IMF Executive Board Concludes 2018 Article IV Consultation with Mexico

Thursday, November 8, 2018

Press Release by IMF

On November 5, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Mexico.

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The Mexican economy has continued to exhibit resilience in the face of a complex environment. Output has grown at a moderate pace while inflation declined, although it remains above the central bank's target. The flexible exchange rate has continued to be a key shock absorber. Fiscal consolidation is on track, monetary policy has maintained a tight stance, while financial supervision and regulation remain strong.

Growth is expected to accelerate modestly in the near term, reaching 2.1 percent in 2018 and 2.3 percent in 2019. Private consumption remains the main driver of activity, supported by manufacturing exports. Private investment strengthened somewhat in recent quarters but continues to be held back by uncertainty, including, until recently, about Mexico's future trade relationship with the United States. Headline inflation has declined notably over the past year but has most recently accelerated somewhat to 5.0 percent in September amid rising energy prices. Core inflation has returned to within the confidence band.

The authorities continued to adhere to their fiscal consolidation path and further tightened monetary policy. The 2018 public sector borrowing requirement target of 2.5 percent of GDP is projected to be met. Better-than-projected revenue performance in part reflecting improvements in tax compliance is expected to be broadly offset by higher-than-budgeted non-programmable expenditures. Public debt is projected to continue to decline to around 53 percent of GDP from 54.3 percent in 2017, thanks to a primary surplus of 1.3 percent of GDP. The central bank further tightened monetary policy, increasing its policy rate in three steps from 7 percent to 7.75 percent between December 2017 and June 2018 amid upward inflation surprises and an uncertain external and domestic environment.

Mexico's external position remains broadly consistent with medium-term fundamentals and desirable policy settings. Staff projects a broadly unchanged current account deficit from last year and a slight widening 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 risk in terms of capital flows reversal and increased risk premia.

Executive Board Assessment[2]

Executive Directors noted that Mexico's very strong policies and policy frameworks, along with important structural reforms, have underpinned its resilience to a complex external environment. They noted that Mexico's external position remains strong and welcomed the conclusion of the new trade agreement with Canada and the United States. Looking forward, Directors viewed the global economic environment as challenging, and underscored the need for continued sound economic management and perseverance with the structural reform agenda to boost growth, improve living standards, and reduce poverty and inequality.

Directors commended the authorities for adhering to their fiscal consolidation plan and welcomed the commitment to fiscal discipline and to put the public debt to GDP ratio on a downward trajectory. Strengthening the fiscal framework by setting up a non partisan, adequately financed fiscal council with a formal mandate to independently evaluate policy would add credibility to the administration's plans. Directors highlighted the need to boost non oil tax revenue and cautioned against the introduction of tax exemptions or reduced rates which could create distortions and erode the tax base. They saw scope for boosting VAT and fuel excise revenues and strengthening tax administration. Directors also recommended restraint in current spending and improvements in spending efficiency to create room for much needed infrastructure investment and other priorities. They underscored that a strengthening of Pemex's financial situation was a prerequisite to contemplating new investments in refining.

Directors considered the current monetary policy stance appropriate. Going forward, they encouraged the Banco de México to remain prudent, vigilant and guided by data developments. The policy rate could be gradually reduced once inflation is firmly on a downward path, expectations remain well anchored, and uncertainty recedes. Directors commended the central bank for improving its communication strategy. They emphasized that the flexible exchange rate should remain the key shock absorber for the Mexican economy.

Directors noted that the financial sector remains resilient and supported continued close monitoring. They welcomed the authorities' efforts to increase financial deepening and inclusion and to regulate the rapidly evolving Fintech industry. Directors noted the positive role of development bank lending in promoting financial inclusion. They encouraged the authorities to close remaining gaps in the regulatory framework to enhance the effectiveness of supervision, and to strengthen the resolution and crisis management framework. Further enhancing the AML/CFT framework also remains a priority.

Directors emphasized the need to rekindle the structural reform agenda to boost growth and reduce poverty and inequality. They urged the authorities to fully implement the National Anti Corruption System. Directors called for a continuation of the energy sector reform and private participation in the oil and gas sector to bring in necessary investment and boost production and growth. They noted that better enforcement of labor market regulations, the introduction of unemployment insurance, improvements in the defined contribution pension system, and a strengthening of the social safety net would encourage formal employment and help reduce poverty and inequality.

Sources: Mexico authorities; and IMF staff estimates and projections.

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.

[1] Under Article IV of the IMF's 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 discussion 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: