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

Strong economic fundamentals, robust policy framework, and a sustained track record of excellent policy implementation have facilitated the maintenance of orderly economic conditions in Mexico even amidst the substantial external volatility during the global crisis. Executive Directors welcomed the authorities’ commitment to maintain Mexico’s strong policy frameworks and take needed actions to manage unforeseen risks. The arrangement of contingent financing with the IMF through the Flexible Credit Line has helped Mexico to maintain confidence and also to insure against external risks while supporting a macroeconomic strategy.

Abstract

Strong economic fundamentals, robust policy framework, and a sustained track record of excellent policy implementation have facilitated the maintenance of orderly economic conditions in Mexico even amidst the substantial external volatility during the global crisis. Executive Directors welcomed the authorities’ commitment to maintain Mexico’s strong policy frameworks and take needed actions to manage unforeseen risks. The arrangement of contingent financing with the IMF through the Flexible Credit Line has helped Mexico to maintain confidence and also to insure against external risks while supporting a macroeconomic strategy.

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 (1,500 percent of quota). It would succeed the existing FCL arrangement 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.

I. Background

2. Against the backdrop of a global economic and financial crisis, a one-year FCL arrangement equivalent to SDR 31.5 billion was approved on April 17, 2009 that the authorities treated as precautionary. This arrangement was succeeded by another FCL arrangement on identical terms approved on March 25, 2010. While Mexico has faced significant challenges in recent years, macroeconomic stability has been supported by the authorities’ strong and timely policy response to the global crisis, and no drawings have been made under the previous and the existing 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. External debt, which was below 20 percent of GDP in the years preceding the recent crisis, increased in 2009 to about 24 percent of GDP largely as a result of the depreciation of the peso and the significant contraction in real GDP. As the economy recovers from the recent decline in output, external debt is projected to decline gradually over the medium term. Short-term debt on a residual maturity basis accounts for less than 25 percent 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 slightly above 45 percent of GDP by end-2011 before starting to decline again in the subsequent years. Public external debt is estimated at about 10 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.

4. The proposed FCL arrangement would represent the largest individual commitment of Fund resources to date and could result in a record high credit exposure.3 The proposed FCL arrangement is by 50 percent higher than the existing FCL arrangement for Mexico, which is already the largest General Resources Account (GRA) arrangement in the Fund’s history. If the full amount available under the FCL arrangement were drawn, Mexico’s outstanding use of GRA resources would reach SDR 47.3 billion, more than twice the Fund’s largest credit exposure to date.

5. If the full amount available under the proposed FCL arrangement were disbursed in 2011:

  • Mexico’s external debt would remain moderate, with Fund credit representing a significant part of this debt: total external debt would rise to about 32 percent of GDP initially, and public external debt would rise close to 17 percent of GDP, with Fund credit representing 7 percent of GDP (Table 1). At its peak, Mexico’s outstanding use of GRA resources would account for 22 percent of total external debt, 43 percent of public external debt, and 36 percent of gross international reserves.

  • External debt service would increase in the medium-term, but remain manageable under staff’s medium-term macro projections. Mexico’s projected debt service to the Fund would peak in 2015 at about SDR 24.2 billion, or about 2.8 percent of GDP.4 In terms of exports of goods and services, external debt service to the Fund would peak at about 8.4 percent, accounting for almost 60 percent of total public external debt service, which would increase to just over 14 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 December 16, 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, adjusted for the impact of the assumed FCL drawing.

6.The impact of the proposed arrangement on the Fund liquidity, and on Fund exposure if disbursed, would be very large:

  • The combination of the cancelation of the current FCL and the approval of the proposed arrangement would reduce the Fund’s one-year forward commitment capacity (FCC) by about 12 percent on a net basis. The liquidity impact would be a reduction in the FCC by SDR 15.8 billion to SDR 116.5 billion. While this level of liquidity remains comfortable by historical standards, the capacity of the Fund to make new commitments could deteriorate rapidly if other members with large financing needs request support. In this regard, the continued availability of supplementary resources under the bilateral borrowing and note purchase agreements, as well as early effectiveness of the expanded NAB are key for maintaining the adequacy of the Fund’s resources.5

  • 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 47 percent. As a result, the concentration of Fund credit among the top five users of Fund resources would increase to about 80 percent, from 72 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 6½ 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.

Takes into account the cancellation of the current FCL. The gross liquidity impact of the proposed FCL would be SDR 47.292 billion.

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

Precautionary balances exclude amounts in Special Reserves attributable to profits on gold sales in FY2010.

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, especially since the cancellation of Mexico’s existing FCL arrangement would partially offset the initial effect from the proposed new FCL arrangement. Nevertheless, in view of the significant uncertainty surrounding the recovery from the global crisis and the likelihood of continuing strong demand for Fund financing, a close monitoring of the liquidity position is warranted.

8. Mexico intends to treat the FCL arrangement as precautionary, but if drawn, 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 FCL arrangements approved in April 2009 and March 2010, 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.

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

A one-year FCL arrangement equivalent to SDR 31.5 billion 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. No drawings have been made under the two FCL arrangements.

Figure I.1.
Figure I.1.

Mexico: IMF Credit Outstanding, 1982-2000 (In millions of SDRs)

Citation: IMF Staff Country Reports 2011, 011; 10.5089/9781455213641.002.A002

Source: Finance Department.
1

See GRA Lending Toolkit and Conditionally—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 year of the arrangement, subsequent purchases can only be made following completion of a review of Mexico’s continued qualification for the FCL arrangement.

3

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

4

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.

5

An update on the Fund’s liquidity position reflecting developments since the last review (see The Fund’s Liquidity Position - Review and Outlook, www.imf.org, 10/4/2010) will be issued separately.

Mexico: Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement
Author: International Monetary Fund