Montufar-Helu & Griotti Consulting 07 December 2010 Report to the Commissions on Industrial Development and Economic Development Senate of the Mexican Republic On behalf of the Ass. of Mexican Manufacturers

Agenda Background: the Mexican economy The two threats: China and the crisis Recommendation: lower interest rates Responding to alternatives and criticisms

Background: the Mexican economy Mexican economy is highly reliant on exports Our major export market is the US

The two threats: China and the crisis China displaced Mexico as the US’ second largest trading partner As a result of the crisis, Mexican GDP fell by 7% in 2009 Mainly driven by fall in exports 2008 293 Mexican exports ($ BN) -18% 2009 240

A fragile recovery In 2010 exports bounced back… GDP estimate: + 3 or 4 % …thanks to a 25% fall in the value of the peso against the dollar

Recommendation for avoiding a double dip Recommendation: the Commissions on Industrial Development and Economic Development should pressure Mexico’s Central Bank into lowering the interest rate from 4.5% to 4%. Further devaluation of the peso leading to an increase in exports to the the US Objective is to gain back second place from China Reduce unemployment which has reached a high point of 6% Improves the governments’ chances of obtaining reelection in 2012

Responding to alternatives and criticism Alternative: pegging the peso to the dollar Implies restricting capital flow and therefore reduces FDI Criticism: low interest rate will increase inflation Inflation is low at 3.6% (down from 5% in 2009) Criticism: pressures on the Central Bank damage its independence This is a price worth paying to ensure economic recovery All governments influence their Central Bank

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