Journal Issue
Share
Article

Mexico: Assessment of the Impact of the Proposed Flexible Credit Line Arrangement on the Fund’s Finances and Liquidity Position

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
December 2014
Share
  • ShareShare
Show Summary Details

Introduction

1. This note assesses the impact of the proposed Flexible Credit Line (FCL) arrangement for Mexico on the Fund’s finances and liquidity position, in accordance with the policy on FCL arrangements.1 The proposed arrangement would cover a 24-month period and access would be in an amount of SDR 47.292 billion (1,304 percent of quota). It would succeed the existing FCL arrangement of the same amount, which would be cancelled upon approval of the proposed arrangement. The full amount of access proposed would be available throughout the arrangement period, in one or multiple purchases.2 The authorities intend to treat the arrangement as precautionary.

Background

2. Since the onset of the global economic and financial crisis, Mexico has entered into successive FCL arrangements with the Fund under which no drawings have been made. A one-year FCL arrangement equivalent to SDR 31.5 billion (1000 percent of quota) was approved on April 17, 2009. This arrangement was succeeded by another FCL arrangement on identical terms approved on March 25, 2010. Subsequently, a two-year FCL arrangement in the amount of SDR 47.292 billion (1304 percent of quota) was approved on January 10, 2011 and cancelled before its expiration upon approval of a successor two-year FCL arrangement in the amount on November 30, 2012. Mexico’s very strong policy framework and fundamentals helped it weather the sluggish global economic recovery and bouts of stress in global financial markets. More recently, it benefitted from the recovery in US manufacturing to which Mexico’s economy is closely connected. Against this backdrop, no drawings have been made under all FCL arrangements. As discussed in Annex I, Mexico has a history of strong performance under earlier Fund arrangements and an exemplary record of meeting its obligations to the Fund.

3. Total external and public debt levels are moderate and are expected to remain stable over the medium run under the baseline. External debt has increased in recent years, but is projected at a moderate level of almost 35 percent of GDP at end-2014, of which 24½ percent of GDP is accounted for by public external debt. Gross public debt is estimated at just over 47¾ percent of GDP at end-2014 and is projected to be contained within 50 percent of GDP over the medium-term. Debt sustainability analyses suggest that both external and public debt would remain manageable under a range of scenarios.

The New Flexible Credit Line Arrangement—Fund Risk Exposure and the Impact on the Fund’s Liquidity Position

A. Risk to the Fund

4. The proposed FCL arrangement—with proposed access unchanged from the existing FCL—would continue to be the largest Fund commitment to date. If the full amount available under the FCL arrangement were drawn, Mexico’s outstanding use of GRA resources would reach SDR 47.3 billion. This would be more than twice the Fund’s largest credit exposure to date.

5. Mexico’s debt and debt service ratios are generally in the low to moderate range relative to recent exceptional access precautionary arrangement cases.

  • At almost 35 percent of GDP, total external debt is at the median of recent exceptional access precautionary arrangement cases (Table 1 and panel A of Figure 1).

  • Total public debt is sustainable though it is slightly above the median of recent precautionary access cases (Figure 1, panel D). The authorities’ envisaged fiscal consolidation over the medium term is expected to help stabilize total public debt at just under 50 percent of GDP and put it on a downward path thereafter (see Staff Report).

  • Public external debt is below the median of recent exceptional access precautionary arrangement cases (Figure 1, panel B). While it does not stand out as a particular risk factor, it is associated with relatively large debt service obligations. Public external debt service represents almost 3 percent of GDP and 9 percent of exports of goods and services. In terms of exports of goods and services, it is slightly above the median of recent exceptional access precautionary arrangement cases (Figure 1, panel C).

Table 1.Mexico: External Debt and Debt Service, 2010–14 1/
20102011201220132014 2/
In billions of US dollars)
Total external Debt260.1298.9369.2420.5457.5
Public170.9202.1267.8297.4320.0
Private89.296.7101.3123.1137.5
Total external debt service59.194.7106.0137.9161.6
Public25.123.323.832.537.7
Private34.071.482.2105.3123.8
(In percent of GDP)
Total external Debt24.725.531.133.334.9
Public16.317.322.623.624.4
Private8.58.38.59.810.5
Total external debt service5.68.18.910.912.3
Public2.42.02.02.62.9
Private3.26.16.98.39.5
Memorandum item
Public external debt service in percent of exports8.06.46.28.19.1
Source: Mexican authorities and IMF staff estimates.

End of period, unless otherwise indicated.

Assumed potential disbursement under the proposed FCL arrangement and related interest are not included.

Source: Mexican authorities and IMF staff estimates.

End of period, unless otherwise indicated.

Assumed potential disbursement under the proposed FCL arrangement and related interest are not included.

Figure 1.Debt Ratios for Recent Exceptional Access Precautionary Arrangements 1/

Source: IMF staff calculations.

1/ Estimates as reported in each staff report on the request of the arrangement.

2/ Public external debt for Mexico (2012 FCL) includes only foreign currency debt while Mexico (2014 FCL) includes also domestic currency debt held by foreigners. Using the broader concept, the number for Mexico (2012 FCL) would have been about 22 percent of GDP.

6. The FCL arrangement complements Mexico’s very strong fundamentals by providing insurance against tail risks stemming from heightened stress in global financial markets. Mexico’s experience with capital flows points to higher vulnerability to capital account shocks relative to other recent exceptional access precautionary arrangement cases. Over the past five years, Mexico has, on average, attracted larger capital flows than other recent exceptional access precautionary arrangement cases in the corresponding years preceding the approval of the arrangements. For Mexico, steady reserve accumulation has helped reduce the ratio of short-term debt-to-reserves compared to its level at the time of the Fund’s approval of the 2012 FCL arrangement and Mexico is at a more comfortable position compared to recent exceptional access precautionary arrangement cases (Figure 2, panel A). However, the ratio of portfolio and other flows to reserves is at the high end of the distribution, signaling greater vulnerability to flow reversals (Figure 2, panel B). Large FDI flows mitigate external vulnerabilities as they cover a higher percentage of the current account deficit relative to recent exceptional access precautionary arrangement cases. On balance, as discussed in the 2014 Article IV consultation report, Mexico’s overall external position is consistent with medium-term fundamentals and desirable policies.

Figure 2.Selected Balance of Payment Ratios 1/

(In percent)

Source: Staff calculations, IFS, WEO, and the Joint External Data Hub (JEDH).

1/ Five year averages ending the first full year immediately preceding the year of the relevant program approval.

7. If the full amount available under the proposed FCL arrangement were disbursed, Fund exposure to Mexico would be large.

  • The level of access relative to quota would be considerable. It would significantly exceed the median of the peak levels of exceptional access cases while remaining below the levels of several recent exceptional access cases such as Greece, Ireland, and Portugal (Figure 3).

  • Mexico’s external debt would remain moderate, with Fund credit representing a non-trivial share of this debt. Total external debt would rise to 40½ percent of GDP initially, and public external debt would rise to 30 percent of GDP, with Fund credit representing 5½ percent of GDP (Table 2). Mexico’s outstanding use of GRA resources would account for almost 13¾ percent of total external debt, 18½ percent of public external debt, and just over 27 percent of gross international reserves.

  • External debt service would increase over the medium-term, but remain manageable under staff’s medium-term macroeconomic projections (Table 2). Mexico’s projected debt service to the Fund would peak in 2018 at about SDR 24.9 billion, or nearly 2¼ percent of GDP.3 In terms of exports of goods and services, external debt service to the Fund would peak at about 6½ percent, accounting for almost 57 percent of total projected public external debt service while public external debt service would peak at just over 11½ percent of exports of goods and services.

Figure 3.Projected Fund Credit Outstanding in the GRA around Peak Borrowing 1/

(In percent of quota)

Source: IFS, Finance Department, and IMF staff estimates.

1/ Peak borrowing ‘t’ is defined as the highest level of credit outstanding for a member. Repurchases are assumed to be on an obligations basis. For illustrative purposes, assumes Mexico makes full purchases of available commitment as was assumed for Morocco under the 2012 and 2014 PLL arrangements.

2/ Median credit outstanding at peak is 751 percent of quota; average is 1,036 percent of quota.

Table 2.Mexico—Capacity to Repay Indicators, 2013–19 1/
2013201420152016201720182019
Exposure and Repayments (In SDR millions)
GRA credit to Mexico47,292.047,292.047,292.047,292.023,646.0
(In percent of quota)(1,304.4)(1,304.4)(1,304.4)(1,304.4)(652.2)
Charges due on GRA credit 2/236.51,130.01,220.81,219.71,251.2367.0
Debt service due on GRA credit 2/236.51,130.01,220.81,219.724,897.224,013.0
Debt and Debt Service Ratios 3/
In percent of GDP
Total external debt33.340.540.941.241.239.036.9
Public external debt23.630.030.030.130.027.725.3
GRA credit to Mexico5.55.25.04.72.2
Total external debt service10.912.412.712.712.314.314.4
Public external debt service2.62.92.22.02.14.14.2
Debt service due on GRA credit0.00.10.10.12.42.2
In percent of Gross International Reserves
Total external debt233.3198.3202.0204.1205.8221.1237.1
Public external debt165.0146.8148.3149.2150.1156.9162.9
GRA credit to Mexico27.125.924.723.612.7
In percent of Exports of Goods and Services
Total external debt service34.538.939.538.235.640.339.1
Public external debt service8.19.16.85.96.011.611.4
Debt service due on GRA credit0.10.40.40.46.65.8
In percent of Total External Debt
GRA credit to Mexico13.712.812.111.55.7
In percent of Public External Debt
GRA credit to Mexico18.417.416.615.88.1
Sources: Mexican authorities, Finance Department, World Economic Outlook, and IMF staff estimates.

Assumes full drawings under the FCL arrangement upon approval. The Mexican authorities have expressed their intention to treat the arrangement as precautionary.

Based on the rate of charge as of November 3, 2014. Includes surcharges under the system currently in force and service charges.

Staff projections for external debt ratios (to GDP, gross international reserves, and exports of goods and services) adjusted for the impact of the assumed drawing under the FCL arrangement.

Sources: Mexican authorities, Finance Department, World Economic Outlook, and IMF staff estimates.

Assumes full drawings under the FCL arrangement upon approval. The Mexican authorities have expressed their intention to treat the arrangement as precautionary.

Based on the rate of charge as of November 3, 2014. Includes surcharges under the system currently in force and service charges.

Staff projections for external debt ratios (to GDP, gross international reserves, and exports of goods and services) adjusted for the impact of the assumed drawing under the FCL arrangement.

B. Impact on Fund Finances

8. The immediate net liquidity impact of the proposed arrangement would be to lower the Fund’s current forward commitment capacity (FCC) by SDR 35.47 billion (13 percent). As the existing FCL arrangement was approved after the 2011 first activation of the expanded and amended New Arrangements to Borrow (NAB), the ratio of 3:1 of NAB-to-quota resources would apply for financing of purchases under the arrangement based on prevailing guidelines. The cancellation of the arrangement would free up the quota resources and raise the FCC by SDR 11.8 billion whereas approval of the successor arrangement would reduce the Fund’s FCC by the proposed access (SDR 47.29 billion).4 Overall, the net reduction in the FCC would amount to SDR 35.47 billion, equivalent to 13 percent of the current FCC (Table 3).5

Table 3.Mexico—Impact on GRA Finances(millions of SDR unless otherwise noted)
as of 10/31/2014
Liquidity measures
Forward Commitment Capacity (FCC) before approval 1/273,659
FCC on approval 2/238,190
Change in percent−13.0
Prudential measures
Fund GRA commitment to Mexico including credit outstanding
in percent of current precautionary balances369.5
in percent of total GRA credit outstanding 3/60.0
Fund GRA credit outstanding to top five borrowers
in percent of total GRA credit outstanding 3/88.8
in percent of total GRA credit outstanding including Mexico’s assumed full drawing91.4
Mexico’s projected annual GRA charges for 2015 in percent of the Fund’s residual burden sharing capacity41,403
Memorandum items
Fund’s precautionary balances (FY14)12,800
Fund’s Residual Burden Sharing Capacity 4/2.7
Sources: Finance Department and IMF staff estimates.

The FCC is defined as the Fund’s stock of usable resources less undrawn balances under existing arrangements, plus projected repurchases during the coming 12 months, less repayments of borrowing due one year forward, less a prudential balance. The FCC does not include about SDR 287 billion (equivalent to US$422.7 billion at November 3, 2014 exchange rates) in bilateral pledges from members to boost IMF resources. These resources will only be counted towards the FCC once: (i) individual bilateral agreements are effective and (ii) the associated resources are available for use by the IMF, in accordance with the borrowing guidelines and the terms of these agreements.

Current FCC minus new access plus access under the expiring program adjusted for the NAB financed portion of the expiring commitment (about SDR 35.47 billion), which was considered as already committed at the time of the most recent NAB activation and is therefore not available to finance new commitments under the current activation period.

As of October 31, 2014.

Burden-sharing capacity is calculated based on the floor for remuneration at 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges and takes into account the loss in capacity due to nonpayment of burden sharing adjustments by members in arrears.

Sources: Finance Department and IMF staff estimates.

The FCC is defined as the Fund’s stock of usable resources less undrawn balances under existing arrangements, plus projected repurchases during the coming 12 months, less repayments of borrowing due one year forward, less a prudential balance. The FCC does not include about SDR 287 billion (equivalent to US$422.7 billion at November 3, 2014 exchange rates) in bilateral pledges from members to boost IMF resources. These resources will only be counted towards the FCC once: (i) individual bilateral agreements are effective and (ii) the associated resources are available for use by the IMF, in accordance with the borrowing guidelines and the terms of these agreements.

Current FCC minus new access plus access under the expiring program adjusted for the NAB financed portion of the expiring commitment (about SDR 35.47 billion), which was considered as already committed at the time of the most recent NAB activation and is therefore not available to finance new commitments under the current activation period.

As of October 31, 2014.

Burden-sharing capacity is calculated based on the floor for remuneration at 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges and takes into account the loss in capacity due to nonpayment of burden sharing adjustments by members in arrears.

9. If the resources available under the FCL arrangement were fully drawn, credit concentration would increase and potential GRA credit exposure to Mexico would be large.

  • Fund credit to Mexico would represent about 37 percent of total GRA credit, the single largest Fund exposure, and the concentration of Fund credit among the top five users of GRA resources would increase to about 91½ percent, from 89 percent as of end-October 2014.

  • Relative to the Fund’s current level of precautionary balances, potential GRA exposure to Mexico would be very large. Fund credit to Mexico would be nearly 3¾ times the Fund’s current precautionary balances.

  • Were Mexico to accrue arrears on charges after drawing under the proposed arrangement, the Fund’s burden sharing mechanism would be insufficient. In a low interest rate environment, such as the current one, potential charges for Mexico would significantly exceed the Fund’s limited capacity to absorb charges in arrears through the burden sharing mechanism.

Assessment

10. The proposed FCL arrangement would have a significant but manageable impact on the Fund’s liquidity position. The current liquidity position appears sufficiently strong to accommodate the proposed arrangement, especially since the cancellation of Mexico’s existing FCL arrangement would partially offset the liquidity effect from the proposed new FCL arrangement. However, the persistent uncertainty in the global economy that could result in an increased demand for Fund resources calls for continued close monitoring of the Fund’s liquidity.

11. If drawn, Mexico’s FCL would become the Fund’s largest credit exposure, but risks to the Fund are mitigated by several factors. As before, Mexico intends to treat the FCL arrangement as precautionary. The risks to the Fund from a potential credit exposure to Mexico would be mitigated by, among other factors, Mexico’s adequate buffers and the credibility of its policy framework. Mexico has a sustained track record of implementing very strong policies, including during the global financial crisis, and the authorities are committed to maintaining implementation of such policies in the future. Also, Mexico’s overall external debt and debt service ratios are expected to remain moderate even assuming full drawing under the proposed arrangement. Against this backdrop, Mexico’s capacity to repay is projected to remain strong.

Annex I. Mexico: History of IMF Arrangements

This annex provides a brief overview of Mexico’s Fund arrangements from 1983 to present.

Prior to the FCL arrangements approved in April 2009, March 2010, January 2011, and in November 2012, Mexico had several Fund arrangements in the 1980s and 1990s. It fully repaid its remaining outstanding credit in 2000 (Table I.1). Mexico has an exemplary track record of meeting its obligations to the Fund.

Annex Table I.1.Mexico: IMF Financial Arrangements, 1983-2014(In millions of SDRs)
YearType of ArrangementDate of ArrangementDate of Expiration or CanellationAmount of New ArrangementAmount DrawnPurchasesRepurchasesFund Exposure 1/
1983EFF1-Jan-8331-Dec-853,410.62,502.71,003.10.01,203.8
19841,203.80.02,407.5
1985295.80.02,703.3
1986SBA19-Nov-861-Apr-881,400.01,400.0741.4 2/125.43,319.3
1987600.0280.03,639.3
1988350.0419.03,570.3
1989EFF26-May-8925-May-933,729.63,263.4943.0 3/639.63,873.6
19901,608.4877.14,604.9
1991932.4807.44,729.9
1992233.1636.14,327.0
19930.0841.73,485.2
19940.0841.02,644.2
1995SBA1-Feb-9515-Feb-9712,070.28,758.08,758.0754.110,648.1
19960.01,413.69,234.5
19970.02,499.26,735.2
19980.0783.75,951.5
1999SBA07-Jul-199930-Nov-20003,103.01,939.51,034.43,726.73,259.2
2000905.14,164.30.0
2009FCL17-Apr-200916-Apr-201031,528.00.00.00.00.0
2010FCL25-Mar-201009-Jan-201131,528.00.00.00.00.0
2011FCL10-Jan-201109-Jan-201347,292.00.00.00.00.0
2012FCL30-Nov-201229-Nov-201447,292.00.00.00.00.0
Source: Finance Department.

As of end-December.

Includes a first credit tranche purchase of SDR 291.4 million.

Includes a purchase of SDR 453.5 million under the Compensatory Financing Facility.

Source: Finance Department.

As of end-December.

Includes a first credit tranche purchase of SDR 291.4 million.

Includes a purchase of SDR 453.5 million under the Compensatory Financing Facility.

From 1983 to 2000, Mexico had two arrangements under the Extended Fund Facility (EFF) and three Stand-By Arrangements (SBAs). Below is a brief description of the two most recent SBAs:

  • In February 1995, the Fund approved an SBA equivalent to SDR 12.1 billion (688 percent of quota) to support Mexico’s adjustment program to deal with a major financial and economic crisis. Under that arrangement, Mexico made purchases totaling SDR 8.8 billion, and its outstanding credit peaked at SDR 10.6 billion (607 percent of quota) at end-1995 (Figure I.1). After regaining access to international capital markets in the second half of 1996, Mexico made sizable advance repurchases.

  • In July 1999, an SBA equivalent to SDR 3.1 billion (120 percent of quota) was approved as the recovery in economic performance was disrupted by unsettled conditions in international capital markets. Solid performance under the program supported by this SBA allowed Mexico to fully repay all its outstanding obligations to the Fund through a series of advance repurchases before the SBA expired in November 2000.

Annex Figure I.1.Mexico: IMF Credit Outstanding, 1982–2000

(In millions of SDRs)

Source: Finance Department.

Since the global financial crisis, Mexico has had several FCL arrangements under which no drawings have been made. A one-year FCL arrangement equivalent to SDR 31.5 billion (1000 percent of quota) was approved on April 17, 2009 to support Mexico’s economic policies and bolster confidence during the crisis. A successor FCL arrangement on identical terms was approved on March 25, 2010. This arrangement was cancelled and a new two-year FCL was approved in January 2011 increasing access to SDR 47.3 billion (1304 percent of quota). On November 30, 2012, a two-year successor FCL arrangement was approved for the same access as the January 2011 FCL arrangement.

See GRA Lending Toolkit and Conditionality—Reform Proposals (3/13/09) and Flexible Credit Line (FCL) Arrangements, Decision No.14283-(09/29), adopted March 24, 2009 as amended by Decision No. 14714-(10/83), adopted August 30, 2010; the Fund’s Mandate—The Future Financing Role: Reform Proposals (http://www.imf.org/external/np/pp/eng/2010/062910.pdf, 6/29/2010) and the IMF’s Mandate—The Future Financing Role: Revised Reform Proposals and Revised Proposed Decisions (http://www.imf.org/external/np/pp/eng/2010/082510.pdf, 8/25/2010); Review of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument—Specific Proposals (http://www.imf.org/external/np/pp/eng/2014/043014.pdf, 5/1/2014 and Decision No. 15593-(14/46)).

If the full amount is not drawn in the first year of the arrangement, subsequent purchases can only be made following completion of a review of Mexico’s continued qualification for the FCL arrangement.

The figures on debt service used in this report are calculated assuming that the full amount available under the arrangement is purchased upon approval of the arrangement, and that all repurchases are made as scheduled.

The freed up bilateral resources cannot be used to finance new commitments unless NAB participants and the Executive Board were to approve an increase in the maximum resources available during the current activation period. Such an increase is not being proposed at this time.

If Mexico were to draw upon the proposed arrangement, there would be an additional impact on the FCC as Mexico would no longer participate in the Financial Transactions Plan and the NAB Resource Mobilization Plan.

Other Resources Citing This Publication