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

This paper discusses the Arrangement for Mexico Under the Flexible Credit Line (FCL) and Cancellation of the Current Arrangement. The recent upward trend in output in Mexico is expected to continue, leading to projected growth of 4 percent for 2010. Financial inflows are projected to gradually resume, reflecting a normalization of global liquidity conditions. IMF staff assesses that Mexico meets the qualification criteria for access to FCL resources and recommends approval of an FCL arrangement for Mexico of SDR 31.528 billion for a period of 12 months.

Abstract

This paper discusses the Arrangement for Mexico Under the Flexible Credit Line (FCL) and Cancellation of the Current Arrangement. The recent upward trend in output in Mexico is expected to continue, leading to projected growth of 4 percent for 2010. Financial inflows are projected to gradually resume, reflecting a normalization of global liquidity conditions. IMF staff assesses that Mexico meets the qualification criteria for access to FCL resources and recommends approval of an FCL arrangement for Mexico of SDR 31.528 billion for a period of 12 months.

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 the FCL arrangements.1 The proposed arrangement could cover a 12-month period, and be in an amount of SDR 31.528 billion (1,000 percent of quota) and would succeed the existing FCL arrangement of an identical amount that 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.

I. Background

2. Against the backdrop of a global economic and financial crisis, a one-year precautionary FCL arrangement equivalent to SDR 31.5 billion was approved on April 17, 2009. The authorities’ forceful and broad-based policy responses to the effects on Mexico of the global crisis have been successful in maintaining stability, and no drawings have been made under the existing FCL arrangement. As discussed in Annex I, Mexico has a history of strong performance also under earlier Fund arrangements and an exemplary record of meeting its obligations to the Fund.

3. Total external and public debt levels are moderate. External debt, which was stable below 20 percent of GDP in the years preceding the recent crisis, increased in 2009 to about 24 percent of GDP owing to the effects of the depreciation of the peso and the significant contraction in real GDP. However, with the recovery in growth, external debt is projected to decline to around 20 percent of GDP over the medium term. Short-term debt on a residual maturity basis accounts for about one-quarter of total external debt. Gross public debt that had stabilized at just under 40 percent of GDP before the crisis, is projected to increase to around 45 percent of GDP by end-2010, and to decline slightly in the coming years. Public external debt is estimated at about 11 percent of GDP at end 2010. Sustainability analyses show both external and public debt remaining manageable under a range of scenarios, with no significant contingent liabilities incurred during the crisis.3

4. Access under the proposed arrangement would be equal to the largest Fund commitment to date and it could result in a record credit exposure.4 The proposed FCL arrangement is equal in size to the largest General Resources Account (GRA) arrangement in the Fund’s history, i.e., the existing FCL arrangement for Mexico. If the full amount available under the FCL arrangement—which the authorities intend to treat as precautionary—were drawn, Mexico’s outstanding use of GRA resources would reach SDR 31.5 billion, one-third higher than the Fund’s largest credit exposure to date.

5. In case the full amount available under the proposed FCL arrangement is disbursed in 2010:

  • Mexico’s external debt would remain moderate, with Fund credit representing a significant part of this debt: total external debt would rise to over 27 percent of GDP initially, and public external debt would rise close to 16 percent of GDP, with Fund credit being close to 5 percent of GDP (Table 1). At its peak, Mexico’s outstanding use of GRA resources would account for close to 18 percent of total external debt, 32 percent of public external debt, and 30 percent of gross international reserves.

  • External debt service would be substantially higher in the medium-term, but this would likely be manageable assuming a continued recovery in the operation of international financial markets. Mexico’s projected debt service to the Fund would peak in 2014 at about SDR 16.2 billion, or close to 2 percent of GDP.5 In terms of exports of goods and services, external debt service to the Fund would peak at close to 6½ percent, accounting for slightly over 60 percent of total public external debt service, which would increase to just over 10 percent of exports of goods and services.

Table 1.

Mexico: Capacity to Repay Indicators 1/

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

Assumes full drawings under the FCL upon approval. The Mexican authorities have expressed their intention to treat the arrangement as precautionary, as balance of payments pressures have not materialized.

Based on the rate of charge as of March 10, 2010. Includes surcharges under the system currently in force and service charges.

Staff projections for external debt, GDP, gross international reserves, and exports of goods and services, as used in the staff report that requests the proposed FCL, adjusted for the impact of the assumed FCL drawing.

6. Reflecting the very high access under the arrangement, the impact on the Fund’s liquidity, and on its potential exposure to credit risk, would be very substantial:

  • The proposed arrangement would reduce the Fund’s one-year forward commitment capacity (FCC) by about one-sixth. The liquidity impact of the proposed arrangement would initially be offset by the cancellation of the existing FCL arrangement. In the absence of a new arrangement, however, the FCC would have increased by SDR 31.5 billion at the expiration of the existing FCL arrangement in mid-April (Table 2). The availability of supplementary resources under the bilateral borrowing and note purchase agreements greatly bolsters the Fund’s resources and thus mitigates the relative impact that the proposed arrangement would have on the Fund’s liquidity position.

  • If the resources available under the FCL arrangement were fully drawn, GRA credit to Mexico as a share of total GRA credit would be about 44 percent. As a result, the concentration of Fund credit among the top five users of Fund resources would increase moderately to about 83 percent, from 80 percent currently.

  • Potential GRA exposure to Mexico would be very large in relation to the current level of the Fund’s precautionary balances. If the resources available under the arrangement were fully drawn, Fund credit to Mexico would be equivalent to some 4½ times the Fund’s current precautionary balances.

Table 2.

FCL Arrangement for Mexico—Impact on GRA Finances

(In SDR millions, unless otherwise indicated)

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Sources: Finance Department.

The FCC measures the Fund’s capacity to make new credit commitments over the next 12 months. It includes the liquidity effects of resources made available under borrowing and note purchase agreements.

The liquidity impact would fully offset the increase in the FCC resulting from the cancellation of Mexico’s current FCL of the identical size, i.e., the reported FCC would remain unchanged.

Based on current Fund credit outstanding plus full drawings under the proposed FCL.

Excluding Mexico’s existing FCL.

II. Assessment

7. The proposed record high commitment has a very substantial, but manageable impact on the Fund’s liquidity. The current liquidity position is sufficiently strong to accommodate the liquidity impact of the proposed arrangement, in particular as the proposed cancellation of Mexico’s existing FCL arrangement would fully offset the initial reduction in FCC arising from the proposed FCL arrangement. However, the liquidity position could change quickly, particularly if there is further demand for large arrangements. This underscores the need for continued close monitoring of liquidity, and to continue the efforts to bring new borrowing agreements on line to supplement the Fund’s resources.

8. Mexico intends to treat the FCL arrangement as precautionary, but if it did prove necessary to draw, this would become the Fund’s largest single credit exposure. Mexico’s overall external debt and debt service ratios are expected to remain moderate even with a drawing under the arrangement. Hence, given Mexico’s sustained track record of implementing very strong policies, including during the global financial crisis, and commitment to maintaining such policies in future, Mexico’s capacity to repay is projected to remain strong. Nonetheless, the scale of the Fund’s potential exposure to Mexico—in conjunction with the recent increase in lending to other members and the prospects for further credit expansion under already existing or possible new Fund arrangements—underscores the need to strengthen the Fund’s precautionary balances.

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 one-year precautionary FCL arrangement approved in April 2009, Mexico had several Fund arrangements in the 1980s and 1990s until it extinguished its remaining outstanding credit in 2000 (Table I.1). Mexico has an exemplary track record of meeting its obligations to the Fund.

Table 1.1.

Mexico: IMF Financial Arrangements, 1983-2010

(In millions of SDR)

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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 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 extinguish all its outstanding obligations to the Fund through a series of advance repurchases before the SBA expired in November 2000.

Figure I.1.
Figure I.1.

Mexico: IMF Credit Outstanding, 1982–2000

(In millions of SDRs)

Citation: IMF Staff Country Reports 2010, 081; 10.5089/9781451981858.002.A002

Source: Finance Department.

Against the backdrop of a global economic and financial crisis, a one-year precautionary FCL arrangement equivalent to SDR 31.5 billion was approved on April 17, 2009. The authorities’ forceful and broad-based policy responses to the effects on Mexico of the global crisis have been successful in maintaining stability and no drawings have been made under the existing FCL arrangement.

1

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.

2

If the full amount is not drawn in the first six months of the arrangement, subsequent purchases are subject to a review of Mexico’s continued qualification for the FCL arrangement.

3

A more detailed description of external and public debt is provided in the staff report.

4

The largest GRA credit exposure has been SDR 23.359 billion to Brazil in 2003.

5

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

Mexico: Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement: Staff Report; Staff Supplement; and Press Release on the Executive Board Discussion
Author: International Monetary Fund