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Mexico: Staff Report For The 2011 Article IV Consultation—Debt Sustainability Analysis

Author(s):
International Monetary Fund
Published Date:
August 2011
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FISCAL DSA

Mexico’s public debt is moderate and will remain stable over the medium term under the baseline scenario, at around 43 percent of GDP. Standard DSA shocks would increase public debt by generally less than 10 percentage points of GDP over the medium term. But Mexico’s balanced-budget framework represents a strong fiscal anchor against the materialization of such scenarios.

Figure 1.Mexico: Gross Public Debt Sustainability: Bound Tests 1/

(Gross public debt in percent of GDP)

Citation: 2011, 250; 10.5089/9781462325429.002.A002

Sources: International Monetary Fund, country desk data, and staffestimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primarybalance.

3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Table 1.Mexico: Gross Public Sector Debt Sustainability Framework, 2002-2016

(In percent of GDP, unless otherwise indicated)

ActualProjections
200220032004200520062007200820092010201120122013201420152016Debt-stabilizing
primary
balance 9/
Baseline: Gross public sector debt 1/45.745.641.439.838.437.843.144.742.942.542.542.742.742.542.4−0.5
o/w foreign-currency denominated 7/15.516.014.612.810.210.212.812.110.09.28.58.07.67.16.7
Change in gross public sector debt3.7−0.1−4.2−1.6−1.5−0.55.31.6−1.8−0.40.00.20.0−0.2−0.1
Identified debt-creating flows (4+7+12)3.6−1.5−5.4−2.5−3.2−2.30.63.8−0.1−1.0−0.9−0.6−0.8−0.9−0.8
Primary deficit0.1−0.9−1.6−1.5−1.5−1.1−1.32.21.80.60.0−0.1−0.2−0.3−0.5
Revenue and grants19.720.619.320.821.421.222.822.222.221.421.821.320.720.420.1
Primary (noninterest) expenditure19.819.717.719.319.920.121.524.424.022.021.821.220.520.019.6
Automatic debt dynamics 2/4.10.0−2.4−0.7−1.4−0.62.63.1−1.7−1.1−0.4−0.1−0.1−0.10.2
Contribution from interest rate/growth differential 3/2.3−1.4−2.5−0.1−1.5−0.50.13.6−1.7−1.1−0.4−0.1−0.1−0.10.2
Of which contribution from real interest rate2.4−0.8−0.91.10.30.60.50.90.50.61.21.31.21.21.4
Of which contribution from real GDP growth0.0−0.6−1.6−1.2−1.8−1.1−0.42.7−2.2−1.7−1.6−1.3−1.3−1.3−1.3
Contribution from exchange rate depreciation 4/1.81.30.0−0.60.10.02.5−0.5
Other identified debt-creating flows−0.6−0.6−1.3−0.2−0.3−0.6−0.7−1.5−0.2−0.5−0.5−0.5−0.5−0.5−0.5
Privatization receipts (negative)−0.6−0.6−1.3−0.2−0.3−0.6−0.7−1.5−0.2−0.5−0.5−0.5−0.5−0.5−0.5
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes (2-3) 5/0.11.41.20.91.81.84.7−2.2−1.70.61.00.80.80.70.7
Gross public sector debt-to-revenue ratio 1/231.7221.7214.6191.3179.1178.4189.3201.6193.1199.0195.0200.9206.0208.5210.8
Gross financing need 6/11.010.98.810.48.48.210.915.413.111.910.410.410.19.99.6
in billions of U.S. dollars77.476.467.188.179.784.7119.4135.5135.2140.2128.8135.6139.3143.1146.6
Scenario with key variables at their historical averages 7/42.642.642.442.342.141.9−0.5
Scenario with no policy change (constant primary balance) in 2010-201543.345.047.149.050.953.1de−0.5
Key Macroeconomic and Fiscal Assumptions Underlying Baselinestabilization
Real GDP growth (in percent)0.11.44.03.25.23.21.2−6.25.44.44.13.33.33.33.2
Average nominal interest rate on public debt (in percent) 8/8.47.67.37.67.87.57.65.95.86.46.26.36.46.56.6
Average real interest rate (nominal rate minus change in GDP deflator, in percent)5.8−1.8−1.83.11.11.91.41.71.51.73.23.33.23.23.7
Nominal appreciation (increase in US dollar value of local currency, in percent)−11.3−8.2−0.34.5−0.90.1−19.73.7
Inflation rate (GDP deflator, in percent)2.69.49.14.66.75.66.24.14.44.73.03.03.23.32.9
Growth of real primary spending (deflated by GDP deflator, in percent)13.00.6−6.412.38.64.48.26.33.7−4.43.50.30.00.91.1
Primary deficit0.1−0.9−1.6−1.5−1.5−1.1−1.32.21.80.60.0−0.1−0.2−0.3−0.5
Table 2.Mexico: External Debt Sustainability Framework, 2006-16

(In percent of GDP, unless otherwise indicated)

ActualProjections
20062007200820092010201120122013201420152016Debt-stabilizing
non-interest
current account 7/
Baseline: External debt17.818.718.421.823.122.121.922.022.021.921.8−1.6
Change in external debt−2.70.9−0.33.41.3−1.0−0.20.10.1−0.1−0.1
Identified external debt-creating flows (4+8+9)−3.5−2.8−0.93.4−3.7−1.9−1.8−1.5−1.4−1.4−1.4
Current account deficit, excluding interest payments−1.0−0.60.2−0.6−0.70.00.10.00.0−0.1−0.2
Deficit in balance of goods and services1.31.62.21.51.31.51.71.81.92.01.9
Exports27.927.928.227.730.332.132.833.534.335.436.6
Imports29.229.530.429.231.633.734.535.336.237.338.5
Net non-debt creating capital inflows (negative)−1.8−2.3−1.3−1.8−1.1−2.1−2.1−2.1−2.1−2.2−2.2
Automatic debt dynamics 1/−0.70.00.35.8−2.00.30.30.60.80.91.1
Contribution from nominal interest rate1.51.41.31.31.21.21.11.31.41.61.7
Contribution from real GDP growth−0.9−0.5−0.31.4−0.9−0.9−0.9−0.7−0.7−0.7−0.7
Contribution from price and exchange rate changes 2/−1.3−0.9−0.83.1−2.3
Residual, incl. change in gross foreign assets (2-3) 3/0.83.70.60.05.10.81.61.61.51.31.3
External debt-to-exports ratio (in percent)63.666.865.178.876.268.766.765.664.262.159.6
Gross external financing need (in billions of US dollars) 4/72.061.473.461.757.877.385.092.2100.4111.9118.3
in percent of GDP7.65.96.77.05.66.66.87.17.37.77.8
Scenario with key variables at their historical averages 5/22.122.222.222.322.322.1−1.5
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)5.23.21.5−6.15.04.44.13.33.33.33.2
GDP deflator in US dollars (change in percent)6.75.34.3−14.311.69.11.51.61.92.11.8
Nominal external interest rate (in percent)8.18.87.55.96.65.75.56.36.97.68.2
Growth of exports (US dollar terms, in percent) 6/15.68.76.9−20.928.320.77.97.27.78.78.7
Growth of imports (US dollar terms, in percent) 6/14.79.79.1−22.726.921.48.37.47.98.78.4
Current account balance, excluding interest payments1.00.6−0.20.60.70.0−0.10.00.00.10.2
Net non-debt creating capital inflows1.82.31.31.81.12.12.12.12.12.22.2

EXTERNAL DSA

Mexico’s external debt is low relative to GDP and will remain low over the medium term. A 30% dep reciation of the peso could bring external debt to 30 percent of GDP, a moderate level, mitigated by the fact that an increasing share of Mexico’s external debt is now denominated in peso. Other shocks, including growth, current account, and interest rate, would have only marginal effects on Mexico’s external indebtedness in relation to GDP.

Figure 2.Mexico: External Debt Sustainability: Bound Tests 1/

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3/ One-time real depreciation of 30 percent occurs in 2011.

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