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Mexico - December 2019

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The IMF and Mexico: A positive report card

With Mexico teetering on the brink of a downgrade by the main credit ratings agencies, the International Monetary Funds (IMF) assessments of the governments economic policy stance and performance results are particularly closely watched. 

In this context, in mid-October the IMF released its annual Article IV assessment following a staff visit in late-September. This was followed, later in October, by a meeting between the IMF’s managing director, Kristalina Georgieva, Mexico’s Finance Minister Arturo Herrera, and the central bank governor Alejandro Díaz de León. 

The good news for the Mexican government was that, broadly speaking, it received a positive overall report card. The  IMF highlighted that the governments commitment to very strong policies and policy frameworks was reassuring, including a prudent fiscal stance and an orthodox monetary policy line, which had helped reduce inflation to the official target range (3%-5%). 

The flexible exchange rate has allowed the economy to respond to changes in external conditions, contributing to what the  IMFdescribed as a desirable set of policies. 

This praise will help alleviate some concerns among the investor community that the quality of macroeconomic policy might weaken under President Andrés Manuel Lopéz Obrador. According to this analysis, policy looks set to remain orthodox.  

Heavily prescriptive 

The concluding statement from the Article IV mission was heavily prescriptive. Although the above areas were highlighted as evidence of the Mexican economys strong points, the IMF devoted the majority of the statement to identifying areas in which the government should ideally focus. 

The  IMF specified weak GDP growth, budget cuts, and productivity-enhancing reforms as particular challenges. In terms of GDP, it is projecting growth of just 0.4% in 2019 and 1.3% in 2020, with risks tilted to the downside, in the form of a deceleration in global economic growth (which affects Mexicos open economy via trade and investment channels), financial market volatility, and uncertainty about the Mexican-US relationship.  

In terms of the public finances, the IMF welcomed the governments commitment to keeping the public-sector borrowing requirement (PSBR, the broadest measure of the fiscal deficit) to 2.2%-2.4% of GDP, which in turn would stabilise public debt at around 55% of GDP. 

However, at the same time the IMF raised concerns about weak revenue-raising capacity, meaning that if underlying economic conditions deteriorate (for example lower oil prices or weaker GDP growth) then there is little scope for a fiscal adjustment, aside from even more stringent budget cuts. 

The most obvious way of lifting non-oil revenue would be through increasing Mexicos tax take, which is extremely low by international comparison. The IMF calculated that levying value-added tax (VAT) on food, for example, would raise fiscal revenue by an additional percentage point of GDP. It also raised other possibilities, including reforms to local property and vehicle registration taxes, as well as the abolition of some tax breaks. 

Structural reform progress looks unlikely 

The IMF also called for a reinvigoration of the structural reform agenda. This has been a repeated call from the IMF for many years, which it views as a prerequisite for lifting long-term potential growth rates and improving social indicators such as poverty and inequality. 

Key among the recommendations are efforts to reduce labour market informality, improving security via better law enforcement, reforms to improve competition in the marketplace, and moves to restart the process of auctioning exploration and production concessions to private-sector oil firms.  

It is unclear to what extent the Mexican government will take on board the IMFs recommendations. Many, such as the measures related to competition, the oil sector, and tax reforms, run counter to Lopéz Obrador’s ideological stance. This is unlikely to derail the relationship between the IMF and Mexico; indeed, the IMF has indicated that negotiations over a new flexible credit line (FCL) are progressing well, which would replace the current FCL that is due to expire at the end of November. The Mexican government has stated that it would continue to treat this FCL as a precautionary credit line.