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1、,Economics&StrategyLatin America MexicoMexico InsightsMonthlyThe external sector passes the torch tothe domestic sector9 October 2012Sergio MartinChief EconomistHSBC Mexico,S.A.,abcGlobal ResearchFeatured article:Labor reform andtransparency law:steps forwardThe domestic economy holds upQE3 and stru
2、ctural reforms momentumsupports a flatter yield curveImproving the Federal Labor Law and makinguse of public resources more transparentThe Institutional Revolutionary Party(PRI),the Green Party(PVEM),and the National Action Party(PAN)reached anagreement to advance most of the proposed amendments tot
3、he Federal Labor Law(FLL).In our view,the amendmentsrepresent a step toward a more-flexible labor market.Thenew FLL provisions promote productivity,improve laborconditions,regulate outsourcing practices,and createcontracts involving payment by the hour.In addition,theupper house passed the General L
4、aw on GovernmentAccounting(GLGA),which seeks to improve transparencyof spending at all levels of government.The measure nowgoes to the lower house.A weaker economy in sight,+52 55 5721 2164Lorena DominguezSenior EconomistHSBC Mexico,S.A.+52 55 5721 2172Claudia NavarreteEconomistHSBC Mexico,S.A.+52 5
5、5 5721 2422,.mx,While we maintain our position that the economy willweaken over the second half of 2012,we see some delay inits materialization.Indeed,domestic demand has taken thetorch from the external demand and gives the extra mile tothe economic strength observed in 2012.We expectpressures on i
6、nflation to take it above 4.0%,although wealso expect a decline in 2013.The MXN continues to besubject to the external environment and technical constraints,Alejandro Martinez-CruzFixed Income Strategist,but we estimate an appreciation path.We may have noisypolitics in the struggle to pass structura
7、l reforms,but,HSBC Mexico,S.A.+52 55 5721 2380,.mx,perspectives on this front look positive.Receive 10Y TIIELocal rates have been supported by QE3 and the structural,View HSBC Global Research at:http:/,reforms momentum.The 10Y sector of the TIIE curveremains more appealing than the 5Y sector as inve
8、stors will,Issuer of report:,HSBC Mxico,S.A.,Institucin de Banca,be looking for duration.Thus,we remain engaged in our 10y,Mltiple,Grupo Financiero HSBCDisclaimer&DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix,and with theDisclaimer,w
9、hich forms part of it,TIIE receiver position(target:5.60%,stop:6.20%).Forthose interested in MBonos,we recommend that investors golong MBonos June 2022.,United,Canada,United,Ireland,Switzerland,Australia,Iceland,Israel,New,Japan,Slovak,Denmark,Hungary,Sweden,Italy,Korea,Poland,Austria,OECD,Netherlan
10、ds,Czech,Finland,Estonia,Germany,Belgium,Chile,Norway,Greece,Spain,France,Mexico,Portugal,Luxembourg,Turkey,4.0,3.0,2.0,1.0,0.0,Economics the upperhouse also may pass it in October after revising itThe upper house approved the transparency law,which goes tothe lower house for any revisions and appro
11、valWe see strong prospects that local curve could flatten on laborreform approval,abc,This section is a reprint of our 5 October 2012report,Mexico Economics&Strategy:Laborreform and transparency law:steps forward.More flexible labor marketThe lower house approved most of the economicproposals contai
12、ned in the labor reform measuresent by President Felipe Calderon.The FederalLabor Law(FLL)enacted in 1970 is one of themost rigid among member states of theOrganization for Economic Cooperation andDevelopment.Thus,in our view,the amendmentsthat were advanced would allow the country to,Here are the m
13、ain aspects of the labor reform:Promotes different types of employmentrelationships.It regulates six different types oflabor contracts,such as specific job,determinedperiod of time,seasonal job,and undeterminedperiod of time,probation period and initialtraining.All these categories have access tosoc
14、ial security,wages,and other benefits.Inour view,this generates proper incentiveseither for enterprises to generateemploymentor for employees to be more productive.Strictness of employment protection,Sergio MartinChief Economist+52 55 5721.mxLorena DominguezEconomist+52 55 5721.mxAlejandro MartinezF
15、I Strategist+52 55 5721.mx,have greater flexibility in its labor market,promote productivity,improve labor conditions,and facilitate hiring and firing of workers.However,effects of the reform would take time tomaterialize,as enterprises and workers wouldhave to adapt to new practices and regulations
16、.Source:OECD2,Economics&StrategyLatin America Mexico9 October 2012Creates contracts involving payment by thehour,considering that calculation of the hourlyrate should not be less than the correspondingvalue of a full working day.It would createconditions for young people and women tofind part-time j
17、obs,promoting formalemployment and making the labor marketmore flexible.This might also help reducethe number of“neets,”short for“not inemployment,education,or training,”in thecountry.According to the OECD,Mexicohas the third-highest number of“neets”among OECD member states.Favors productivity and l
18、abor skills as the maincriteria to promote workers,in contrast to theinitial law that forced enterprises withcollective agreements to promote workersbased on their labor seniority.It acknowledgestraining as most important factor to increaseproductivity and considers creation of aNational Committee f
19、or Productivity.This,inour view,represents a significant step toincrease productivity,which is the best wayto create economic wealth.Limits to one year unpaid wages duringjudiciary decisions.We believe that thisprovides legal certainty and avoids abusesof labor court procedures that in manycases tak
20、e small enterprises to thebankruptcy proceedings.Regulates hiring by intermediaries.It forcesemployers or intermediaries to provide socialsecurity benefits to employees.Improves labor conditions for mining,rural,and domestic workers,and provides for fivedays of paid paternity leave.However,the amend
21、ments that were aimed atforcing labor unions to become more transparentin their functioning were not approved,because,congressional representatives that belong tounions vetoed them.Government accounting:thenext step to strengthentransparencyThe upper house approved and sent to the lowerhouse the Gen
22、eral Law on GovernmentAccounting(GLGA)sent by President Calderon,which seeks to strengthen transparency ingovernment spending at all levels of government.Here are the main aspects of this measure:All levels of government would be required topublish all financial information in uniformformats and upd
23、ate information onexpenditures of public funds.This wouldallow making comparisons,whichfacilitates finding irregularities andfighting corruption.State revenue laws and state budgets wouldbe reduced to a minimum in a uniformmanner across the country.This wouldprevent states from excess borrowing anda
24、void fiscal problems at the federal level.The main audit body,the Supreme AuditOffice,would have more powers.More severe penalties would apply whengovernment officials failed to fulfill the law,including higher fines and prison terms aslong as seven years.This might improveaccountability of public o
25、fficials and helpavert corruption.Structural reforms momentumThe PRI,the Green Party(PVEM),and the PANreached an agreement and approved a substantialnumber of amendments to the FLL,as well as theGLGA sent to Congress by President Calderon on1 September.,abc3,5,0,-5,-10,-15,-20,Economics&StrategyLati
26、n America Mexico9 October 2012In the lower house,the labor reform was approvedwith 351 votes in favor:209 from the PRI,114from the PAN,and 28 from the Green Party.Votes against all came from leftist political partiesand totaled 128:100 from the Party of theDemocratic Revolution,PRD,13 from the Labor
27、Party(PT),and 15 from the Social MovementParty(SMP).There were 10 abstentions from theteachers union political party,PANAL.The GLGA was advanced with 104 votes in favor,3 against,and 3 abstentions in the upper house,which is composed of 128 senators.These two reforms are evidence that the PRI andthe
28、 PAN can reach agreements and set conditionsfor the next presidential administration to functionproperly and advance terms of pending structuralreforms.The party of President-elect Enrique PeaNieto,who will take office on 1 December,did notwin majority in Congress,and thus needs thePANs support for
29、passage of important reforms,such as on fiscal and energy issues.Hence,thepolitical incentives from both political parties arealigning for passage of pending reforms.What does labor reform meanfor FI markets?To answer this question,first we have to ask whetherlabor reform could help to reduce the ma
30、invulnerabilities of Mexico established by creditagencies following the 2008-2009 global financialcrisis.These are:a)a low economic growth rate,b)public finances that are highly dependent on oilrevenues,c)limited room to undertake fiscal,Approval of key structural reforms regardingfiscal and energy
31、issues would contribute to GDPgrowth to attract more private investment,bothforeign and domestic,and to increase non-oil taxrevenues.All these together would contribute toreduce the vulnerability of the country to externalshocks.The sharp impact of the 2008-09 globalcrisis on Mexico was explained by
32、 its strongdependence on the US economy and vulnerabilityof fiscal accounts to a global slowdown.Fixed income markets deteriorated sharply in2008-09 and reflected the weakness of theMexican economy.Thus,the latest structuralreforms would contribute to lower the country riskpremium.If that were to ha
33、ppen,we could see areduction in Mexicos credit default swaps levels,tighter spreads between Mexicos hard-currencybonds and developed-market bonds,and a flatterlocal yield curve.CDS market:Little room for compressionThe 5Y CDS of Mexico has been consistentlytrading through the average level of the La
34、tAmlow betas(Brazil,Colombia,Panama,and Peru)since 1Q11.Following the July presidentialelection,this spread widened even more,but it hasshrunk recently.Thus,if structural reforms wereto materialize in the coming months,we believethere is room for this spread to widen again.The credit spread between
35、LatAm“BBB”countries and Chile,the only country in the regionMexico 5Y CDS vs average LatAm“BBB”ex-Mexico 5Y CDS,abc,countercyclical policies,d)low foreign directinvestment(FDI)as a share of GDP,and e)lack ofagreements to undertake structural changes.There isno a direct link between labor reform and
36、reductionof the vulnerabilities,but approval of labor reformcould become a game-changer to unlock the,10,bp,structural reforms agenda that has been stuck for the,Jan-2011 May-2011,Sep-2011,Jan-2012,May-2012,Sep-2012,past 12-15 years.4,Source:Bloomberg,Mex vs Latam Low Betas,80,70,60,50,40,30,20,10,0
37、,60%,50%,40%,30%,20%,10%,0%,Economics&StrategyLatin America Mexico9 October 2012with“A”rating,has compressed throughout thisyear.Yet since 2Q12,the Mexico 5Y CDS hastightened faster than the rest of LatAm“BBB”credits.Indeed,the spread reached a level of 10bpjust a few weeks ago.Thus,it seems the amb
38、itiousreform agenda of the incoming administration haspartly been incorporated by the CDS market.5Y CDS Mexico vs Chile&LatAm BBB ex-Mexico vs Chilebp,faster.Now AUM grows at an annual rate between15-19%,much faster than economic growth andlocal debt issuance growth.Also,these growthrates would cont
39、inue in the next 10-15 years due toa demographic bonus,as more young people willbe sufficient to support the pension system.Thus,if the growth rate accelerates due to higheremployment levels,demand for local bondscoming from Afores would increase,in particularthat of long-term bonds,of which Afores
40、hold49%of the total amount outstanding.Yet,if theinvestment regime that applies to Afores changesand allows them to increase investments overseas currently there is a limit of 20%of AUM theeffect of the labor reform in the long end of the,abc,Jan-2011,May-2011,Sep-2011,Jan-2012,May-2012,Sep-2012,cur
41、ve should be milder.,Mexico vs Chile,Latam BBB ex-Mexico vs Chile,All in all,we believe that momentum for local rates,Source:BloombergGlobal Bonds:Something has been priced inWe believe there is more room for UMS spreadsto tighten.As we look at current spread levels oflow betas relative to the tight
42、est levels of the EMsovereign index,Mexico sticks out by being onthe wide end of the range.The 10-year UMS Z-spread has been tightening by 90bp since mid-June.Yet it still trades wider than the 10yBrazilian global bonds.Also,Mexico has beenunderperforming other high betas in the past fewweeks.Thus,a
43、lthough it seems that some of thereforms approval is priced in,we believe there isstill some room for UMS bonds to tighten withrespect to US Treasuries.Local rates:We see a flatter yield curveThe impact of the labor reform on local rates,remains favorable,supported by a bunch of globalliquidity,lowe
44、r US yields,and local structuralreforms momentum.Moreover,the potentialdemand for local bonds coming from Aforesfollowing labor reform approval would contributeto flatten the curve.To reflect this favorablemomentum,we are still recommending investorsreceive 10Y TIIE(target:5.6%,stop:6.2%).Distributi
45、on of 20Y and 30Y MBonos holdings,should be positive in the following ways:1)The,Afores,Foreign inv estors,Other local inv estors,structural reforms momentum may increase the,appetite for duration and,for instance,flatten the,Source:Banxico,local curve.2)If labor reform increases jobcreation,more pe
46、ople would enter the pensionsystem,and assets under management(AUM)bylocal pension funds,the Afores,would increase5,Economics&StrategyLatin America Mexico9 October 2012Economic outlookThe expected weakening for the Mexican economy may bedelayed thanks to a strong domestic sectorPressures may keep pu
47、shing inflation above the upper bound ofthe 2-4%targetIn spite of looser monetary policies abroad and inflation concerns,Banxico may keep its rate on hold for a long time,abc,A domestic fighterBottom line:While we maintain our positionthat a weaker economy is in sight,we see somedelay in its materia
48、lization.Indeed,domesticdemand has taken the torch from the externaldemand and gives the extra mile to theeconomic strength observed in 2012.We seepressures on inflation that may take it above4.0%,although we may also expect a decline in2013.The MXN continues to be subject to theexternal environment
49、 and technicalconstraints,but we estimate an appreciationpath.We may have noisy politics in thestruggle to pass structural reforms,butperspectives in this front look positive.Global economic perspectives remain challenging.The US may grow slightly above 2.0%,whileEurope is expected to remain in rece
50、ssion againin 2013.Emerging countries are holding upbetter.Therefore,monetary policy has becomeloose for longer.This weak global scenario is moderating theMexican exports growth rate and will likely hitthe rest of the economy sooner or later.However,domestic demand has helped offset this reduction,6
