Boston, MA -- (SBWIRE) -- 05/27/2013 -- We remain optimistic about Mexico's long-term growth outlook, forecasting real GDP growth to average 4.0% between 2013 and 2022 on the back of a booming manufacturing sector, an increasingly strong private consumer and favourable demographics. That said, we believe Mexico's ability to reverse its severe macroeconomic imbalances and generate the robust growth necessary to propel it to 'developed market' status still hinges on the passage of substantive energy sector reform.

We continue to expect Mexico to end 2013 with a policy rate of 4.00%. While the Banco de Mexico (Banxico) reduced the policy rate by 50 basis points in March, slightly earlier than we had initially anticipated, the accompanying communique stipulated that it was a 'one-off' cut. Moreover, with inflation having climbed above Banxico's target band, we see little chance for further easing in the short term.

We continue to expect that Mexico will post real GDP growth of 3.6% in 2013, reflecting our expectation that after the robust 3.9% growth recorded in 2012, the economy will slow on the back of moderating external demand.

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Major Forecast Changes

Given slightly stronger appreciation than we expected in the first four months of the year, we have revised up our peso forecast, now projecting it to average MXN12.30/US$ in 2013. Central bank intervention and a weaker goods trade dynamic could slow the pace of appreciation in the coming quarters. However, with US markets set to remain on an upward trajectory over a multi-quarter horizon, and key structural reforms to be introduced in Mexico in H213, which will very likely buoy investor enthusiasm, we see further upside for the currency.

We have modestly revised our current account deficit forecast for 2013, from 0.6% of GDP to 0.9%, on the back of an expected widening of the goods trade shortfall. We expect a pickup in demand later in the year; however, the manufacturing sector is expected to only slowly reaccelerate after a substantial end-2012 slowdown in production. Substantial unfavourable base effects also are behind our view that export growth will be slow to improve.

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