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Annual Report 1999 Annual Report 1999 APRIL 2000 BOARD OF GOVERNORS Governor GUILLERMO ORTIZ MARTÍNEZ Deputy Governors EVERARDO ELIZONDO ALMAGUER GUILLERMO GÜEMEZ GARCÍA JESÚS MARCOS YACAMÁN JOSÉ JULIÁN SIDAOUI DIB Secretary HÉCTOR REYNALDO TINOCO JARAMILLO OFFICERS General Directors JAVIER ARRIGUNAGA GÓMEZ DEL CAMPO (Legal) ARMANDO BAQUEIRO CÁRDENAS (Economic Research) JORGE ESPINOSA DE LOS MONTEROS GUERRA (Internal Administration) ALONSO GARCÍA TAMÉS (Central Banking Operations) ANGEL ANTONIO PALOMINO HASBACH (Development Financial Intermediaries) JOSÉ GERARDO QUIJANO LEÓN (Analysis of the Financial System) Directors GILBERTO CALVILLO VIVES (Information Systems) FRANCISCO JAVIER CÁRDENAS RIOSECO (Development Financial Intermediaries) CARLOS CASTAÑEDA GASCA (Administration) JESÚS ALEJANDRO CERVANTES GONZÁLEZ (Economic Measurement) MANUEL GALÁN MEDINA (Market Analysis and Evaluation) ALEJANDRO GARAY ESPINOSA (Comptroller) JAVIER EDUARDO GUZMÁN CALAFELL (External Relations) DAVID MARGOLÍN SCHABES (Operations) MARGARITA MOLERÉS BARONA (Operational Registry) JOSÉ CUAUHTÉMOC MONTES CAMPOS (Information of the Financial System) FRANCISCO JOAQUÍN MORENO Y GUTIÉRREZ (Legal) PASCUAL RAMÓN O´DOGHERTY MADRAZO (Analysis of the Financial System) JAIME PACREU VIZCAYA (Bank Note Issuance) JAVIER SALAS MARTÍN DEL CAMPO (Prices, Wages and Productivity) MOISÉS SCHWARTZ ROSENTHAL (Macroeconomic Analysis) HECTOR REYNALDO TINOCO JARAMILLO (Central Bank Regulations) FRANCISCO VARA MORA (Security) GABRIEL ALBERTO VERA Y FERRER (Systematization of Economic Information and Services) GERARDO RUBÉN ZUÑIGA VILLARCE (Accounting) ALEJANDRO MARIANO WERNER WAINFELD (Economic Studies) As of this year, the translation of Banco de México's "Annual Report" replaces the publication of "The Mexican Economy". The Spanish version of this Annual Report was Submitted to the President and the Congress of Mexico, in accordance with Banco de México’s Law, Article 51, section III. FOREWARNING The figures presented for 1999 are preliminary, and are subject to change. Although the data are consistent within each section, comparing figures drawn from various sections may result in discrepancies, because they have been estimated on the basis of different sources and methodologies. Banco de México has always given the utmost importance to the publication of information that will help decision-making and allow the public to evaluate the execution of its policies. This text is provided only as a convenience to the reader, and discrepancies could eventually arise from the translation of the original document into English. The original and unabridged Annual Report in Spanish is the only official document. Contents I. Introduction 1 II. International Environment 5 III. The Economy in 1999: An Overview 9 III.1. Economic Activity 9 III.2. Employment, Wages and Productivity 22 III.3. External Sector 29 III.4. Public Finances 42 III.5. Evolution of Monetary and Credit Aggregates and of the Securities Market 52 III.6. Inflation 67 IV. Monetary and Exchange Rate Policy 84 IV.1. Monetary Policy 84 IV.2. Exchange Rate Policy 103 V. Final Remarks 109 Appendix 1 117 The Year 2000 Computer Challenge 117 Appendix 2 125 Mexico’s Relationship with International Financial Organizations 125 Appendix 3 129 The Institute for the Protection of Bank Savings 129 Appendix 4 133 Total Public-Sector Borrowing Requirements (PSBR) 133 Statistical Appendix 135 Statistical Appendix Contents 137 A NNUAL R EPORT 1999 I. Introduction The main variables in the Mexican economy performed better in 1999 than had been anticipated at the start of the year, as opposed to the rest of Latin American countries, where average economic growth was the lowest of the last ten years. In 1999, Mexico's Gross Domestic Product (GDP) grew 3.7 percent in real terms, 0.7 percentage points above official estimates and 1.36 points more than private-sector analysts had forecasted when the year began. Economic development in 1999 was balanced both in terms of its distribution across economic sectors and across the various components of aggregate demand. At the same time, the National Consumer Price Index (INPC) rose 12.32 percent during the year, 0.68 percentage points below Banco de México's 13 percent official target, and 4.20 points less than had been predicted early in the year by the aforementioned group of private economic specialists. The combination of declining inflation and stronger than expected economic expansion confirms once again that reducing inflation has positive effects on economic activity. In fact, price stability is an indispensable requirement for sustained economic growth. Other indicators whose performance during the past year is worth mentioning are: (a) Some 701,000 formal jobs were created, real wages in the manufacturing industry rose 5.3 percent, and the real payroll level increased by 6.8 percent. (b) The trade balance and current account deficits of the balance of payments declined from 1.9 and 3.7 percent of GDP in 1998 to 1.1 and 2.9 percent, respectively, in 1999. (c) The current account deficit was financed predominantly by long-term capital flows, including 11.568 billion dollars in foreign direct investment, which covered 82.6 percent of that deficit. (d) Non-oil exports grew 14.9 percent. 1 B ANCO DE M ÉXICO (e) Private sector investment and consumption increased by 9 and 4.3 percent, respectively. (f) The central bank accumulated more foreign currency reserves than anticipated, bringing the year-end stock to 30.733 billion dollars. The macroeconomic results of 1999 can be attributed to the implementation of an appropriate economic policy, combined with a beneficial external environment. The government's achievements in the area of fiscal policy confirmed its commitment to keeping sound public finances, increasing investors’ confidence in the prospects for the Mexican economy. In addition, a prompt and preemptive application of monetary policy, aimed at keeping inflation within the official target, helped to maintain financial markets stable. On the external front, two factors were key: first, economic growth in the United States —which was approximately double than the initial projections— encouraged an expansion in Mexican exports; and second, an upturn in oil prices, which bolstered Mexico's external accounts and public finances. The combination of positive internal and external factors played a crucial role in restoring normalcy to international capital markets after the Russian crisis of 1998. Consequently, investors’ perception of Mexico’s country-risk improved, more swiftly than for other emerging markets. This improvement, together with the easing of inflation and inflation expectations, induced a decline in domestic nominal and real interest rates. The result was a pickup in private consumption and investment, which in conjunction with the strength of exports gave a significant boost to economic growth. By constitutional mandate, the main objective of monetary policy is the abatement of inflation. To gradually achieve its price stability goal and to minimize the costs of such process, the Board of Governors of Banco de México has established a medium-term monetary policy goal of bringing Mexican inflation into line with that of the country’s main trading partners by the year 2003. Consequently, the inflation target for 1999 was set at 13 percent, and monetary policy was applied in pursuit of this objective starting in the last few months of 1998 and throughout 1999. 2 A NNUAL R EPORT 1999 Inflationary disturbances affecting the Mexican economy in the second half of 1998 sparked a severe deterioration of inflation expectations for 1999. Therefore, in November 1998 the Central Bank's Board of Governors agreed to increase the "short" to 130 million pesos. The purpose of this measure was to mitigate economic agents’ upward revision of inflation expectations and to increase the feasibility of attaining the inflation target established for 1999. In January 1999, the domestic financial markets were negatively affected once again, this time by the devaluation of the Brazilian currency and by fears that the financial instability in that country would spread to other emerging economies. In response to this situation, on January 13, the day the Brazilian authorities began their transition to a floating exchange rate regime, the Board of Governors of Banco de México agreed to another increase of the "short", from 130 to 160 million pesos. The prompt reaction by the monetary authorities limited the impact of these phenomena on the exchange rate, swiftly restoring stability to the domestic financial markets. After the January 13 adjustment, the "short" remained at 160 million pesos for the rest of the year. As it was mentioned previously, this monetary policy stance was necessary to bring inflation in line with the target, especially in light of the inflationary pressures carried over from late 1998 and amid the public’s general skepticism regarding the attainability of the inflation target for the year. In addition, as the negative external factors present during the second half of 1998 subsided, the Mexican peso appreciated in the first months of 1999, followed by a period of exchange rate stability. Indisputably, this was a powerful contributing factor in reducing inflation. The decline in the prices of fruits and vegetables was another element that helped bring inflation below the initial target. It is worth noting that the abatement of inflation was also assisted by a solid fiscal stance and by the fact that
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