Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) Earnings Call Transcript & Summary

Good afternoon, and welcome, everyone, to this new addition of BBVA strategic talks which today will be focused on BBVA research views on the global macro environment and the outlook for our core markets. It's my pleasure to be joined today by [indiscernible] BBVA's Chief Economist, together with Mirel Cardoso, Carlos Serrano and Seda Golder, Chief Economist for BBVA Spain, Mexico and Turkey. Here with me in Madrid, are -- here and Miguel and connected from Mexico and Turkey, we have Carlos and Seda as well. Today, the team will start sharing their views on the latest economic development and key challenges and opportunities in our core markets. After the presentations, we will open the line to take your questions in the live session. As we are currently in our blackout period, I will kindly request you to limit your questions to macro and financial system related topics. Unfortunately, we will not be able to address any topic related to the bank's performance. So thank you in advance for your understanding. In any case, I hope you will find this session useful. And I strongly encourage you to participate and make the most of it given the expertise and on-the-ground knowledge of the BBVA economic team on our core markets. With that and without further delay, Jorge, the floor is yours.

Thank you Patricia for the invitation, and thank you for those of you that are attending this call. The idea here today is not to give a comprehensive discussion on how we see the global outlook on our footprint countries. But rather to tackle the main issues that you have commented to the IR team that you're interested in basically in the 3 areas of Spain, Mexico and Turkey. I will just give a short introduction on global issues, but only on the ones that I think are relevant for some of the elements that we're going to share with you in each of the 3 geographies. In any case, if we missed in this presentation issues that you're concerned about, be it about these countries or others in which we're based, happy to answer your questions. So let me start with the economic outlook for this year and 2027. And with a very simple framework in which we all need to analyze what's going on. There are two tectonic forces that right now are significantly affecting the economic outlook, and they're doing it across different horizons. And so they are having an impact, not only on the very short term, but also on the forces that shape our views about trend potential growth, for example, but also how we think in terms of the changing of economic regimes that we might be seeing in different parts of the world. Of course, those 2 tectonic forces are related to geopolitical concerns. There are many elements that fall under this definition that we are focusing on conflicts on strategic rivalry on tariffs, protectionism, the use of choke points, strategic autonomy, defense, and those are gaining importance in the economic analysis. On the other hand, we have the transformation that the AI is injecting into many economies. The channels are better understood probably. But the extent of the impact, the scale and scope of what might mean for different countries and sectors is far from. At the same time, we do know that when we go to longer horizons, demographic migrations play a role as they do climate events. But in any case, the main point here is that many of the elements that we are trying to understand in terms of building a scenarios and doing projections are very much related to these long-term issues. Now together with Russia invasion of Ukraine, the main visible due event, of course, these days of this month is related to the attacks on Iran by the U.S. and Israel. And this is changing the dynamics on a daily basis in terms of the geopolitical tensions and in terms of the impact on oil and other prices on the supply chain. We're now in a again, complicated period to understand. But to put it in perspective, we're still our geopolitical risk that we consider lower than the ones we have been witnessing over the previous months. And on the other hand, when we look at oil prices and gas prices, we're not only below the levels that we have been seeing over the previous months. But in any case, those relatively high levels were, in any case, lower than the ones we had in the Russia-Ukraine innovation, especially if you looked at them in real terms. This is something that can change very, very quickly. It is complex. But in any case, we build our projections in the baseline scenario with the idea that although many elements remain in place as the agreement between the 2 countries doesn't incorporate a clear road map on many of the issues where they still have differences, the conditions are still set in place for -- to expect a decline in oil prices going forward, which is what we have. Now our path is or has been higher than the path that we have been having over the past 3 or 4 weeks, it can be higher than what we have in our projections, if things turn sour, from where we are today. But in any case, we have this ingrained in our model. So this baseline scenario of oil prices is what we use to do the projections. Now with all this in mind, we have a relatively benign outlook for growth given the shocks that we are getting. The U.S. will grow over the next 2 years over 2%. The Eurozone is going to suffer a little bit more. And we have recently revised down our forecast on account of having a larger impact of what is happening in the closure of atoms but also because we have now some issues of high volatility growth in Ireland that is also changing number in the Eurozone. On China, we are relatively comfortable with the projection. The weakness that we have seen in the latest data is overall in line with with not only with what we expected, but what the government expected and is unlikely to trigger any type of measures that, for now, that will change that forecast. Many of what is happening depends on the AI boom, as you probably know. This has become even more salient in the recent revision of Q1 data in the U.S. as consumption has been revised down and basically investment mainly related to AI is supporting growth. But that support of growth is also having a spillover beyond the U.S., not only because this is something that other countries are also investing in the AI boom. But as you can see on the right-hand chart, there is a lot of imports that the U.S. needs in order to feed all the investments that they are undertaking in this sector right? And what you see on the chart on the right is how many points of growth it adds or it abstracts in terms of exports and imports. The other issue that very much related to geopolitics that in Europe is playing a significant role and in the U.S., it will as well, that the expenditure is already significant. So the margin is not going to be so so much is on defense, right? And when we -- what we see when we analyze the impact of all the shocks that we have been having on the euro area, many of the revisions have been to the downside in terms of uncertainty, tariffs, for the time of strength of the euro, et cetera, but fiscal expenditure, which is mainly related to defense has been supporting growth significantly. And by the exercises that we have made on multipliers in Europe on defense spending, this it has long lags but it's relatively easy to see multipliers that should be larger than 1. And in some cases, over the short-term period significantly higher than or slightly higher than 1.5. The variable where we're seeing more impact in terms of what is happening in Iran is related, of course, with inflation. So we have had to increase the forecast inflation due to increase in oil prices. But beyond that, we are seeing very little second-round effects, not even very clear effects on transportation costs of other goods, including agriculture, so for now, we're relatively comfortable and not to speak about wages or inflation expectations, which are very contained. So for now, we're relatively comfortable with core inflation that are going to be between 2% and 3% in the U.S. and Europe. On HCP, of course, whatever happened with oil prices is going to be very, very significant. Now this generates, of course, a difficult environment for central banks. It's very difficult to deal with negative supply shops, so consecutive negative supply shocks. They are starting to communicate in their own ways how they want to address this type of shocks. But we still think that there is sufficient room to think that the baseline scenario for the Feds is still to wait throughout the next months and probably until the end of this year and then see how things are settled down. In the case of Europe, similarly, they increased interest rates as they receive that this was a robust move in the context of being an adequate move in all these scenarios, but let me remind you that inflation right now is lower than even the lowest scenario. So probably in the realm of views of what the ECB is going to discuss in the next few months that probably this increase in interest rates and second-round effect is probably going to be enough. Having said that, we are all, I mean, all very conscious that in this world where we have this long-term tectonic forces playing the ground -- at the same time, the likelihood that we have to attach to a particular scenario is especially low is probably lower than the ones that we have been able to build since the global financial crisis and since the pandemic. So we are, again, in a period where we have to understand that many elements can change the scenarios. And in this regard, is not only that the probability of the baseline is lower, but is that many different scenarios on the positive where the negative sides depending on demand or supply shocks, which would be positive or negative. And here, we pencil in for you, some of the ones that were following in terms of attaching probabilities is very relevant for the analysis. And to finalize my part before I give the floor to Miguel, just a couple of issues on Geo strategy that I have not touched upon in this presentation, but as I said, I think it might be relevant for -- it will be relevant for some of the analysis in our footprint. I mean, the first is that tariffs are having an impact on trade. But at the same time, growth is sufficiently large and the needs of different countries continue to exist that what is happening is that global growth continues to increase at a relatively solid pace. U.S. imports are booming, especially in the AI, as you can see here. But the composition of imports is changing and due to tariffs and due to concerns about geostrategic issues and many others, what we're seeing is a change in the import dynamic pattern in the U.S. It's not only that they import more of certain AI-related projects, but also that they import more from countries that have less tariffs than others. And in this regard, in addition, of course, of South Korea, Vietnam and Taiwan, Mexico is 1 of the countries that has been able to gain significant market share in Europe. The second element is that geopolitics is not only something that we look in bacon. I mean, we do think, as I said before, that this has been going on for -- I didn't say it, but it has been going on for some time, and that is why we think it is from -- it has a structural nature, as you can see, basically since the global financial crisis, all the indicators that we can build in terms of internal geopolitical risk, external risks. So we put them together in this global structural geopolitical risk index has been increasing since the global financial crisis. And we see that when we run the upgrade regressions, it does have an impact on trade and certainly on FDI. So even though there's a lot of sectoral noise, there is an impact of all these elements and how the world is changing. Turning to my last 2 comments and going back to the short term. So the conflict in Iran is already having an impact on portfolio flows. You see it every day, there seems to be -- there is preference for the U.S. and rather than the euro area when we looked among developed economies when we looked in emerging economies, taking away China, there is a preference to Lat Am, including Mexico and Central America and emerging markets ex Asia. There seems to be a trend to continue pumping flows into these countries, south of the U.S. In part, this is related to the fact that there is a there is an idea which accompanies the booming in terms of minerals certainly and energy-related concerns, but there's also an issue of being away from the conflict, right? And this is another way in which using short-term data, we try to analyze the impact of geopolitical analysis or conflicts on CDS in real time. Of course, those are mainly driven by what happens in short-term interest rates and the VIX volatility and economic conditions. But when we cluster together all the short-term geopolitical indexes, they do have an impact. And what we find is that they have a special impact when combined with other effects. So financial markets and geopolitical it generates nonlinearities in the reaction of financial markets. But all this to say, when you look to the right-hand side, and this has happened with the Russia invasion of Ukraine with the attack from Hamas, the terrorist attack on Israel and the Israel conflict, the distance that Latin America has from this conflict basically explained the reason why the markets seem to be validating the chart that I put before, which is that this area is an area where where flows typically have gone in the recent past. So that would be on my side for the introduction, Miguel, please.

Thank you, Jorge, and thank you all for listening. And from my side regarding the Spanish economy, what we see as an extension of the current expansion that we are seeing in terms of GDP growth, in terms of employment growth, our current forecast are for GDP to grow 2.4% in 2026. At 2.1% in 2027. Now this is based on the fact that currently, what we are seeing is a relatively strong economy. Quarter-on-quarter growth currently, we estimated at 0.7%. So in an annual annualized growth rate, we are seeing that growth remains between 2.5% and 3%. As you can see in this graph, this real estimation compares to first quarter growth that stayed at 0.6%. And this improves in our forecast from the first quarter where we were expecting growth to slow down over the second quarter. So we haven't seen a slowdown related to all this foreign uncertainty, the increase in oil prices and in the country, what we're seeing is that at least the job creation data and any real-time indicator is pointing towards at most the stabilization in terms of growth in the economy. So -- and this, as I said, is despite the fact that the external environment is not very favorable for the Spanish economy, specifically this comes we were revising downwards our GDP growth forecast for the eurozone as you can see in the left-hand side of the slide, we revised our growth forecast for Europe from 1.1% this year to 0.7% as incoming data was disappointing. And the impact of this higher energy prices was expected to be negative on the European economy. We not only revised downwards our 2026 GDP growth forecast, but we also revised our 2027 GDP growth forecast to the downside. And this is having a negative impact on our perception of how exports, specifically exports of goods are going to perform or are performing at this moment in Spanish experts of goods. As you can see from our forecast, we're thinking that this is pulling down the ability of the industry to grow, expanding exports are expected to drop this year by 1.2%. And then to recover as we get more favorable scenario for the Spanish economy in 2027. But for at least the short term, what we are seeing is that this is affecting negatively a part of the Spanish economy, basically the industry along what is happening in terms of the impact, for example, of Chinese exports towards the Eurozone and the effect that it's having, specifically in the automobile sector. But despite this, what we're seeing is this strong recovery, specifically as a result of relatively dynamic sector, the exports of services, which are performing relatively well, what you have here on the left-hand side of this slide is exports of tourism services, consumption of nonresidents. We see the number that the National Institute of Statistics published and then the data that we get from the expenditure that foreigners do on point-of-sales terminals owned by BBVA. You can see that even as we are having this relatively high uncertainty in the world scenario, what we are seeing is an acceleration of this kind of expenditures. We expect this to continue as geopolitical risk is probably going to deviate or is already deviating. There is some evidence that this is happening. It's already deviating visitors from other that would have gone to other destinations that they are now coming to Spain. And as you can see, year-on-year terms, we are seeing growth of this type of consumption around 10%, double digits. And what we think is that this is going to translate on is that -- as you can see, the resiliency of nonresident consumption is going to remain and is going to post growth that is going to remain above GDP growth the next following 2 years. But it's not only exports of tourism services as important is what is happening to the exports of non-tourism services. You can see here on the left-hand side, the average growth rate between 2025 and 2026 of this kind of exports around 7% yearly average growth, and that has increased towards 14% average growth between the years 2021 and 2025. You can see that this is even more or less even distributed between what is happening in information and communication technologies, transport services, business services that includes engineering services, financial services, trade-related services. All of these are sectors that have relatively high value added. And as you can see, we are also thinking that there is capacity to keep growing and therefore, for growth in this part of the economy to again exceed GDP growth. Third, a big part of why we're seeing this growth in export services in -- specifically in tourism and non-tourism services is the impact that immigration is having and it's not slowing down. As you can see in the left-hand side of the slide, what you get is several indicators related to tourism. If they remain above 0, they are normalized. So if they remain above 0, it means that immigration is continuing to grow. And therefore, what we are seeing in 2026 is that this immigration push is continuing. As you know, there is this policy announced by the government, an ongoing process of regularizing immigrants in Spain and this is going to probably add to the impact in employment. We are thinking that in 2026 and 2027 job creation is going to remain between 450,000 to 550,000 jobs per year, which is quite an extraordinary number for Spain. Fourth, what we think is that even the scenario, what we are experiencing is strengthening on the growth of domestic supply, specifically in consumption. Consumption remains a key driver of growth. What you see here is different factors that are supporting consumption and spending by households. As you can see, in real terms, gross disposable income is growing at a rate around between 2% to 2.5%. Housing wealth. I'm going to talk a little bit about the problems in the housing sector. But a big majority of Spanish households are real estate owners. So as long as prices keep increasing, that's also adding strength to their willingness to spend. Interest rates remain relatively below what we would have on a historical average. So this would be a level that is attractive for households to take on and credit, and therefore, what we are again thinking of is an average growth rate in consumption that would surpass historical average and remain between 2% to 3% on a year-on-year basis. And this is also going to be a particularly favorable environment for investment growth. Specifically, one kind of investment is residential investment, which we think that is going to increase because all the key variables that normally support residential construction are going to remain favorable. Household formation is going to remain around 200,000 as in the previous years. Home prices are going to keep going up. There you have our forecast for 2026 and 2027. So this is going to increase the profitability of projects. Interest rates are going to remain again, relatively low by historical standards. And therefore, as you can see, we expect residential investment to accelerate over the short term, and this is going to also be accompanied by other type of investment. I haven't mentioned the ending of NGU funds, but this is going to also increase investment in Spain, but also what we have is this increase in defense expenditure that we're seeing in the left-hand side of the slide, what you see is this commitment that the government has announced regarding a specific defense-related projects that amount to between EUR 20 billion to EUR 25 billion. It is true that Spain does not have a relatively big defense industry. As you can see on the right-hand side, what you would expect to be directly affected what we would expect to be traditional defense represents a relatively small share of value added. But if you go and try to follow which other sectors can benefit from this increase in defense expenditure, what you get is that around industries that represent around 2% to 3% of value-added in the Spanish economy could benefit. And if you extend that to services that could also potentially benefit from this higher spending in defense, you could get to even around 15% of the value added of the Spanish economy. Finally fiscal policies being relatively expansionary. You can see here that since 2022, the discretionary fiscal impulse has amounted to between 1.5% to 2% of GDP. This is going to support the economy in 2026. Unfortunately, going towards 2027, this is going to also explain why we see this slowdown going towards 2027 as some of these measures are going to expire. And therefore, this is going to substract from part of growth. Another advantage of the Spanish economy is all this investment that has been made and that has increased, as you can see in the left-hand side of the slide, the share of the participation of renewable energy in the production of electricity. And this is implying, as you can also see that there is a favorable differential in the price of electricity in the wholesale market. Unfortunately, there are some structural issues regarding infrastructure that are not supporting the translation of this favorable gap that we see in the wholesale electricity prices towards inflation, and this is, again, a structural challenge towards the future remains elevated when compared to the Eurozone. What we see is that the difference between domestic inflation and the Eurozone inflation right now is expected to remain between 0.5 percentage point to 1 percentage point. And talking about the structural challenges, the 1 related to housing is very important. We estimate that what you see here is that the housing deficit in Spain and is measured by the difference between household creation and the number of units that are being built in Spain could reach around 800,000 by 2027, 2028. And it's going to -- even with this acceleration that we have in investment in the housing sector, that would be just enough to stabilize the deficit that we are that we are witnessing. It would take an acceleration towards levels of investment in housing close to 10% of GDPs, levels that we only saw in 2007, 2008 at the peak of the bubble, the in order to reduce that deficit that we are seeing. And finally, in terms also of structural challenges, going forward, we are seeing a strong recovery of the Spanish economy. GDP could go to amount to somewhere around between 15% to 20% or to reach levels 15% to 20% above what we had in 2019, but this is a growth explained mostly by increase in employment, as you can see in this graph. But then when you begin to catch and try to measure the impact, for example, in wages you see that growth does not even reach 10% since 2019 and that productivity remains relatively stagnant. And this is basically one of the main challenges of the Spanish economy. And with that, I'll finish. Thank you. Miguel, let's cross the Atlantic and let's go to the Mexican economy. Carlos, please?

Thank you, Patricia and Jorge, and hi, everyone. And we're going to go now over the slides of the Mexican economy. Can we go over the next slide, please, because Okay. So first thing to convey to you is that the Mexican economy is going through a phase of low growth in 2025 was 0.7%. We have data on the first quarter of this year where there was a contraction on a quarter-on-quarter basis of 0.6%. And in general, the last year's in the previous administration and this administration, we have seen a period of slower than usual growth closer to 1% rather than the historical 2% of the last 3 decades. The main reason why the Mexican economy has been slowing down, especially last year and this year is what you see on the right-hand side, which is that investment is declining. This year, we have data in the first quarter. Investment declined 3% over the in comparison with the first quarter of last year. And in that quarter, growth had already declined 6.5%. Overall, investment since July 2024, has declined around 8%. And one of the main reasons of this decline is some uncertainty around institutional issues, in particular companies do not know well how the new judicial system is going to work, but also this deceleration in the past 2 years has to do with the fact that the Mexican government has been undergoing a fiscal consolidation process. And as a result, public investment has been declining. So this is one of the reasons of the slowdown. If we go to Nexon, however, one positive news on this front is that the government has announced that it will award 37 contracts to private companies to generate clean electricity. And we think this is a very positive development, first because it marks a sharp contrast with the previous administration were basically private participation in general on energy was completely shut down. Now this government has been saying that they need private investment in energy. And these contracts, I mean, they have not been signed. They have been awarded. We have yet to know how the contracts will look like. What is very positive that among the winners, we see some developers that have very good reputation and history not all of them, but the majority of them have that. And again, the fact that the government is willing to open the sector to prior participation. We think it's a positive signal. -- not only because this means higher investment in this sector, but also because this was one of the main bottlenecks that prevented Mexico to attract higher investment across many sectors to take advantage of near shoring opportunities, which we think are opportunities that are still there as we will see shortly. If we go to the next one, please. So as I was saying, the deceleration is explained mainly by a decline in investment. That decline in investment has meant a deceleration in job creation, which has meant a deceleration in consumption, which has been somewhat resilient but has decelerated. But on the components on aggregate demand, what is having a very good performance is exports. Exports, we have data on, they have been growing at 28%. And the main reason is that despite all the noise, Mexico has a much better access in terms of tariffs to the U.S. market than basically all the rest of the countries. It's probably with Canada. So Exports have been growing at -- as I was telling you, at a very strong pace. That being said, this has been a recomposition on the Mexican export base where exports of automobiles are flat and declining a little bit. That has been declining 0.5% in part because demand in the U.S. has been flat, but also because, in particular, that sector has been hit with a 25% tariff, basically, a tariff that has been applied to every country, except some countries that have been able to negotiate better tariffs such as Japan, Korea and the European Union that faced 15% tariffs. Mexico is still in the process of negotiating that. In Mexico, is able to get also a 15% tariff. We think it will remain competitive. But so far, these 2 factors are resulting in the fact that our exports are flat. But on the other hand, the rest of exports are doing quite well. And in particular, exports of computer equipment have been doing really well. They have been growing in the period January to May, they've been growing at 73%. And the main reason is that Mexico has been able to in this boom of AI investment that Jorge was mentioning and as a result, exports in that sector are doing quite well. Breaking overall, the fact that Mexico is able to export are 2% of total exports tariff free to the U.S. is one of the main reasons that explain that the external sector is having this very good performance. If we go to next one, please. So with all this, we are expecting the economy to gradually recover. Our estimate for this year is 1.2%. We think it will go 1.8% next year. So a rate recovery as some of the uncertainty is fate, and we see more investment in particular, this private investment in energy. If we go to next one, please. Now on inflation, just I will mention that inflation is becoming quite well. There was a significant increase in inflation in the first quarter where general inflation reached 4.6%. But basically, that was explained by some temporary supply shocks, some special taxes that were introduced at the beginning of the year, some weather issues that resulted in a significant increase in agricultural products, but those shops as was expected, had been fading. And now inflation in Mexico is at levels at the historical levels before the postpandemic inflation search. Inflation is at 3.4%. Within the next couple of months, we're going to see some negative base effects and probably it can go up to 4%. But basically, we are seeing a situation where inflation is behaving the same way that before the postpandemic inflation search. And as a result, as you know, the Central Bank cut interest rates 2 times this year. You can see here the behavior of monetary policy rate. And what we think is that we're going to see a long post in monetary policy within these rates of 6.5% will stay there for the remainder of this year and most likely during all 2027. Just to mention something some analysts were worried about the fact that the Central Bank was easing monetary policy, while the Fed was in a pause, and that has resulted, of course, in decrease in the differential between monetary policy rates in Mexico and the U.S. you can see -- if we can go back just 1 just for a second, you can see the green line differential has been, of course, declining and is now at low levels. But now if we go to the next one, we think it is warranted to have this lower differential because if we compare that with previous periods, we see that inflation relative to the U.S. in Mexico, is lower that the exchange rate is stronger than volatility is lower. And in general, country risk indicators are performing better. And not only that, probably 1 of the main reasons why a lower differential is warranted is the fact that because of a pension reform in 2020, local capital markets are growing at a very fast pace, and that means that Mexico now is a country that is much less dependent on foreign inflows. And basically, the government can now it could even finance its entire -- as of next year, the issuance program within local markets. If we go to next one, please -- and this issue of or better fundamentals in terms of what's going on with local capital markets. The fact that the government has been ongoing fiscal consolidation program and the fact that despite all the noise, Mexico appears to be more integrated with the U.S. and that Mexico has had this preferential treatment to export to the U.S. have resulted in that basically all relevant country risk indicators have been improving for Mexico. They had a bad period when the conflict in the Middle East began. But after that, they have been been well. If we go to next one, please. Talking about USMCA, First, as you can see on the left-hand side, Mexico and Canada are facing the lower levels of relative protectionism in terms of weighted average tariffs to export to the U.S. As I was telling you last year, 82% of Mexican exports to the U.S. were tariff-free because, as you know, in terms of provision that not taking into account tariffs, mainly on autos, steel and aluminum. -- whatever goes through A go stay free. And that is a very big advantage. Not only that, if you see on the right-hand side, the Chinese content on Mexican export is way lower, for example, to what you see in Vietnam. So we think that Mexico is in a good position to gain comparative advantage to export to the U.S., not only vis-a-vis China, but also vis-a-vis other East Asian countries that are facing higher tariffs and not only that -- these are countries that have much larger content of Chinese inputs, and that should result in a better treatment for Mexico. If we go to the next one, please. Just to mention, what's going on with USMCA. As you know, USMCA is set to expire in 2036. But beginning this year, there are going to be annual revisions to the agreement. And at any point from now until 2036, the agreement can be extended and can be extended for 16 years. A few weeks ago, the U.S., the USTR announced that they were not going to renew the agreement. That was completely expected. That was our base case scenario, but also the market was expecting that the day of the announcement, nothing happened with the CDS spread nothing happened with the exchange rate. And the reason is we think that the U.S. will maintain some leverage with the possibility of extending the agreement. That being said, our base case scenario that the agreement will go forward. And the main reason why we think this is that on this, the U.S. government has been consistent. Last year, when the tariffs on a liberation day when imposed to basically all countries. That's when the U.S. had whatever comes to U.S. MCU will be tariff-free. And that was again the case this year when the Supreme Court declared those tariffs legal and the U.S. used another section of tradeco. Again, there was an exception for U.S. and we think that explained by the fact that there's an acknowledgment in the U.S. that Mexico helps the U.S. to be more competitive through complex value chains and in particular, it helps us to be more competitive vis-a-vis. So our base case is that we will go on annual revisions. And at some point, the agreement will renew -- but as long as we are in this equilibrium, we think it's a positive equilibrium, for Mexico where most goods can be exported tariff free. If we go to next one, just to finish 1 last section on the financial sector, just to begin with, we think that there is still scope for credit to increase above GDP growth for several reasons. One is this that you can see in this chart, the level of credit to GDP in Mexico has not yet recovered the level that it had before the 1994 crisis. It was, as you know, a very significant crisis that resulted in the insolvency of most banks. And as a result, bank credit declined for several years, and we are still not there at that level. If we go to next one, please. Not only that, Mexico is well below in terms of credit over GDP not only, of course, in comparison to advanced countries, both in comparison with most of its peers. So just a normal process of convergence to have credit penetration similar to other Latin American countries can -- will mean that credit can keep on growing above what the economy is doing. And if we go to next one, please. And this issue with low credit penetration that is a result of informality that that was the result of a banking crisis in '94 has meant that in the last couple of decades, as you can see on the right-hand side, credit to the private sector has been growing significantly above GDP. And we think that we have some conditions that will allow this to continue to happen, in particular, the fact that we are seeing a digitalization program by the Mexican government. So as long as we see this progress in bank penetration, we think this is a banking system that can grow above GDP in the years to come. And with that, I will stop the Mexican section. Thank you for your attention.

Thank you, Carlos. Let's now turn to Turkey. Seda, please, floor is yours.

Thank you. Thank you very much, Laura. Patricia and the team. So you present share the presentation. Okay. Okay. Thank you, everyone. I will start the general perspective that we basically keep as an assumption to understand the cyclical part of the story. So we are now in the third year of the disinflation program. But if you remember, the approach, we see the political preference remains to be taking the path for just a moderation in the GDP growth rates. As you see, we see still about 2% growth rates compared to the potential of 4.5% according to our estimates. So that has been the choice. And compared to the previous years, that moderation has also been in the domestic demand composition but the trade-off has been to keep the growth rate at just modest levels. As you see, the sacrifice ratio remains to be too low. And we continue to see the revisions in the Central Bank projections because in the beginning, we were observing very deep negative output gaps, the inflation report presentations, but later, in every report, there had been the operate revisions. And at the end of today, we see this is a repetition of the situation that the sensitivity remains to be seen over the GDP growth rates. Of course, this year, we have another external shock. And given the uncertainties on the [Audio Gap] growth rate this year. But again, the store is not changing. The sensitivity is staying there to keep that as a benchmark, especially for the economic policy mix. So in the next slide, since this has been the choice, this inflation is continuing, but the process is also gradually happening. As of June, the year-over-year CPI had reached 32% and we forecast 30% inflation for the end of this year. Of course, we have a slight limited normal price for the end of this year, which could be maybe around 29%, given the fast decline in the oil prices, but it is still high. And if you remember, the real appreciation of the currency has been the main anchors to keep this inflation process on track. And we think maybe that gap has already closed. If you take, for example, the PPI adjusted effective exchange rate adjustment, you see that convergence has already happened. And we see the stickiness over the headline CPI trends, Yes, it is, again, converging towards 2% monthly trend, but if you check the previous episode, I mean, half year, it has been hovering above 2%. So the stickiness is continuing, but the good point is the commitment to keep the program alive is still there. I didn't mention about it, but our main assumption is -- having an early election later next year, now the sooner election so that commitment could still be alive, and we can see a further gain over the inflation outlook before reaching the election cycle. And at the end of the day, again, if we come back previous slides, there will be the need to keep the real rates high in order to had that anchorage over the currency to keep that this inflation process on track. So in the next slide, if you continue with that. We need to think about the broader picture over the month-- it's not just the policy rate with that 5 to 6 percentage point rerates. We need to think about the mix of both the credit rules and the depot troughs in the banking sector. And on the left-hand side, you see how the Turkish deposit rates are hovering above the cost of funding, which has been, again, the other strategy of the Central Bank to keep tolarization under control below 40% levels you will see in the next slide. And on the other hand, the Central Bank is also managing the credit growth in order to keep it below the inflation trend and lately, they restricted further the monthly growth caps and they also narrowed the incentives and the exceptions of the rules. And right now, the control is further restrictive. And this is making the more restricted than the policy rate is implying. So this could be, again, the strategy going forward ahead of the election according to our view. In the next slide, and with that, this background, we see increasing demand for the Turkish assets. Of course, the Central Bank's motivation to keep the month currency. You see there has been a collaboration, but it is just a collaboration according to the new inflation part. The information targets for this story has not changed. And with that, we again see increasing demands for Turkish lira offsets, particularly for the Turkish lira swaps. Again, you see the fast decline in the offshore Turkish rates and the market has also become relatively more dovish after the Sanbank combination -- of course, this week, we had seen a slight uptick in the oil prices now question, made. Next week's MPC could be the starting point for the normalization towards the policy rate. Maybe there could be a few weeks delay compared to what we had talked before. But in any case, the perspective, the motivation is there to find a way to start the easing in the cost of funding as soon as possible. Of course, this is conditional to the inflation outlook and of course, the financial stability regarding the dollarization tendency of the residents. So in the next slide, -- in that perspective, if I start with the residence part on the right-hand side, you see the dotation stays under control. But this is, again, the main pillars of the general story that I'm trying to explain. Of course, we are closely watching the foreign currency flows of the foreigners are behaving, how the residents are reacting. On that front, you see the forgers increasing again, exposure. During March, the outflow was significant, but later as of the start of maybe April around that $5 billion came back to the start of July. But again, the exposure is very short term. We see again a higher inflow towards the care trade. But other than that, we also see flows into euro bonds and also the market. These are the good news, of course, to see but as long as the managed currency is there with the gain the guaranteed gain. We see this flow to continue to support the residence again, motivation today in Turkish lira as. So this is a toric that we need to check. So in the next slide, this is, of course, particularly important for the Santa Bank resource -- we understand the Santo Bank wants to keep the resource as strong as possible. Of course, the higher share of gold is an important pillar to check, but they they show themselves that they can be able to use the gold softs if something happens to support the foreign currency liquidity in the market. And if you check the high quality liquid foreign assets, it's also improving towards $40 billion today we had the additional week data, and it has improved about $40 billion in terms of that high for assets. So things are improving in terms of the flows. And as of June, as you see in the middle of the chart, the inflow of the Central Bank reserves have been the case. And finally, as of the end of last week, the gross amount, the growth resource has reached above $160 billion. So we understand this will be the main again anchored for the Cental Bank to keep that story as I tried to explain in the previous slide on track. So in the next slide, we are also questioning whether the tourism season could be one of the factors that we can see a threat, but it's not happening. They are closely watching our big data or our post machines transactions of the foreigners to understand how they're spending is changing on a daily basis. And as of June, we realized a similar level compared to last year. And if we make a forecast for the high season for the third quarter, you see a relatively stable outlook for this quarter. So it means maybe this year's tourism revenue targets could be achievable -- this is, of course, a strong buffer, which is also confirmed by the Central Bank reserves, as I tried to show in the previous slide. This is also supporting the activity -- we now cast, for example, as of June, close to 2.4% year-over-year growth. which was very similar, which is very similar to what we had seen in the first quarter. So in the first half, the growth will reach 2.5% year-over-year. We, of course, expect a slight recovery in the second half, which we finally reach 3% on average for this year. We are also closely watching how the external balance is reacting because this is particularly important, again, for the Central Bank resource and the motivation for both the foreigners and residents motivation for the Turkish savings. And on that front, risks are coming down. with the decline with the fires negotiations with the decline in oil prices, -- but this is still a delicate balance of risk. So we need to close the watch on the clause are happening. But regarding the financing, they do not see any risk. So this is 1 thing to highlight. We continuously see above 100% rollover ratios a higher demand for the treasuries, external borrowings, so things are relatively fine in terms of the financing story. So in the next slide, -- on the fiscal front, this is, of course, again, important to understand the policy mix. We think ahead of the next election, Monte policy will stay as the guard to the system, but we can see maybe some selective easing over the fiscal policy and income policies. And before that, of course, the current performance is important to understand the room available. And we see a relatively good performance in the revenues. Of course, the tax collection shifts because of the calendar effects and the, again, ships in the collection time. compared to last year's had affected the revenue performance year-over-year. But in terms of the trend, we do not see a much worse outlook as we observed in the first quarter of the year. And in terms of the noninterest spending, you see a controlled manage, which is moving part to the inflation. And you see finally the primary cash balance, it is still above 0. So we still generate a surplus in the primary balance, which is good to say. So it seems since last year's April, the fiscal stance has been relatively restrictive. But as of this year, we see relatively a stable outlook, but we are closely watching the nontrespanding manner. They are trying to keep it under control. And finally, on the employment outlook, the headline on employment rate is hovering around 8%, which is historically low. Of course, it doesn't mean the labor market is too tight instead if thing about the broader picture, the under utilization rate is above 30%, which is showing that the impact from this moderation in growth rates have been seen. But of course, the headline figure is portions and it seems it is relatively low, and this is basically keeping that commitment bar with the program. So it's all from my side. I can stop here.

Okay. Thank you very much, Seda. Thank you, Jorge, and the whole team for your presentation and insightful perspectives on the different markets. We are ready to move now on to the Q&A session. I don't know if there is any questions online. Operator, please, the first question.

[Operator Instructions] Our first question today comes from Marta Sánchez Romero from JPMorgan.

I got 2 on Spain. The first one, if you could share with us the in your view that the 2, 3 most urgent key policy changes we need to see in Spain and what the likelihood is a new government and parliament minus together the working majority that we may have done? And the second question is how worried we should be about the growth that we've seen low-income households, taking more leverage, how vulnerable could the balance sheet of banks be to a change in cycle given how the speed of growth that we've seen in the past few years from this segment that is more vulnerable to in the cycle?

Yes. Thank you for your question -- for your questions. Regarding the 2 or 3 key policy changes, probably I mean, obviously, there are lots of challenges for Spain, but currently, the housing problem is something that will, if not resolved relatively quickly, it could affect not only the macroeconomic outlook, consumption by households, but also, it could be a bottleneck for attracting human capital. So there is a land development, low proposal that needs to gather consensus in order to unlock homebuilding and therefore, to tackle this very important issue as prices are increasing and are, again, having a negative impact on expenditure and on the perception of households regarding the current recovery. Second, I would mention anything that would try to unlock also the -- and try to foster investment in the renewable sector. I mean the distribution of electricity -- the network is overcrowded, and we need further investment there in order for all this investment that has already been done to really push prices down and to reap the benefits of all the effort that has been done in order to transform the energy metrics in Spain. And finally, I would say the 1 of the key challenges going forward is going to be how to reduce the relatively high structural fiscal deficit that that the Spanish government has right now is somewhere around 3% of GDP, a little above that. And with the current challenges that we have on or the future challenges that we're going to have in terms of health expenditure, in terms of pension expenditure this is one of the things that the next government should tackle relatively soon going forward. Obviously, there are some long-term reforms that should also accompany this like improving education, specifically for the unemployed and to improve the education also for the immigrants to -- for them to reach the same kind of of human capital that domestic residents have. But I would say those are the 3 most important reforms ahead of ahead of the next government. And in terms of leverage, one of the things that we're seeing is that actually what we keep seeing is that credit in terms of GDP for households is relatively below what we see in the rest of the Eurozone. We don't see -- we are not seeing any signal any negative signal, for example, in nonperforming loans. It's not -- in fact, it keeps going down. So at least for the moment, it doesn't seem to be a problem this growth, this incipient growth that we are seeing in terms of credit.

Thank you very much. Next question please.

Our next question comes from Britta Schmidt from Autonomous Research. Please proceed.

Yes. I've got 3, please, 2 on Mexico and 1 on Turkey. With regards to Mexico, what is your view on the productive capacity in Mexico and the risk of replacing it within the U.S.? Or do you have a view on how Mexico can move products higher up the value chain. The second one would be whether you've quantified the impact of uncertainty and the lack of planning ability around the U.S. MCA annual revision process in terms of GDP growth. And then on Turkey, I mean in your view, what would need to happen to derail the normalization path, what are the largest realistic risks to the current situation?

Thank you. Can you please take the first 2, Carlos and then Seda.

Absolutely. Yes. Well, on the issue of productive capacity, I would mention that the probably main bottleneck in this issue is in terms of energy. -- many of -- we have been talking with our clients in the industrial parks, and they say that the main reason why they are not building more parties that they do not have enough supply of electricity at competitive prices. And on that aspect, I think the announcement that I was mentioning of prior participation to develop electricity generation, I think, is quite positive. Apart from that, I will mention that in terms of product capacity of firms, you still have some spare capacity. So that means firms can increase production without building more plants. So we still have some room over there. Again, I think the main issues in Mexico, more than with the capacity of firms and more with infrastructure, in particular, energy. On your second point, on the uncertainty around USMCA, we think -- and not only we think our impression by talking with clients is that that has not been a significant source of uncertainty because, as I was saying, despite the fact that we have these review processes, all the signals that are coming is that CA will go forward. It's true that the negotiations are going to be complex. It's true that some things are going to be changed. But there have been no seem that UMC will not go forward. It's true that it will -- it's not going to be renewed soon. But as long as -- we continue on the existing equilibrium that's a positive equilibrium. And again, no one I think expected that the agreement was going to be renewed. So I think that local uncertainty is more binding constraint. Again, firms are waiting to see how the new judicial is going to operate. And we think that, that has played a more significant factor explaining the decline in investment than USMCA uncertainty. And in fact, you can see -- you see a time series investment began to decline when the judicial reform was announced well before the uncertainty on trade gain. And in fact, there was not an inflection point when trade uncertainty began. So I think domestic reasons, domestic uncertainty is playing a larger role. I will stop it there, Jorge.

Okay. Let me continue with the question. Yes, we do not see that kind of motivation from the cooling alliance from the President so far. Of course, if your question is about a preparation for the next election cycle, yes, we assume that kind of preparation. But it seems as they also communicate that way, they want to make it as a selective by a target approach to introduce that kind of populist measures because we also understand the path that we go to the election cycle will generate different tactics, and we already started to see that kind of tactic on the political front. So if this is the case, the economic outlook, the economic policy mix should be keeping the guard for the system to sustain the regime. So in our view, that kind of commitments will be needed, and I understand our President also sees the picture that way. And so far, we see the full commitment support for the program for Sims management. Of course, there might be some pressures over the Central Bank resource as the gets closer to the time of the election. Of course, we don't know about the time of the election, but it seems we are getting closer to that, but it will not be that soon. Even though it is the case even though we see that pressure is growing, as we saw in the last 2 years, the current team, the current economy team is ready to tighten the policy further in order to provide again that financial stability to the system. So we do not see -- we do not that kind of unorthodox policies attached to the picture instead, we can see some select leasing in a targeted way and the commitment will still be there.

Yes. Just 1 comment on the Mexican issue. I should you be interested in our website, we do follow in real-time indicators of the geopolitical nature. We have economic policy uncertainty, trade uncertainty. What you see in Mexico going to your question is that although economic policy uncertainty typically goes between minus 1 and 1, which means that -- it's within the normal range, but it has been increasing. In trade policy uncertainty, it has been decreasing and is very close to minus 1, kind of showing or supporting what Carlos is saying and also pointing to you something that you can look at if you're interested.

Thank you very much, Peter, for your questions. Next question, please.