important given the fact that roughly four-fifths of U.S. trade with Mexico is by land.3
Direct investment from Texas has greatly helped Mexico, which is on the receiving end of
knowhow and advanced production technology. Many Mexican companies, for their part, do
business in Texas.
Furthermore, a great many trade-related jobs have emerged on both sides of the border. In
fact, the Lone-Star State is that with the greatest number of exports-related jobs in the United
States.4
Additionally, Texas is the second most important state in terms of labor migration from
Mexico. For a long time, as we all know, our migrants have found opportunities to contribute
to this vibrant economy with great dedication and efficiency. Remittances, in turn, have
allowed families in Mexico to increase schooling and build better housing.
During the last few years, net Mexican migration to the United States has decreased
significantly, to levels that recently became negative. This trend seems to reflect the slow
rebound since 2009 of U.S. economic sectors such as construction, which have traditionally
absorbed Mexican labor. Lower fertility rates in Mexico since the 1980s might also be a part
of the explanation.5
Finally, Texas provides a rich supply of schools and universities such as your own, which
many Mexicans have chosen for all levels of education.
Mexican economic developments and outlook
Like other emerging economies during the last couple of years, Mexico has been hit by
turbulence in international financial markets. Two sources of fear dominate on the world
stage.
The first is uncertainty surrounding the beginning of U.S. monetary normalization.
Speculation regarding the possible date of the Federal Reserve's first hike is great in spite of
efforts to confirm intentions to make the process gradual.
The second stems from the recent slowdown of China's economy, with leading indicators
suggesting that this trend may continue. Potentially unsustainable financial imbalances in
that country have also raised concerns.
As a result, since the middle of 2014, net capital flows to emerging markets have declined,
commodity prices have fallen sharply, and most currencies have depreciated against the
U.S. dollar. In this scenario, the Mexican peso has weakened significantly, stressed in
particular by faltering oil prices and production, while the yield curve has seen a moderate
upward shift, probably in anticipation of the start of U.S. monetary normalization. The share
of nonresident holdings of peso-denominated government securities in the total outstanding
has dipped only slightly. However, a potential portfolio adjustment with significant pressures
on domestic financial markets cannot be ruled out.6
To cope with possibly rising uncertainty and risk, Mexico should distinguish itself from other
emerging economies by strengthening its growth prospects and macroeconomic policy
framework. Steps to favor greater growth include deep structural changes and improvements
to the rule of law and public security. Especially important to financial stability are actions to
ensure the sustainability of the path of the public-debt-to-GDP ratio, and timely adjustment of
monetary policy, with the relative stance vis-à-vis the United States taken into account,
among other factors.7
Since 2014, Mexico's economy has been recovering, growing in the first half of 2015 at an
annual rate of 2.4 percent. This pace is slightly below the yearly average of the previous two
decades, and is held back by at least three drags. The first is a slowdown in industrial
production, which has resulted mainly from persistent contraction in mining, dominated by
falling oil output.
Second, the manufacturing sector has been deterred largely by a deceleration in U.S.
industry in 2015, affected by another severe winter and declining energy investment in the
face of significantly lower energy prices. Modest Mexican manufacturing activity is in line with
less vigorous exports to the United States in spite of substantial real peso depreciation. We
expect these factors to be transitory and momentum for Mexican exports to pick up once
again.
Third, domestic spending has remained tepid, as indicated by damp investment growth and a
measured pace for recovering private consumption. The main weight on domestic spending
does not seem to come from the labor market, where unemployment continues to drop and
labor force participation remains stable. Nor does it seem to stem from a lack of domestic
financing, the growth of which has been gaining steam.
More likely causes are disappointing trends in consumer confidence, which has not seen a
previously hoped-for rebound, and in producer confidence, which keeps on declining.
Analysts' consensus is for a moderate and gradual Mexican economic upturn in tandem with
that of the United States. The Bank of Mexico forecasts growth of 1.7 to 2.5 percent this
year, and 2.5 to 3.5 percent in 2016.8
Downside risks to growth likely predominate. These include further reductions in oil
extraction, less robust-than-expected U.S. industrial production, and continued fragile
consumer and producer sentiment.
Structural reforms currently underway in Mexico could enhance long-term productivity
growth. However, eventual benefits will take time to show-up, and success crucially depends
on careful and deep implementation. Changes in the energy sector may prove particularly
attractive to Texan investors. New possibilities in oil extraction, as well as opportunities in
natural gas transportation and electricity generation, among others, provide for tantalizing
potential investments.
Inflation and monetary policy
Monetary policy in Mexico has been guided by the priority aim of attaining price stability,
which, within an inflation-targeting approach, means a permanent objective of 3 percent
annual inflation. The conduct of monetary policy has taken into account the cyclical phase of
the economy. In the last two and a half years, the policy interest rate was cut by 150 basis
points to accommodate sluggish economic activity.
After some price pressures in 2014 coming mainly from tax hikes, annual inflation in 2015
has remained on target, even reaching historically low levels below the objective. This
achievement is noteworthy, given the fact that until only a few years ago, Mexico had a long
history of high and unstable inflation. Therefore, it is imperative to consolidate the record,
recognizing that price stability demands continuous attention to prevent a reversal of the
trend.
Some factors call for vigilance. Recent performance has been aided by positive shocks such
as favorable base effects related to last year's tax hikes, the elimination of domestic
longdistance telephone charges, and slower increases in energy prices. These phenomena may
prove ephemeral.
Peso depreciation has not affected inflation much so far, and the impact has been
concentrated in durable goods. This may not be the case going forward, especially if the
weakening of the currency becomes amplified.
Additionally, in spite of current unprecedented declines in inflation, survey expectations for
the medium term are stable but above the target. This may reflect a perception that work still
needs to be done to solidify the good results. Price stability will not be secure until
mediumterm inflation expectations are firmly anchored on the objective.
The Bank of Mexico expects inflation to remain around the target in 2015 and 2016.9
Nevertheless, upside risks should be monitored, especially given the possibility of
secondround effects. Continued significant peso depreciation, negative supply shocks, and eventual
aggregate demand pressures are among these risks.
Concluding remarks
Let me conclude by saying how much I value the contributions of the University of Texas at
El Paso to the understanding and collaboration between our societies. We have exploited
opportunities in better ways due to the assiduous efforts of academics from this university,
and I have no doubt that further progress is yet to come.
Texas and Mexico continue to find new avenues to profit mutually from trade, investment,
and human capital resources. Mexico currently faces challenges both on the international
and domestic fronts. The best way to deal with them is by cultivating long-term economic
growth prospects, notably through well-implemented structural reforms, and buttressing the
macroeconomic framework, including monetary policy.
On that note, inflation this year has reached historically low levels. This achievement requires
consolidation for Mexico to reap the full benefits of permanent price stability.