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IMF Executive Board Concludes 2019 Article IV Consultation with Mexico

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Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2019 Article IV Consultation with Mexico







November 5, 2019















On November 4, 2019 the Executive Board of the International Monetary Fund
concluded the Article IV Consultation

[1]

with Mexico.

The Mexican economy has continued to exhibit resilience in a complex
environment, but growth has come to a standstill amid elevated policy
uncertainty, tight monetary conditions, and budget under-execution. The
authorities’ commitment to fiscal prudence is strong, monetary policy has
succeeded in bringing inflation to target, and financial sector supervision
and regulation remain robust. The flexible exchange rate is playing a key
role in helping the economy adjust to shocks.

Growth is expected to accelerate modestly in the near-term, reaching 0.4
percent in 2019, as macroeconomic policies become less contractionary. It
is projected to recover to 1.3 percent in 2020 on the back of strengthening
consumption and despite continued weakness in investment. Headline
inflation is projected to remain around the central bank’s target of 3
percent, while core inflation is expected to gradually decline from
elevated levels amid still tight monetary policy.

Fiscal policy remains prudent. The authorities adhered to their 2.5 percent
of GDP fiscal deficit target in 2018 but are projected to narrowly miss the
same target in 2019 due to a weak revenue performance. The authorities’
current medium-term targets would keep debt broadly stable at around 55
percent of GDP. However, in the absence of additional measures to raise
revenues or reduce spending, a fiscal gap of 0.5–1.5 percent of GDP would
emerge during 2020–24.

Monetary policy has started easing in the context of a widening negative
output gap and declining inflation. The central bank reduced the policy
rate in two 25 basis point steps in August and September to 7.75 percent.
Meanwhile, it did not intervene in the market, which allowed the peso to
adjust freely to shocks.

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Mexico’s external position remains broadly consistent with medium-term
fundamentals and desirable policy settings. Staff projects the current
account deficit to narrow this year and to widen modestly over the
medium-term. Foreign exchange reserves are adequate according to a range of
indicators, while the FCL continues to provide an effective complement in
reducing risks. However, the strong presence of foreign investors leaves
Mexico exposed to greater risks in terms of capital flow reversals and
increased risk premia.

Executive Board Assessment

[2]

Executive Directors commended the authorities for the continued maintenance
of a strong policy framework, which contributed to the resilience of the
Mexican economy in the face of elevated uncertainty. Noting these risks and
the recent slowdown in growth, they highlighted the need for steadfast
implementation of sound macroeconomic policies combined with an
acceleration of structural policy reforms to foster strong, sustainable,
and inclusive growth.

Directors welcomed the authorities’ resolve to maintain fiscal discipline.
They stressed, however, that more ambitious fiscal targets were necessary
to put the public debt ratio on a downward path. In this context, they
underscored the need to increase non-oil tax revenues. They saw scope for,
strengthening revenue administration, rationalizing tax expenditures,
raising subnational taxes, and making the tax system more progressive,
while also enhancing public expenditure efficiency. In this regard,
Directors also saw merit in establishing a fiscal council to support the
administration’s commitment to fiscal responsibility.

Directors urged the authorities to revise Pemex’s business plan to
strengthen its financial position and reduce risks to the budget. Directors
underscored the need for Pemex to make progress in selling non-core assets
and provide credible plans to reduce operating costs to strengthen
profitability. Increased cooperation with private firms could also bolster
production and diversify risks.

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While being mindful of risks, directors saw scope for easing of monetary
policy, as long as inflation stays close to the target and inflation
expectations remain anchored. They commended the Banco de México’s
continued efforts in improving its communication strategy, which would help
provide greater clarity and effectiveness to monetary policy. They noted
that exchange rate flexibility should remain a key absorber of shocks,
foreign exchange intervention should be limited to incidences of disorderly
market conditions.

Directors noted that the financial sector remained sound and emphasized
that resilience could be further enhanced by closing gaps in the regulatory
and supervisory framework. They welcomed efforts to boost financial sector
competition and inclusion and considered that a multi-pronged strategy to
further boost competition and inclusion should be a policy priority going
forward.

Directors underscored that reinvigorating the structural reform agenda is
an imperative to foster strong, sustainable and inclusive growth. They
emphasized the need to reduce corruption, labor informality, and enhance
the rule of law by strengthening the AML/CFT framework and implementing the
National Anti-Corruption System (NACS). Lowering participation barriers for
women and removing constraints to trade in services could narrow the gender
gap and boost activity. Directors considered that, in general, labor
informality could be addressed by reducing entry costs strengthening
enforcement and replacing hiring and firing restrictions with an
unemployment insurance scheme.



Mexico: Selected Economic, Financial Indicators 1/

(2015–2019)

2015

2016

2017

2018

2019 2/

(Annual percentage changes, unless
otherwise indicated)


National accounts and prices

Real GDP

3.3

2.9

2.1

2.1

0.4

GDP per capita in U.S. dollars 3/

9,674

8,816

9,373

9,786

10,064

Gross domestic investment (in percent
of GDP)

23.3

23.8

23.0

22.7

21.6

Gross domestic savings (in percent of
GDP)

20.6

21.5

21.2

20.9

20.4

Consumer price index (end of period)

2.1

3.4

6.8

4.8

3.1

External sector

Exports, f.o.b.

-4.1

-1.7

9.5

10.1

2.2

Imports, f.o.b.

-1.2

-2.1

8.6

10.4

1.2

External current account balance (in
percent of GDP)

-2.6

-2.2

-1.7

-1.8

-1.2

Gross international reserves (in
billions of U.S. dollars)

177.6

178.0

175.4

176.4

178.0

Outstanding external debt (in percent
of GDP)

35.6

38.3

37.7

36.6

37.4


Nonfinancial public sector (in
percent of GDP)

Government Revenue

23.5

24.6

24.7

23.5

22.8

Government Expenditure

27.5

27.4

25.7

25.7

25.6

Augmented overall balance

-4.0

-2.8

-1.1

-2.2

-2.8

Money and credit

Financial system credit to the
non-financial private sector

14.8

16.5

10.8

8.8

6.9

Broad money (M2a)

12.2

12.3

11.2

5.5

5.1

Source:

1/ Methodological differences mean that
the figures in this table may differ
from those published by the
authorities.

2/ Staff projections.

3/ IMF staff estimates.

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[1]

Under Article IV of its Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussions by the
Executive Board.


[2]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.imf.org/external/np/sec/misc/qualifiers.htm

.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Maria Candia

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson








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