not be healthy. relative government indebtedness is already higher than in many other emerging markets. also, mexico ’ s sovereign credit risk perception, as measured by cds premiums, has remained above that of other countries with the same rating. furthermore, rating agencies have given mexico a clear warning this year in the form of a downward change in perspective. a second contributing factor to peso depreciation may be markets ’ disappointment on lowerthan - expected growth in mexico. a third cause may stem from uncertainty on the forthcoming u. s. presidential election and its implications. finally, given the depth and liquidity of the peso market, and the fact that derivatives are used to hedge peso positions and as a proxy for other emerging - market asset investments, price swings for the mexican currency may be exacerbated. volatility could easily increase in the future, in light of so many unknown global geopolitical and financial variables. this situation could be even more risky in the face of mexico ’ s high exposure to foreign holdings of peso - denominated government debt. these holdings represent one of the highest proportions of the total outstanding of local currency debt in the emerging - market group, decreasing somewhat during the last two years, at close to a third, with the drop concentrated mainly in short - term securities. the still high ratios of foreign holdings could be interpreted as a positive sign. the tables could rapidly turn, however, if perception of strength evaporates. therefore, it is absolutely urgent that mexico strengthen its fiscal stance in an unambiguous way, cutting public expenditures significantly in order to stabilize, and eventually reduce, total government debt to gdp. obviously, monetary policy should also continue to carry its weight in the effort to fortify macroeconomic fundamentals. recent economic developments and outlook since 2014, gdp has risen at a relatively stable rate of around 2. 3 percent year - on - year, including a dip in the 2016 second quarter. two offsetting forces have contributed : expansion in services and decelerating industrial production. recently, the pace has slowed in both sectors. the main drag on industrial output has been a contraction in mining, driven by a longstanding decline in oil extraction. manufacturing production has also been slowing to almost no growth recently. to a large extent, these developments have resulted from a falling trend in u. s. manufacturing production and a contraction in manufacturing exports to the united states since 2015, despite the significant real depreciation of the

manuel sanchez : the united states and mexico – a lasting bond remarks by mr manuel sanchez, deputy governor of the bank of mexico, at the mosbacher institute, bush school of government and public service, texas a & m university, college station, texas, 15 september 2016. * * * it is a pleasure and an honor to participate in the series “ conversations in public policy ” held by the mosbacher institute at the bush school at texas a & m university. the occasion is important for at least two reasons. texas a & m is a world - renowned educational and research center, with a 140 - year history, and it is located in the state with the most significant social and economic connections to mexico. the longstanding relationship between the lone star state and mexico is deeply rooted in a common cultural and social heritage. today, i would like to talk first about the long - term economic ties between the united states, in particular texas, and mexico. second, i will focus on financial markets and challenges. third, i will examine recent economic developments and the outlook, and finally, discuss inflation and monetary policy in mexico. as usual, my remarks are entirely my own and do not necessarily reflect those of the bank of mexico or its governing board. long - term economic ties mexico has long been in a process of increasing economic integration with the united states, encompassing goods and services, capital, and labor markets. these links, reinforced by the north american free trade agreement, have yielded substantial benefits on both sides of the border, including more competition, efficiency, job creation, and consumer wellbeing. the most significant bond with any state is with texas, given its place as the tenth largest economy in the world and the extensive border it shares with mexico. in terms of trade of goods, the united states is mexico ’ s most important partner in both imports and exports, while mexico is second in exports and in imports for the united states. texas, however, is number one in both categories for mexico – and vice versa. the backdrop to bilateral merchandise trade is a long - term, growing industrial integration between the two countries. in particular, mexico ’ s manufacturing production holds an extraordinarily high correlation with u. s. manufacturing output. also, the united states, and texas in particular, are important providers of foreign direct investment to mexico, transferring technology and knowhow, while exploiting mutually advantageous business opportunities. in fact, mexico is the second most important destination for