larc2014 - spotlight on mexico

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1 SWIFT Latin American Regional Conference (LARC) - 2014 28-28 May 2014 Jairo Namur SWIFT USA Sergio Luna Alexis Milo Banamex-Citi Mexico Deutsche Bank Securities Mexico Spotlight on Mexico Spotlight on Mexico #LARC2014 @swiftcommunity

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Page 1: Larc2014 - Spotlight on Mexico

1 SWIFT Latin American Regional Conference (LARC) - 2014 28-28 May 2014

Jairo

Namur

SWIFT

USA

Sergio Luna Alexis Milo

Banamex-Citi

Mexico

Deutsche Bank

Securities

Mexico

Spotlight on Mexico

Spotlight on Mexico

#LARC2014

@swiftcommunity

Page 2: Larc2014 - Spotlight on Mexico

2

La Economía Mexicana a la Luz de las Reformas Estudios Económicos, Banamex-Citi

Mayo 2014

Sergio Luna

Director de Estudios Económicos

[email protected]

+52 55 2226-6799

Page 3: Larc2014 - Spotlight on Mexico

3

PIB (Variación anual, %)

México: Los Promedios son Engañosos

Fuente: INEGI.

PIB Regional (Índice, 1994=100)

Fuente: INEGI.

-8

-6

-4

-2

0

2

4

6

8

94 96 98 00 02 04 06 08 10 12

50

100

150

200

250

94 96 98 00 02 04 06 08 10 12

Querétaro Nuevo León Total nacional Guerrero

Page 4: Larc2014 - Spotlight on Mexico

4

Restricciones Políticas

Fuente: Banamex.

Mayoría en el Congreso (Millones de personas)

“Productividad”Legislativa (Número de votos/iniciativas)

0

10

20

30

40

50

60

70

LVII(1997 -2000)

LVIII(2000 -2003)

LIX(2003 -2006)

LX(2006 -2009)

LXI(2009 -2012)

LXII(2012 -2015)

PRI PAN

PeñaCalderónFOXZedillo

Mayoría Calificada

Mayoría Absoluta

0

50

100

150

200

250

300

350

LVII(1997 -2000)

LVIII(2000 -2003)

LIX(2003 -2006)

LX(2006 -2009)

LXI(2009 -2012)

LXII(2012 -2015)

Votaciones Iniciativas Votadas

PeñaCalderónFOXZedillo

Page 5: Larc2014 - Spotlight on Mexico

5

Objetivo de Reformas: Aumentar la Productividad

Fuentes de crecimiento

(Promedio 1992-2009, variación annual, %)

Fuente: Banamex e INEGI.

1.24

0.43

-0.64

0.40

Capital Trabajo PTF

Convencional TI

*México: Radio, TV y otros servicios informativos.

Telecomunicaciones (Promedio 1992-2009, %)

-6

-4

-2

0

2

4

6

8

Alemania Japón EUA España México*

Educación (Promedio 1992-2009, %)

Fuente: Banamex, estimaciones propias con datos de INEGI y the KLEMS project.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

España Alemania Japón EUA México

Minería y Canteras (Promedio 1992-2009, %)

* México: extracción de petróleo y gas.

-4

-3

-2

-1

0

1

2

3

Alemania España EUA México México* Japón

Page 6: Larc2014 - Spotlight on Mexico

6

Reforma Energética: Implicaciones de Inversión

Materialización de los flujos de inversión será gradual, en

lugar de un proceso discreto: probablemente alcancen su

máximo alrededor de 2018

Las estimaciones varían pero los flujos de inversión

posiblemente serán relevantes macroeconómicamente:

• De Producción y Exploración convencionales,

estimamos de 15 a 20 mmd por año

• La inversión en actividades “aguas abajo” podrían

materializarse más rápido, y contribuirían a detonar la

competitividad manufacturera

• La reforma también incluye al sector eléctrico: su

atractivo como destino de inversión es también

bastante considerable

En suma, la inversión fija bruta podría incrementarse en

2% del PIB, con impactos de crecimiento impulsados por la

demanda que implican fácilmente un crecimiento adicional

del PIB en al menos un 1%.

Flujos de Inversión Proyectada (enfoques “Top-Down”) (millones de dólares)

Fuente: Banamex

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2015 2016 2017 2018 2019

PMX Citi CCE PEMEX

GFDI / WGDP Tend. FDI Promedio Media Ajustada

Page 7: Larc2014 - Spotlight on Mexico

7

Implicaciones “Renacimiento” Manufacturero

Costo de energía como proporción de los costos totales de producción; sectores

seleccionados

Fuente: INEGI y Banamex

(Promedio 2007 a 2001)

0

1

2

3

4

5

6

7

8

Manufacturas (total)

Equipo de transporte

Bienes electrónicos

Maquinaria y equipo

Productos de metales básicos

Page 8: Larc2014 - Spotlight on Mexico

8

Tipo de Cambio Real (Índice 2000=100)

Crédito Bancario al Sector Privado (% del PIB)

Fuente: Indicadores de Desarrollo Mundial, Banco Mundial. Fuente: BIS.

Reforma Energética: Impactos Macroeconómicos

0

20

40

60

80

100

120

140

Brasil China México Rusia

0

40

80

120

160

Brasil China Mexico Rusia

Page 9: Larc2014 - Spotlight on Mexico

9

Implicaciones: Sectores Sensibles al Crédito

Precios Departamentos (Costo por m2, Dls.)

Ventas de Autos (Por cada 1,000 personas)

Turismo: Egresivo (Milliones de personas)

Fuente: Banamex con datos de Indicadores de Desarrollo Mundial: Viajes y Turismo. Banco Mundial.

Fuente: Banamex con datos de la Guía de Propiedad Mundial. Fuente: Banamex con datos del Reporte Gloval de Autos. Economía Global, Scotiabank, Abril 30, 2014.

0

3,000

6,000

9,000

12,000

15,000

18,000

Brasil China México Rusia

0

5

10

15

20

25

Brasil China México Rusia

0

20

40

60

80

100

Brazil China Mexico Russia

Page 10: Larc2014 - Spotlight on Mexico

10

Nota Legal

El presente reporte ha sido elaborado por analistas miembros del Departamento de Estudios Económicos y Sociopolíticos de Banco Nacional de México, S.A,

integrante del Grupo Financiero Banamex ("Banamex- Citigroup") que lo suscribe, con base en información de acceso público no verificada de forma independiente

por parte de Banamex-Citigroup. En este reporte se incluyen opiniones y/o juicios personales del analista que lo suscribe, a la fecha del reporte, los que no

necesariamente representan, reflejan, expresan, divulgan o resumen el punto de vista, opinión o postura de Banamex-Citigroup respecto de los temas o asuntos

tratados o previstos en el presente. Asimismo, la información contenida en este reporte se considera veraz y precisa. No obstante lo anterior, Banamex-Citigroup no

asume responsabilidad alguna respecto de su veracidad, precisión, exactitud e integridad, ni de las opiniones y/o juicios personales del analista que se incluyen en

el presente reporte. Las opiniones y cotizaciones contenidas en el presente reporte corresponden a la fecha de este texto y están sujetas a cambios sin previo aviso

como resultado de la volatilidad del mercado o por cualquier otra razón. El presente reporte tiene carácter únicamente informativo y Banamex-Citigroup no asume

responsabilidad alguna por el contenido del mismo. Las opiniones y cotizaciones de mercado aquí contenidas y los criterios utilizados para la elaboración de este

reporte no deben interpretarse como una oferta de venta o compra de valores, asesoría o recomendación, promesa o contrato alguno para realizar operación

alguna. Banamex-Citigroup no asume compromiso u otorga garantía alguna, ya sea expresa o tácitamente, acerca de ninguna de las opiniones aquí contenidas, por

ello, Banamex- Citigroup no será responsable en ningún caso por daños y perjuicios de cualquier tipo o naturaleza, derivados de o relacionados con la información

contenida en este reporte o uso de este sitio de Internet. Corresponde de forma exclusiva al lector del presente reporte, tomar cualquier decisión de inversión sobre

la base de la propia evaluación (interna o a través de un asesor profesional independiente) de los beneficios económicos y riesgos inherentes (legales, financieros y

de cualquier otra naturaleza), así como los aspectos legales y fiscales asociados a la operación de que se trate, y determinar con base en dicha evaluación si es

capaz de aceptar y asumir dichos riesgos. Banamex-Citigroup se reserva invariablemente el derecho de modificar en cualquier tiempo el contenido del presente

reporte. La información contenida en el presente reporte, es propiedad exclusiva de Banamex-Citigroup, por lo que no podrá ser objeto de reproducción o

distribución total o parcial alguna, sin la previa autorización por escrito de Banamex-Citigroup. El presente reporte se distribuye por Banamex-Citigroup

exclusivamente en los Estados Unidos Mexicanos. Por ello, está prohibida su distribución o transmisión por cualquier medio a aquellos países y jurisdicciones en

los que la difusión del presente reporte se encuentre restringida o prohibida por las leyes aplicables. El incumplimiento a esta prohibición podría ser objeto de

sanciones conforme a la legislación aplicable. Los analistas que contribuyen con la presente publicación pueden o no mantener inversiones, directa o por

interpósita persona, en los valores o instrumentos financieros derivados cuyo subyacente sean valores objeto de este reporte de análisis. El análisis contenido en

el presente reporte refleja exclusivamente el punto de vista de los analistas responsables de su elaboración, a su vez, estos últimos no perciben compensación

alguna de personas distintas a Banamex-Citigroup o personas morales que pertenezcan al mismo Grupo financiero. El presente reporte tiene como destinatarios a

clientes, autoridades gubernamentales, miembros de la academia, prensa y público en general. El presente reporte, en adición a otros elaborados por nuestra

Dirección, se encuentra disponible en http://www.banamex.com/economia_finanzas/es/estudios_economicos/resumen.htm.

Page 11: Larc2014 - Spotlight on Mexico

Deutsche Bank

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 148/04/2014

Mexico View Alexis Milo Chief Economist - Deutsche Bank Mexico

SWIFT Latin American Regional Conference Mexico City – May 28, 2014

Emerging Markets Research

Deutsche Bank Securities

Page 12: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Source: INEGI

Mexico’s GDP growth (1981-2014, %YoY)

2.10

2.45

-8

-6

-4

-2

0

2

4

6

8

10

19

81/0

1

19

81/0

4

19

82/0

3

19

83/0

2

19

84/0

1

19

84/0

4

19

85/0

3

19

86/0

2

19

87/0

1

19

87/0

4

19

88/0

3

19

89/0

2

19

90/0

1

19

90/0

4

19

91/0

3

19

92/0

2

19

93/0

1

19

93/0

4

19

94/0

3

19

95/0

2

19

96/0

1

19

96/0

4

19

97/0

3

19

98/0

2

19

99/0

1

19

99/0

4

20

00/0

3

20

01/0

2

20

02/0

1

20

02/0

4

20

03/0

3

20

04/0

2

20

05/0

1

20

05/0

4

20

06/0

3

20

07/0

2

20

08/0

1

20

08/0

4

20

09/0

3

20

10/0

2

20

11/0

1

20

11/0

4

20

12/0

3

20

13/0

2

20

14/0

1

Mexico has grown below potential in the last decades

12

2010 DB Blue template

Page 13: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Source: INEGI

Total Factor Productivity (%YoY)

-0.33

-6

-5

-4

-3

-2

-1

0

1

2

3

4

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12e

20

13e

5

10

15

20

25

30

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Public

Private

Total Investment (% GDP)

Productivity growth and investment partly explain low

growth

13

2010 DB Blue template

Page 14: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Source: DB Research

Energy

Financial

Fiscal

Telecomm

Education

Labor

2.0

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

No reform Reform

FDI

(% of GDP)

9.9

6.2

0

2

4

6

8

10

12

No reform Reform

Electricity price

(USD cents per Kw/h)

5.0 3.5

0

2

4

6

No reform Reform

Natural gas price

(USD per Th cubic feet)

Reforms are expected to increase

productivity and investment

14

2010 DB Blue template

Page 15: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Fundamentals were already there:

• Trade

• Demographic structure

• Exchange rate regime

• External balance

• Inflation and nominal system

• Public finances

• Banking system

15

2010 DB Blue template

Page 16: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Source: INEGI and DB Research

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

19

93/0

419

94/0

319

95/0

219

96/0

119

96/0

419

97/0

319

98/0

219

99/0

119

99/0

420

00/0

320

01/0

220

02/0

120

02/0

420

03/0

320

04/0

220

05/0

120

05/0

420

06/0

320

07/0

220

08/0

120

08/0

420

09/0

320

10/0

220

11/0

120

11/0

420

12/0

320

13/0

2

Trade (Imports + Exports as % of GDP)

Mexico and US cycles (%YoY)

An open economy closely integrated with the US

-15%

-10%

-5%

0%

5%

10%

19

894

19

904

19

914

19

924

19

934

19

944

19

954

19

964

19

974

19

984

19

994

20

004

20

014

20

024

20

034

20

044

20

054

20

064

20

074

20

084

20

094

20

104

20

114

20

124

20

134

IP US

GDP US

GDP MX

16

2010 DB Blue template

Page 17: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Source: INEGI, CONAPO and US Bureau of Labor

0

20

40

60

80

100

120

1950 1960 1970 1990 1995 2000 2005 2010 2020 2030 2040 2050

60+ yrs 15 to 59 yrs 0 to 14 yrs

MEXICO

US

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

20

05/0

1

20

05/0

3

20

06/0

1

20

06/0

3

20

07/0

1

20

07/0

3

20

08/0

1

20

08/0

3

20

09/0

1

20

09/0

3

20

10/0

1

20

10/0

3

20

11/0

1

20

11/0

3

20

12/0

1

20

12/0

3

20

13/0

1

20

13/0

3

20

14/0

1

Demographic bonus and skilled labor

Population (%)

Workers employed in Manufacturing (million)

17

2010 DB Blue template

Page 18: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Source: INEGI, Banxico and Bank for International Settlements (BIS)

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Jan-8

0

Jul-8

1

Jan-8

3

Jul-8

4

Jan-8

6

Jul-8

7

Jan-8

9

Jul-9

0

Jan-9

2

Jul-9

3

Jan-9

5

Jul-9

6

Jan-9

8

Jul-9

9

Jan-0

1

Jul-0

2

Jan-0

4

Jul-0

5

Jan-0

7

Jul-0

8

Jan-1

0

Jul-1

1

Jan-1

3

-0.4

0.1

0.6

1.1

1.6

2.1

2.6

1998 2001 2004 2007 2010 2013

Brazil China

Chile Colombia

Korea India

Mexico Poland

Russia Czech Rep.

An efficient exchange rate regime and a liquid FX market

FX and headline CPI inflation (correlation coefficient)

Global FX market volume share (%)

*Shares add 200% since two currencies are involved in

each transaction

18

2010 DB Blue template

Page 19: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Source: INEGI, National Authorities and DB Research

0

1

2

3

4

5

6

7

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

BRA

CHL

CHN

COL

KOR

PHL

HUN

IND

INDO

ISR

MAL MEX

PER

POL

RCH

SA

THA

TUR

-5

0

5

10

15

20

25

30

-8 -6 -4 -2 0 2 4 6

Current account, % of GDP

Nominal FX depreciation

May13-Apr14, %

Current account balance (% of GDP)

CA balance and FX depreciation (% of GDP and %)

No external imbalances have piled up

19

2010 DB Blue template

Page 20: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Source: INEGI and SHCP

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Jan-8

0

Aug-8

1

Ma

r-8

3

Oct-

84

Ma

y-8

6

De

c-8

7

Jul-8

9

Feb

-91

Sep-9

2

Apr-

94

No

v-9

5

Jun-9

7

Jan-9

9

Aug-0

0

Ma

r-0

2

Oct-

03

Ma

y-0

5

De

c-0

6

Jul-0

8

Feb

-10

Sep-1

1

Apr-

13 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

19

891

19

901

19

911

19

921

19

931

19

941

19

951

19

961

19

971

19

981

19

991

20

001

20

011

20

021

20

031

20

041

20

051

20

061

20

071

20

081

20

091

20

101

20

111

20

121

20

131

Total

(% of GDP)

Inflation seems anchored and public finances are sound

Headline CPI inflation (%)

Public debt (%)

Peso-denominated

(% of total)

20

2010 DB Blue template

Page 21: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Source: CNBV and Banxico

NPL

Bank loans

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Jan-0

4

Jul-0

4

Jan-0

5

Jul-0

5

Jan-0

6

Jul-0

6

Jan-0

7

Jul-0

7

Jan-0

8

Jul-0

8

Jan-0

9

Jul-0

9

Jan-1

0

Jul-1

0

Jan-1

1

Jul-1

1

Jan-1

2

Jul-1

2

Jan-1

3

Jul-1

3

Jan-1

4

Bank loans: Total and non-performing (%YoY and % of total)

A banking system with good capital ratios

0

2

4

6

8

10

12

14

16

18

20

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Complementary

Basic

Capital ratio (ICAP, %)

21

2010 DB Blue template

Page 22: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, [email protected]

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Concluding remarks:

• The structural reforms will likely have an

impact in the medium term

• The reforms highlighted sound

fundamentals already present in the

Mexican economy

• We expect growth to accelerate as the

global economy recovers

• A favorable position with respect to EMs

22

2010 DB Blue template

Page 23: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, +52(55)52018534 , [email protected]

2010 DB Blue template

Additional information available upon request

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this

research, please see the most recently published company report or visit our global disclosure look-up page on our website

at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the

undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view

in this report. Alexis Milo

23

Appendix 1 Important Disclosures

Page 24: Larc2014 - Spotlight on Mexico

Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, +52(55)52018534 , [email protected]

2010 DB Blue template

Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the “Disc losures Lookup” and “Legal” tabs. Investors are strongly encouraged to review this information before investing. 2. Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com. 3. Country-Specific Disclosures

Australia & New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively.

Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless “Japan” is specifically designated in the name of the entity. Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.

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Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, +52(55)52018534 , [email protected]

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Risks to Fixed Income Positions Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

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Identifier Deutsche Bank

May 28th , 2014, Alexis Milo, +52(55)52018534 , [email protected]

Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.

Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report.

Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement.

The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis.

Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities and as such investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options," at http://www.theocc.com/components/docs/riskstoc.pdf If you are unable to access the website please contact Deutsche Bank AG at +1 (212) 250-7994, for a copy of this important document.

The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited.

Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting.

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Page 27: Larc2014 - Spotlight on Mexico

27 SWIFT Latin American Regional Conference (LARC) - 2014 28-28 May 2014

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SWIFT

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Sergio Luna Alexis Milo

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Spotlight on Mexico

Spotlight on Mexico

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