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

The report discusses the important role of the Flexible Credit Line (FCL) in helping Mexico to survive in the fragile global economic environment. The FCL’s contribution in maintaining an orderly financial market in Mexico is noteworthy. IMF staff reaffirms their commitment toward Mexico in taking the necessary actions to manage unforeseen risks. According to the IMF staff report, Mexico meets the qualification criteria for access to FCL resources, and staff recommends approval of a fund of SDR 47.292 billion for a period of 24 months.

Abstract

The report discusses the important role of the Flexible Credit Line (FCL) in helping Mexico to survive in the fragile global economic environment. The FCL’s contribution in maintaining an orderly financial market in Mexico is noteworthy. IMF staff reaffirms their commitment toward Mexico in taking the necessary actions to manage unforeseen risks. According to the IMF staff report, Mexico meets the qualification criteria for access to FCL resources, and staff recommends approval of a fund of SDR 47.292 billion for a period of 24 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 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).2 It would succeed the existing FCL arrangement of the same size in SDR terms which would be cancelled. The full amount of access proposed would be available throughout the arrangement period, in one or multiple purchases.3 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 (1,000 percent of quota) was approved on April 17, 2009 which the authorities treated as precautionary. This arrangement was succeeded by another FCL arrangement on identical terms approved on March 25, 2010 and a two-year FCL arrangement in the amount of SDR 47.292 billion (1,500 percent of quota) approved on January 10, 2011. Despite the sluggish U.S. recovery and persistent uncertainty from Europe, Mexico has maintained strong macroeconomic performance supported by the authorities’ sound policy management, and no drawings have been made under the previous and the existing FCL arrangements.4 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. External debt increased moderately in recent years largely as a result of the depreciation of the peso, but still remains below 25 percent of GDP in 2011 and is projected to be low and sustainable over the medium term. Short-term debt on a residual maturity basis accounts for less than 28 percent of total external debt. Gross public debt is currently at about 44 percent of GDP and is projected to stabilize at around 43 percent in subsequent years. Public external debt is estimated at close to 20 percent of GDP at end 2012.5 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. If the full amount available under the proposed FCL arrangement were disbursed in 2012:

  • Mexico’s external debt would remain moderate, with Fund credit representing a significant part of this debt: total external debt would rise to about 34 percent of GDP initially, and public external debt would rise close to 26 percent of GDP, with Fund credit representing 6 percent of GDP (Table 1). Mexico’s outstanding use of GRA resources would account for 19 percent of total external debt, 24 percent of public external debt, and 30 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 2016 at about SDR 24.9 billion, or about 2.7 percent of GDP.6 In terms of exports of goods and services, external debt service to the Fund would peak at about 7.7 percent, accounting for about 54 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.

Based on the rate of charge as of November 1, 2012. 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.

5. The immediate net impact of the proposed arrangement would be to lower the Fund’s forward commitment capacity (FCC) by SDR 23.6 billion (9.4 percent). This is because:

  • The current arrangement was approved before the first activation of the NAB and, under existing policies, any drawings would be financed equally by quota and bilateral resources. In the absence of a new arrangement, the cancellation of the existing arrangement would free up the quota resources (and thereby raise the FCC by SDR 23.6 billion).

  • However, the freed up bilateral resources cannot be used to finance new commitments, and therefore do not lead to a corresponding increase in the FCC. While this will reduce the need to set aside NAB resources to allow for the folding in of bilateral claims, these 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.

  • Approval of the proposed new FCL arrangement will reduce the FCC by the full amount of the arrangement. Thus, the overall net effect on the FCC is a reduction by SDR 23.6 billion (Table 2).7

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. It includes the liquidity effects of resources made available under bilateral borrowing and note purchase agreements and the NAB.

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

Excluding Mexico’s existing FCL.

6. If the resources available under the proposed FCL arrangement were fully drawn, the Fund’s exposure to Mexico would be large in relation to total credit outstanding and current precautionary balances:

  • Mexico would represent the Fund’s largest single credit exposure at about 34 percent of total GRA credit outstanding—though this represents a reduction of 13 percent compared with the potential share at the time of approval of the current FCL.

  • The concentration of Fund credit among the top five users of Fund resources would increase to about 78 percent from 76 percent currently.

  • The 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 nearly 5 times the Fund’s current precautionary balances.

II. Assessment

7. 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 would partially offset the liquidity effect from the proposed new FCL. In addition, the need to set aside NAB resources to allow for the folding in of bilateral claims would be reduced, and the 2012 bilateral borrowing and note purchase agreements will provide a further boost to the Fund’s lending capacity as they become effective.8 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.

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 the 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 FCL arrangements approved in April 2009, March 2010 and January 2011, 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, 1983–2012

(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.

Figure I.1.
Figure I.1.

Mexico: IMF Credit Outstanding, 1982–2000

(In millions of SDRs)

Citation: IMF Staff Country Reports 2012, 327; 10.5089/9781475575095.002.A002

Source: Finance Department.

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. This arrangement was cancelled and a new two-year FCL was approved in January 2011 increasing the access to SDR 47.3 billion. No drawings have been made under any of the FCL arrangements.

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

See Mexico—Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement (11/20/12). After the 2008 Quota and Voice Reform became effective, Mexico’s quota increased from SDR 3152.8 million to SDR 3625.7 million.

3

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.

4

Since the crisis, Mexico has benefited from the relatively good performance of the U.S. manufacturing sector (to which it is closely integrated) and achieved a strong recovery of its market share in that market.

5

For the purposes of this assessment, public external debt includes the nonresident holdings of peso-denominated debt.

6

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.

7

Staff plans to propose an amendment of the Financial Transaction Plan (FTP) and Resource Mobilization Plan (RMP) to reflect the change in the composition of potential financing under the new FCL arrangement which would be approved during the current NAB activation period.

8

These resources can be drawn in accordance with the borrowing modalities approved by the Board on June 15, 2012.

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. Western Hemisphere Dept.