Thanks to PDN member, Dr. Robert W. (Bill) Gilmer, our members had the opportunity to hear directly from a top official of the Mexican equivalent of the U. S. Federal Reserve. In light of recent developments on both sides of the border and our organization’s new responsibilities, this is a timely and worthwhile presentation. You may especially want to note: - Slide 9 which displays Public Debt and Fiscal Deficits as a Percent of GDP. Note how the U. S. compares to Mexico. - Slides 27 – 29 which provide the economic outlook for Mexico.

1. The Mexican Economy: Recent
Developments and Outlook
Dallas FED Federico Rubli Kaiser*/
The Paso del Norte Group External Relations Director
El Paso, Texas Banco de México
May 18, 2010 frubli@banxico.org.mx
*/ The opinions expressed may not necessarily coincide with the institution’s official views.

2. Contents
1. The World Economy
2. The Mexican Economy
3. Final Remarks
4. Appendix: Mexico’s Exchange Rate

3. Gross Domestic Product1/ Balance of Bank Credit to the Non-
(Annualized Quarterly Financial Private Sector
% Change ) (Annual % Change)
12 15
Forecast
10
8
10
6
4
5
2
0
-2 0
-4
-6 United States 2/
World -5
-8 Eurozone 3/
Advanced
-10 Japan 4/
Emerging
-12 -10
Ene-08
Ene-09
Ene-04
Ene-05
Ene-06
Ene-07
I 2005
I 2006
I 2007
I 2008
I 2009
I 2010
Jul-08
Jul-09
Jul-04
Jul-05
Jul-06
Jul-07
III 2005
III 2006
III 2007
III 2008
III 2009
III 2010
1/ Adjusted for purchasing power parity. 2/ Commercial, industrial, & consumer loans, and mortgages.
Source: IMF. 3/ Loans to the non-financial private sector.
4/ Total loans to the private sector.
Source: Federal Reserve, ECB and Bank of Japan. 3

4. Expected Real GDP Growth in 2010 for Key Bank Credit to the Private Sector in
Emerging Economies Emerging Economies
(% Annual Change) (6-month Annualized % Change1/)
12 60
April 09 Asia exc. China
July 09 China
50
10 Medio Oriente y África
October 09
Europa
January 10 América Latina 40
8
30
6 20
4 10
0
2
-10
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Dic-04
Dic-05
Dic-06
Dic-07
Dic-08
0
Brasil Rusia India China México
Source: IMF, World Economic Outlook (WEO) April 2009 and 1/ Versus previous six months, elevated to the fourth.
October 2009, and WEO Update July 2009 and January 2010. Source: IMF, International Financial Statistics.
4

5. The ongoing expansion of the world economy, led
by EME, is expected to continue
World Real GDP Growth Projections
(%)
2009 2010 2011
World -2.1 3.2 3.3
USA -2.4 3.2 3.1
Japan -5.2 2.2 1.6
Euro Zone -4.0 1.2 1.5
France -2.2 1.4 1.7
Germany -5.0 1.6 1.7
UK -4.9 1.3 2.3
Asia 1.5 5.7 5.2
China 8.7 9.9 9.0
Latin America -1.9 4.2 3.8
Brazil -0.2 5.8 4.5
Mexico -6.5 4.2 3.5
Source: Consensus Forecasts, April 2010.
5

6. Expansionary policies in advanced countries entail
the risk of capital flow reversals from EME
Accumulated flows from funds dedicated to emerging markets
(billion US dollars)
Shares Debt
2007
9
2008 50
6
2009
3
30
2010
0
10
-3
2007 -6
-10
2008
-9
-30 2009
-12
2010
-50 -15
Apr
Ags
Nov
Feb
Jun
Jul
Dec
Jan
Mar
May
Oct
Sep
Apr
Ags
Nov
Feb
Jun
Jul
Dec
Jan
Mar
May
Oct
Sep
Source: Emerging Portfolio Fund Research. Source: Emerging Portfolio Fund Research. 6

7. …which might materialize as a result of exit strategies
from their stimulus monetary and fiscal measures
Fiscal Balance 1/ Public Debt 2/
(% of GDP) (% of GDP)
2 120
Forecast Forecast
0 100
-2 80
-4 60
G-20 -6 40
Advance economies G-20
Emerging economies -8 Advance economies 20
Emerging economies
-10 0
2011
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2012
2013
2014
2015
2011
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2012
2013
2014
2015
1/ G-20 countries. 2/ G-20 countries.
Source: IMF. Source: IMF. 7

8. Mounting fiscal pressures are especially evident in
some European nations
Credit Default Swaps (CDS): Selected
Public Debt 1/
countries (% of GDP)
(basis points)
140
Portugal Ireland
Portugal 900 Forecast
Italy Greece
Ireland 800 120
Spain
Italy 700
Greece 100
600
Spain
500 80
400
300 60
200
40
100
0 20
Sep-09
May-09
Jul-09
Mar-10
May-10
Nov-09
Jan-10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1/ Takes into account the latest stability programs but Portugal.
Source: Bloomberg. Source: European Commission. 8

9. Public debt and fiscal deficits as a % of GDP, Maastricht criteria,
2010 targets
Source: Fitch, UBS WMR, February 2010 9

10.  In sum, the expected scenario for the global economy is not
free of risks:
 Possible effects of withdrawing fiscal and monetary stimulus:
• The vulnerability of the recovery.
• Effects on interest rates of the withdrawal of monetary
stimulus.
• The need for fiscal consolidation in advanced-economy
countries.
→Capital flows to emerging economies.
 Additional problems in case carry trade positions abruptly
unwind.
10

11.  In sum, the evolution of the United States in general shows
hopeful signs, but is not free of risk and uncertainty:
 Doubts that the recovery is sustainable and risk of a new slump.
 Badly timed monetary stimulus exit strategies.
 The beginning of a phase of chronic fiscal deficits.
 Reluctant reactivation of bank credit, particularly mortgages and
consumer loans.
 Lackluster creation of lost jobs (possible “jobless recovery”).
11

12. Contents
1. The World Economy
2. The Mexican Economy
3. Final Remarks
4. Appendix: Mexico’s Exchange Rate

13. Private sector analysts foresee a gradual recovery
of the Mexican economy
Mexico: Real GDP Projections
(percent change)
Blue Chip Consesus Forecasts
Banco de Mexico's Survey Brokerage firms*
4.7
4.2 4.2 4.1
4
3.5 3.5 3.6 3.5
3
2
1
0
2010 2011
Source: Blue Chip, Consensus Forecasts, Banxico’s survey and brokerage firms.
13
*/ Deutsche Bank, Goldman Sachs, JP Morgan, Merril Lynch y Morgan Stanley.

14. Mexico is already benefitting from a stronger US
industrial activity
Mexico: Real GDP Growth US and Mexico: Manufacturing Production
(%) (annual growth; %; 3-month moving average)
4 Mexico
2.5 9
2.0 U.S.
2 6
0 3
0
-2 -2.3
-3
-4
Quarterly change* -6
-6 -6.1
-9
Annual change
-8 -12
-15
-10
-18
-12
Sep-08
Sep-09
Mar-08
May-08
Jul-08
Mar-09
May-09
Jul-09
Mar-10
Nov-08
Jan-09
Nov-09
Jan-10
I II III IV I II III IV I II III IV
2007 2008 2009
*/ Seasonally adjusted.
Source: INEGI and US Federal Reserve. 14
Source: INEGI.

15. The business sector is expecting that the Mexican
economy will continue to grow
Mexico: Purchasing Managers’ Index
(seasonally adjusted)
Expanding 55
50
Contracting
45
40
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Sep-04
Dec-04
Sep-05
Dec-05
Sep-06
Dec-06
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Dec-09
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Source: INEGI. 15

16. The main driver of the Mexican rebound has been
the external sector, notably automotive sales
Non-Oil Exports Vehicle exports from Mexico and
(annual % growth; seasonally adjusted) Sales in the United States
(thousands of units per month, s.a.)
30 160
20 140
120
10
100
0
80
-10
60
Exports
-20
40
Sales of vehicles in the United States
produced exclusively in Mexico
-30 20
Mar-06
Jul-06
Mar-07
Jul-07
Mar-08
Jul-08
Mar-09
Jul-09
Mar-10
Nov-06
Nov-07
Nov-08
Nov-09
Mar-06
Jul-06
Mar-07
Jul-07
Mar-08
Jul-08
Mar-09
Jul-09
Mar-10
Nov-06
Nov-07
Nov-08
Nov-09
Source: Banco de México. Source: AMIA y Bloomberg. 16

17. There has been some geographic diversification
of exports
Non-oil Exports to Different Markets
(%)
Share Annual change, 2010
2010
2004 January February March* Jan-Mar
Jan-Mar
Total 100.0 100.0 20.7 26.8 35.2 28.1
US 88.7 79.7 18.6 25.4 32.4 26.0
Automotive 23.0 21.4 100.7 78.7 69.3 80.3
Other 65.7 58.4 3.3 12.6 22.9 13.5
Rest of the world 11.4 20.3 29.5 32.5 47.8 37.2
Automotive 2.1 4.5 88.0 48.6 95.3 77.0
Other 9.3 15.8 19.1 29.0 37.4 29.0
* Preliminary data
Source: Banco de México.
17

18. However, recent data confirm the continued
weakness of private investment,
Private and Public Investment Imports
(2007=100; seasonally adjusted) (annual growth, moving average 3-month%)
120
15
Private
Public 0
110
-15
100
-30
Total
Consumer goods
90 -45
Intermediate goods
Capital goods
-60
80 Jul-08
Jul-09
Nov-08
Nov-09
Sep-08
Ene-09
Sep-09
Ene-10
Mar-08
May-08
Mar-09
May-09
Mar-10
I II III IV I II III IV I II III IV I II III IV
2006 2007 2008 2009
Source: INEGI. Source: Banco de México.
18

19. Feb-07
Apr-07
Jun-07
Aug-07
Source: INEGI.
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
… private consumption
Aug-08
Oct-08
Retail Sales
Dec-08
Feb-09
Apr-09
(2007=100; seasonally adjusted)
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
94
96
98
100
102
19

20. … as well as the construction sector
Industrial Production,
Manufacturing Production
and Construction
(2003=100; seasonally adjusted) Construction
(constant pesos)
Share Annual var.%
124 2009 2009
Total 100.00 -6.34
120
Public Building 9.53 22.07
Private Residential Building 26.27 -16.62
116
Private Non-Residential Building 12.14 -28.63
Other Builiding 52.06 3.2
112
Private 10.46 -25.95
108 Industrial production Public 41.60 14.55
Source: INEGI.
104 Manufacturing
100 Construction
96
Jul-06
Jul-07
Jul-08
Jul-09
Nov-06
Nov-07
Nov-08
Nov-09
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Source: INEGI.
20

21. Family remittances from the US continue to fall, mainly
as a result of employment losses in that country
Family Remittances and Family Remittances
US employment in the construction sector (2006=100; seasonally adjusted)
(annual change, %)
120
US Dollars
20
Constant pesos
110
10
0 100
-10
Family remittances 90
-20
US Employment in
Construction
80
-30
-40 70
Mar-05
Jul-05
Mar-06
Jul-06
Mar-07
Jul-07
Mar-08
Jul-08
Mar-09
Jul-09
Mar-10
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Source: Banco de México. 21

22. … while international travel has not yet recovered
International Travel International Travel
(annual change, %) (million travelers)
10 Visitors to Mexico
10
Mexicans travelers abroad
0
9
-10
-20 Revenues
8
-30 Expenditures
-40 7
-50
Sep-07
Sep-08
Sep-09
Mar-07
Jun-07
Mar-08
Jun-08
Mar-09
Jun-09
Mar-10
Dec-07
Dec-08
Dec-09
6
2006 2007 2008 2009 *2009 *2010
Source: Banco de México. * January-March.
22

23. Despite a well-capitalized banking system,
Capital Adequacy Index: Banking System
Billion constant peso Percent
(2009)
500 Tier 2 (left)
Tier 1 (left)
17
400 Capital Adequacy Index (right)
16
300
15
200
100 14
0 13
*2010
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
* Until February.
Source: Banco de México. 23

24. … adjustment to the recent crisis has implied that
loans positive impact on activity will take time
Commercial Banks’ Credit Adjusted Delinquency Rate*/
(%, real annual change) (%)
24
Firms
30 Consumption
20
Housing
20 Total
16
10
12
0
Consumption 8
-10
Housing
Firms -20 4
Total
-30 0
Jun-07
Jun-08
Jun-09
Dec-06
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Dec-09
Mar-07
Mar-08
Mar-09
Sep-07
Sep-08
Sep-09
Feb-10
Mar-07
Jun-07
Mar-08
Jun-08
Mar-09
Jun-09
Mar-10
Dec-07
Dec-08
Dec-09
*/ The Adjusted Delinquency Rate is defined as the quotient of the sum of the direct non-performing loan portfolio plus charges or
losses taken by the banks in the previous 12 months, divided into the sum of the total loan portfolio plus those charges or losses.
24

25. Finally, public finances remain relatively solid
Public Sector Balance Duration and Yield of
(% of GDP) Government Securities
Average maturity
Economic Balance (left)
4 PSBR
2,200 45
3 Primary Balance Implicit interest
% (6-month moving average)
rate 40
2 1,950
(right)
35
1 1,700
0 30
1,450
Days
-1 25
1,200
-2 20
950
-3 15
-4 700 10
-5 450 5
-6 200 0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Until March *
Source: Ministry of Finance
Source: Bank of Mexico 25

26. … although, the dependence of public sector
revenues from oil calls for further reforms
Extraction of Crude Oil and, Volume of Oil
Oil Revenue
Exports: 1995-2015
(% of total Federal Government income)
(thousand barrels per day)
45
4,000
40
3,500
35
3,000
30
25 2,500
20
2,000
Forecast
15
1,500
10
Crude oil output
1,000
5 Oil-export volume
0 500
2011
1995
1997
1999
2001
2003
2005
2007
2009
2013
2015
1980
1985
1990
1995
2000
2005
2006
2007
2008
2009
Source: Ministry of Finance. Source: PEMEX 26

27. Economic Outlook 2010
 Growth in 2010: The external sector
 Domestic demand:
 In 2010 employment and consumption will improve but at a slow pace.
 Inflexion point for employment.
 Remittances in pesos have not decreased.
 Imports of consumption goods are recovering.
 Domestic automobile sales are increasing.
 Consumer confidence recovered in January but is still weak.
 Consumer credit is still falling but has stabilized.
 As a result:
 Retail sales growth will be slow and moderate; domestic demand will
thus show slow recovery but will eventually catch up to the external
sector.
27

28. Forecasts
Gross Domestic Product Number of Workers Insured Current Account
(Annual % Change) by the IMSS (% of GDP)
(Millions)
4.0 – 5.0 6
Between 500 &
600 thousand
15.5 0.0
3.2 – 4.2
5 jobs
4 15.0
Between 500 & 600
3 thousand jobs
2 14.5 -0.5
1
0 14.0
-1 -1.0
-2 13.5
-3
-4 13.0
-5 -1.5
-6 12.5
-7
-8 12.0
-2.0
2005
2006
2007
2008
2009
2010p
2011p
2005
2006
2007
2008
2009p
2010p
2011p
2007
2008
2005
2006
2009p
2010p
p/ Estimated. p/ Estimated p/ Estimated
Source: INEGI and Banco de México. Source: IMSS and Banco de México. Source: Banco de México.
28

29. Inflation, monetary policy, exchange rate
 2010 has seen a rebound in inflation due to clearly identified factors:
 The impact of tax changes on consumer prices.
 The realignment of energy prices with international reference
prices.
 Increases to tariffs and taxes determined by local governments.
 Also, inflation in the 2010 first quarter was affected by increases in the
prices of some fruits and vegetables as a result of adverse climate
effects.
 To date, inflation expectations for the medium- and long-term have not
been affected.
 The increase in inflation seen in the first quarter this year is consistent
with Banco de México’s expectations.
29

30. Ene-04
May-04
Sep-04
Ene-05
May-05
Sep-05
Ene-06
May-06
Source: Banco de México.
Sep-06
(%)
Ene-07
May-07
CPI
Core
Sep-07
Non Core
Ene-08
Headline Inflation
May-08
Sep-08
Ene-09
May-09
Sep-09
Ene-10
1
2
3
4
5
6
7
8
9
10
Ene-04
May-04
Sep-04
Ene-05
May-05
Sep-05
Ene-06
Core
Source: Banco de México.
May-06
Services
Sep-06
Merchandises
Ene-07
(%)
May-07
Sep-07
Ene-08
Core Inflation
May-08
Inflation, monetary policy, exchange rate
Sep-08
Ene-09
May-09
Sep-09
Ene-10
2
3
4
5
6
7
8
30

31. Inflation, monetary policy, exchange rate
 In April 2010, the Consumer Price Index (INPC) saw a drop of 0.32%. Year-
over-year headline inflation was 4.27%, a drop of 0.70 percentage points
compared to the previous month.
 The drop in the year-over-year INPC in April vs. March is explained in part by
lower core inflation. At the same time, there was a negative change in the non-
core index, influenced mainly by decreases in the prices of agricultrual
products and electiricity.
Consumer Price Index
Annual percentage change
31
31

32. Inflation, monetary policy, exchange rate
April 2010/ April 2010/ March 2010/
March2010 April 2009 March 2009
Core Inflation 0.11 4.11 4.40
Goods 0.25 4.68 5.11
Services -0.03 3.58 3.73
Non-core Inflation -1.46 4.70 6.53
Agricultural -2.29 3.71 9.11
Administered -1.01 5.24 4.66
32

33. Inflation, monetary policy, exchange rate
Headline Inflation Forecasts
(%)
6.5
IV-2009 IV-2010
6.0
5.5
5.0
4.5
4.0
3.5
3.0
Observed Inflation
2.5
First Quarter 2010, forecast 2.0
1.5
IV 2008
IV 2009
IV 2010
IV 2011
IV 2006
IV 2007
I 2009
I 2010
I 2012
I 2006
I 2007
I 2008
I 2011
II 2008
II 2009
II 2010
II 2006
II 2007
II 2011
III 2006
III 2007
III 2008
III 2009
III 2010
III 2011
The forecast in this report coincides with that of the previous one, with the addition of the corresponding forecast for the 2012 first
quarter. In addition, the fourth-quarter forecast in the report coincides with that of the addendum of the third-quarter report.
Importantly, in each inflation report, the time line for the forecast is for eight quarters ahead. This means that with each report a
quarter is added to the forecast, while the first quarter in the previous report becomes an observed data point.
Source: Banco de México. 33

34. Inflation, monetary policy, exchange rate
Headline Inflation Expectations Yield Curve
Annual for year-end 2010, 2011, (%)
Next 4 and 5-8 Years
(%)
5.5 9
Cierre 2010 31-Dec-09
5.0 8
Cierre 2011 07-May-10
Próximos 4 años 4.5 7
Próximos 5-8 años
4.0 6
3.5 5
3.0 4
1 1 3 6 1 2 3 5 10 20 30
Dic-07
Dic-08
Dic-09
Oct-08
Oct-09
Ago-08
Ago-09
Abr-08
Abr-09
Feb-08
Feb-09
Feb-10
Jun-08
Jun-09
día meses años
Source: Banco de México y Proveedor Integral de Precios.
Source: Banco de México Survey.
34

35. Inflation, monetary policy, exchange rate
Overnight interbank
interest rate 2/
(%)
11
10
9
8
7
375 bps.
6
5
4
01-07
03-07
05-07
07-07
09-07
11-07
01-08
03-08
05-08
07-08
09-08
11-08
01-09
03-09
05-09
07-09
09-09
11-09
01-10
03-10
2/ Starting on January 21, 2008 the overnight interbank interest rate is shown. Source: Banco de México.
35

36. Inflation, monetary policy, exchange rate
International Reserves Intervention Mechanisms
(In Billions of Dollars)
100
Accumulation of International
Mechanism for
the
90 Reserves
accumulation of 80  Auction of dollar put options for 600
international
70 million dollars each month.
reserves
effective: 1996- 60  The holders of the options can sell
2001 dollars to Banco de México at the
50
Fix exchange rate from the previous
40 day, as long as the Fix is not higher
30 than the 20-day moving average
from the previous 20 days.
20
10
 This does not affect the free-
floating exchange-rage regime.
0
Sales of International Reserves
Abr-99
Ago-03
Feb-97
Jun-01
Sep-04
Oct-05
Nov-06
Feb-10
Ene-96
Ene-09
Mar-98
Jul-02
May-00
Dic-07
 Daily sales are maintained via
auctions at a minimum price.
Fuente: Banco de México.
36

37. The floating exchange rate regime
The floating-rate currency regime has proved to be a useful
instrument in protecting the Mexican economy against external
shocks in the last few years:
 Instability in international financial markets.
 Volatility in international oil prices.
 Fluctuations in the terms of trade.
37

38. The floating exchange rate regime
Interbank Exchange Rate 48 hrs*
16.5
2002 2003 2004 2005 2006 2007 2008 2009 2010
15.5
14.5
13.5
12.5
11.5
10.5
9.5
8.5
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
* Last observation: May 12, 2010 (12.3695)
38

39. The floating exchange rate regime
550 95
Nominal
Exchange Rate
500 90
Index
Real Exchange
450 85
Rate Index (right
axis)
400 80
350 75
300 70
Sep-07
Sep-08
Sep-09
Ene-07
Ene-08
Ene-09
Jul-07
Jul-08
Jul-09
Mar-07
Mar-08
Mar-09
Nov-07
Nov-08
Nov-09
May-07
May-08
May-09
39

40. The floating exchange rate regime
 The variability of the exchange rate has been consistent
with what should be expected under a floating-rate
currency regime.
 The currency movements have not been the result of a
deliberate policy. Mexico maintains a firm commitment to
the floating-rate regime without market intervention.
 The country’s financial authorities are convinced that the
currency regime that is most suited to the circumstances
for Mexio is that of a floating rate.
40

41. Contents
1. The World Economy
2. The Mexican Economy
3. Final Remarks
4. Appendix: Mexico’s Exchange Rate
41

42. Final Remarks
 The global economy is improving and its prospects
are positive
 The US rebound has been supported by inventories,
consumption and recently investment. The
construction sector and real estate markets are
lagging behind the rest of the economy
 Some global risk might materialize as advanced
economies withdraw their monetary and fiscal
stimulus measures. Mounting pressures are
particularly acute in some European countries
42

43. Final Remarks
 Growth in 2010 will be driven by the external sector,
although it will be modest.
 The domestic market will continue to lag, but as investment
recovers, inflation falls back and employment increases, the
recovery of the domestic market will pick up.
 It is likely that potential GDP growth in the U.S. has
decreased. This makes it more urgent for our domestic
economy to grow at a faster pace, also rendering oft-
discussed structural reforms necessary.
43

44. Final Remarks
 The inflation outlook faces several risks. The most
important is the possibility of deterioration in long-term
inflation expectations associated with the foreseen
rebound in inflation.
 This could generate second-round effects on inflation if
firms translate higher costs to consumer goods and
services prices that are not directly affected, possibly
putting at risk the objective of price stability.
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45. Final Remarks
 In order to enhance potential economic growth,
major structural reforms must be implemented
 Stronger public finances
 Rule of law and protection of property rights
 Public security
 Deregulation
 Competition and market flexibility
 Education
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