March 22 (Bloomberg) -- Mexico’s government is raising its forecast for growth this year, betting that rising domestic demand will allow the economy to maintain momentum after the strongest expansion in a decade last year.
Latin America’s second-biggest economy will expand 4 percent to 5 percent this year after 5.5 percent growth in 2010, Finance Minister Ernesto Cordero said during a speech at the London School of Economics yesterday.
A recovery of U.S. manufacturing has helped spur Mexican exports and job growth, which is driving domestic consumption. Exports rose 23 percent to $79.7 billion in the last three months ending in January and the country added 52,000 formal jobs in the first six weeks of 2011, President Felipe Calderon said in a Feb. 17 speech.
Cordero said his ministry was reviewing its forecast that the economy would expand 4 percent this year. “I’m sure we will make it higher,” he said in an interview with Bloomberg Television yesterday.
Stronger domestic growth has led economists to boost their estimates for 2011 growth, and the Finance Ministry’s forecast is at the low end, Cordero said in the interview. Credit Suisse Group AG raised its estimate to 4.4 percent on March 17.
“Manufacturing continues to be the main driver of economic activity in Mexico,” said Bertrand Delgado, an economist with Roubini Global Economics in New York, who has a forecast of 4.5 percent growth for Mexico this year. “It also seems that general demand has been improving.”
After shrinking 6.1 percent in 2009 on the back of a U.S. recession, Mexico’s economy in 2010 rebounded to post its fastest expansion in 10 years while adding more than 730,000 jobs.
“The overview for the Mexican economy this year and next year is quite good and we believe that we are going to have a very good rally in terms of economic growth for the next years,” Cordero said in the interview.
After ending 2010 at 4.4 percent, Cordero said he sees consumer price inflation of 2 percent to 4 percent this year. The central bank kept its benchmark lending rate at 4.50 percent for a 17th straight meeting on March 4.
Mexico is seeking to sell more goods to Latin America and Asia to reduce its dependence on the U.S., which buys about 80 percent of the country’s exports.
Last year, Mexico exported $229.7 billion to the U.S., a 30 percent gain from 2009, according to the U.S. Commerce Department.
Higher crude prices don’t benefit Mexico as much as other major oil exporting nations because higher energy costs can damp U.S. growth, Cordero said.
Mexico imports gasoline and sells it at subsidized prices, which hurts Mexico’s finances when oil rises. The currency also appreciates as crude increases, giving the country fewer pesos per barrel of exports, he said.
“There is a relation between the oil prices and the appreciation of the currency because of the way the budget is constructed,” Cordero said in his speech at the LSE. “So there’s an automatic mechanism that balances the windfall in oil prices.”
Cordero ruled out directly intervening in the currency markets to stem the appreciation of the peso, which has gained 3 percent against the dollar this year, the best performance against the dollar among the seven major Latin American currencies tracked by Bloomberg.
The Finance Ministry may raise the amount and frequency of its auctions of dollar options to increase international reserves, he said. Sales of dollar options are now $600 million a month. The increased amount wouldn’t be so much “that it would affect the market in Mexico,” he said.
The peso strengthened for a third day, appreciating 0.6 percent to 11.9870 per dollar yesterday from 12.0527 on March 18.
An increase in the amount of dollar options has “always been in the cards” if the currency continues to strengthen against the dollar, Delgado said. The amount may be boosted if the peso moves suddenly to 11.50 pesos or 11 pesos to the dollar, he said.
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