This Selected Issues paper analyzes fiscal multipliers in Mexico. Estimates of fiscal multipliers--obtained from state-level spending--fall within 0.6-0.7 after accounting for dynamic effects. However, the size of multipliers varies with the output gap. The planned fiscal consolidation-under the estimated multipliers-is projected to subtract on average 0.5 percentage points from growth over 2015-20. However, there are offsetting effects. The positive growth impulse of lower costs on manufactured goods production is estimated to reach 0.5 percentage point in 2015 and 2016, largely offsetting the impact of fiscal consolidation on growth in the near term.


This Selected Issues paper analyzes fiscal multipliers in Mexico. Estimates of fiscal multipliers--obtained from state-level spending--fall within 0.6-0.7 after accounting for dynamic effects. However, the size of multipliers varies with the output gap. The planned fiscal consolidation-under the estimated multipliers-is projected to subtract on average 0.5 percentage points from growth over 2015-20. However, there are offsetting effects. The positive growth impulse of lower costs on manufactured goods production is estimated to reach 0.5 percentage point in 2015 and 2016, largely offsetting the impact of fiscal consolidation on growth in the near term.

Financial Deepening in Mexico1

International comparisons reveal that, even controlling for a host of explanatory factors, credit depth is exceptionally low in Mexico, with a structural gap of about 40 percent of GDP. Possible explanations include the history of banking crises, the large informal sector and an inefficient legal system. Recent financial reforms address many of the supply constraints, but their success will depend on implementation. The main challenge going forward will be to support financial deepening, while limiting risks to financial stability. Current credit growth rates of around 10 percent allow gradual financial deepening, and boosting them much further would appear risky.

A. Motivation

1. The Mexican authorities are striving to boost growth structurally. Following the improvements in macroeconomic frameworks and the recent structural reforms, it is important to ensure that there are no other factors holding back the expected improvement in growth rates. One of the potentially important conditions for economic growth is the availability of financial intermediation, as recent studies (e.g., Sahay and others (2015) and papers quoted therein) have shown a positive growth impact from financial development.


Credit to the Nonfinancial Private Sector, 2014

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Sources: BIS; and Banxico.

2. Credit depth is very low in Mexico, not only in comparison to advanced economies, but also emerging markets. Bank credit is about a quarter of the level observed in other emerging markets, including Brazil, and it is just 1/6th of advanced economy average. While this paper focuses on bank credit, even total credit is comparatively low, so including other sources of credit would not change this broad finding.


Recipients of Banking System Credit

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Sources: BIS; and Banco de Mexico.

3. The low degree of financial intermediation has been a feature of the Mexican economic for the last two decades and—apart from a short-lived boom in the early nineties—many years before. In particular, credit to firms has been low, which is worrying, as empirically this part of credit is particularly important for growth (Angeles, 2015). Given prudent macroeconomic policies, this is not caused by financial repression. Indeed, bank credit to the public sector is also quite low and while there may be some crowding out of other lending, it is unlikely to be a sufficient explanation.

4. Summary measures of overall financial sector development are negatively affected by the low level of credit depth. Mexico has fallen behind the LA5 (the other financially integrated economies in Latin America: Brazil, Chile, Colombia, Peru, and Uruguay), although still remains above the overall LAC (Latin America and Caribbean) average. An analysis of the components of the financial development index2 reveals that Mexico’s market development is quite strong, but the institutions lag behind the LA5. Among the institutional components, access and depth are weak, with the low value for depth driven by the low credit figures, and also low deposits and a small stock of insurance and mutual funds assets. The low value for access is the result of a comparatively small network of branches, and to a lesser extent a comparative scarcity of ATMs.


Financial Development Index

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Sources: Hang and others (2015); and IMF staff calculations.Note: LAC = Average of Latin American and Caribbean economies other than Mexico;LA5 = Brazil, Chile, Colombia, Peru, and Uruguay

5. Access to credit remains difficult for some individuals and businesses. According to the World Bank Financial Inclusion Database, in 2014 51 percent of adults borrowed some money, but only 10 percent (up from 8 percent in 2011) used a formal financial institution. According to the 2010 World Bank enterprise survey, access to credit by small and medium-sized firms is low by international standards (text figure). CNBV data show that the amount of credit has been growing for most categories. However, the number of businesses obtaining loans has stagnated in the case of medium firms and recently even fallen in the case of microenterprises (Figure 1). According to the World Bank’s Doing Business Indicators, however, Mexico fares relatively well in terms of ease of getting credit, with a rank of 12, and a distance to frontier of 20 percentage points (down from 25 percentage points in 2014) in 2015. The subcomponent of the strength of legal rights was however a weak point (at 8 out of 12 points).

Figure 1.
Figure 1.

Mexico: Bank Loans to Enterprises

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Source: CNBV

Firm Access to Credit

(Percent of firms with a bank loan or line of credit)

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Source: World Bank Group Enterprise Surveys.

6. The economic benefits of deepening financial integration need to be weighed against the risks to financial stability. Excessive credit growth can lead to financial risks and has been shown to be one of the most robust predictors of banking and currency crises (the other predictor being real appreciation, see Gourinchas and Obstfeld (2012)). This is particularly important in an environment of rising interest rates. This would immediately affect the affordability of variable interest rate loans, but ultimately also the cost of rolling over fixed-term debt, and it could entail risks for financial institutions with maturity mismatches.

7. Credit growth can be both cyclical and structural, but empirically it can be difficult to disentangle both. The recent financial reforms could boost credit structurally, but the improvement in the economy can also be expected to lead to a cyclical rise in credit, given that credit cycles tend to lag growth cycles in Mexico.

8. This paper aims to address a few policy-relevant questions related to financial intermediation in Mexico:

  • How large is the gap between credit depth in Mexico and other economies, controlling for macroeconomic and structural fundamentals?

  • What are the potential reasons for the low level of financial intermediation?

  • Are current trends and policies adequate or is there a need for fundamental change?

B. Credit Depth in Mexico

Credit cycles

9. Estimates suggest that the cyclical credit gap is small in Mexico. This means that credit is currently growing close to its trend rate. However, if there is a structural change in trend credit growth, then estimates based on an HP-filter are hard to interpret. Credit cycles also appear to lag output cycles, a finding which has also been confirmed in a dedicated empirical study (Banco de Mexico (2010), Box 3).


Output and Credit Gaps

(In percentage points)

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Sources: National authorities; and IMF staff calculations.

10. Empirical evidence suggests that credit and real cycles are synchronized, but not very strongly. Indeed credit cycles have been shorter and more volatile on average (Table 1).

Table 1.

Mexico: Synchronization of Credit and Real Cycles

article image
Note: Amplitude is defined as the standard deviation divided by the mean of a series. Synchronization ratio is the ratio of number of observations where GDP and credit are in the same phase divided by total observations.Source: IMF staff calculations.

11. Cyclical analysis cannot reveal structural credit gaps. While there does not appear to be a short-term credit gap in Mexico, international comparative data are needed to assess the structural level of financial intermediation. Moreover, if Mexico is in a process of increasing credit depth, then estimated trend growth may be affected by a structural increase lasting many years.

Credit depth in international comparison

12. Regressions linking credit growth and fundamentals using international panel data allow the estimation of expected credit levels in Mexico. Specifically, a random-effects regression linking credit depth to fundamentals was estimated using data from advanced and emerging markets. The specification follows closely Cottarelli and others (2004):


where BCPS stands for bank credit to the private sector, ui is a random effect and εit an error term. X contains explanatory variables, which are: public debt, logged per capita GDP, inflation, capital account openness, bank regulation indicators, legal origin and a time trend. This is estimated on all other countries. Then, using Mexico’s fundamentals, the expected level for Mexico is calculated.


BCPS, predictions based on fundamentals

(percent of GDP)

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Source: IMF staff calculations.

13. Given Mexico’s fundamentals bank credit in Mexico appears to be between 40 and 80 percent of GPD below of what would be expected. Instead of around 20 percent of GDP, based on estimates from the full sample, including advanced economies, credit would be expected to reach almost 100 percent of GDP. Based on estimates from other emerging markets and Mexican fundamentals, bank credit would be expected to reach 60 percent of GDP. Finally, to allow for the impact of bank crises, a variable containing the number of years the banking system was in crisis (using data from Laeven and Valencia (2012)) in each country was added. With this approach, Mexican credit depth appears to be in line with expectations during the crisis years. After the year 2000, however, when macroeconomic policy stabilized, credit would have been expected to be much higher. In recent years, the resulting gap is the virtually the same as in the specification without a crisis variable.3

C. Reasons for the Low Level of Financial Intermediation

14. The Mexican banking sector has had a tumultuous history, with two major banking crises since 1980. During the debt crisis of 1982 Mexican banks were nationalized and reduced in numbers through mergers. They faced tight regulations, such as interest rate caps and credit allocation regulations, which limited possibilities for credit growth. In the early 1990s the sector was liberalized, banks were privatized again, and new banks also entered the market. Credit supply boomed, but lending standards were low, possibly because of lack of experience after the years of state-owned banking. There were also weaknesses in financial supervision, for example banks circumvented the not open foreign currency exposure limit of 15 percent of capital by using derivatives. The currency crisis of 1994 then had a greater than expected impact on banks, both through international funding difficulties, and because of rising NPLs, resulting from the economic crisis, and specifically from the widespread use of variable rate mortgages, which were affected by the interest rate rises. A major rescue program, partly financed by the IMF and the U.S., was put in place addressing (i) the short-term funding needs of banks that lost access to international markets and (ii) recapitalization needs, both through capital injections via convertible debt and the purchase of NPLs above market value. For some banks these programs were insufficient and the government needed to intervene and take them over. Additionally, various programs were set up to support debtors, especially for mortgages.4 Overall, estimates of the cost of financial sector support are about 15 percent of GDP (see, for example, McQuerry (1999)).

15. The history of banking crisis is likely to have had lasting effects. Trust in financial institutions was eroded, both for savers who lost deposits in the crisis of the 1980s and for borrowers, who faced difficulties due to rising interest rates in the 1990s. Moreover, banking know-how was lost, because following the nationalization of banks, a tightly regulated system required very different skills from commercial banking and offered lower rewards. While these effects are likely to have largely faded, the legacy of a years of slow credit and deposit growth still affects today’s stocks, even though growth is now at a healthy pace.

16. The application of the rule of law remains subject to difficulties. Repossession of collateral, in particular, is difficult and costly to enforce.

17. Lack of competition in the banking sector may play a role, but does not seem to be a major impediment. Claessens and Laeven (2004) show that already between 1994 and 2001, banking competition as measured by the H-statistic5 was relatively high in Mexico compared to other economies. IMF staff estimates of an H-statistic also show a slow, improvement in competition over time. The Herfindahl concentration index6 stands at 0.13, indicating that the commercial banking sector is moderately concentrated. Recent developments in lending and deposit rates also suggest that competition may be intensifying as spreads are coming down (Figure 2).

Figure 2.
Figure 2.

Mexico: Marginal Interest Rates

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Source: CNBV.

Competition in the Commercial Banking Sector

(H-statistic, ranging from -⧜ to 1 (monopoly to perfect competition))

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Source: IMF staff calculations.

18. Financial education may still be lacking in some sectors of the economy and some regions of the country. More generally, Campero and Kaiser (2013) have shown that households with greater levels of schooling are more likely to be aware of credit sources (formal and informal) and that regions with greater average schooling levels are marked by greater use of formal credit.

19. The large informal sector may impede access to financial services. Participants in the informal sector find it harder to document their financial situation, given the absence of tax returns. They may also prefer to deal in cash to avoid leaving traces in the financial system.7 Campero and Kaiser (2013) show empirically for Mexico that households employed in the formal sector are 5.7 times more likely to use bank credit than those in the informal sector.

20. Regressions using a disequilibrium approach allow distinguishing between supply and demand factors in determining credit growth. Following Everaert and others (2015)8 a disequilibrium approach was used to estimate credit demand and supply separately, so that actual credit is the minimum of both:


where C is new credit to firms measured in real monthly terms, superscripts S and D indicate supply and demand, and Xi and X2 are two sets of explanatory variables. Both include the real lending rate as the price of credit. Moreover, demand equation contains the NPL ratio as a measure of debt overhang, consumer confidence as a measure of economic conditions, and the growth of the stock market as a measure of alternative funding sources. The supply equation includes also the NPL ratio as measure of debt overhang, the deposit rate as a measure of funding costs, and banking system capital as a share of the minimum capital requirement as a measure of capacity to lend. This set of related equations is estimated using a maximum likelihood method developed by Maddala and Nelson (1974).


Estimation Results, NFCs

(Billions of 2010 pesos)

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Source: IMF staff calculations.

21. An analysis of supply and demand for credit suggests that in recent years, credit was mostly supply driven. Since 2008, credit supply has been insufficient to meet demand by about MXN (of 2010) 300 billion in recent months. While the estimated figures for the gap between demand and supply are quite sensitive to the explanatory variables used, the general finding of supply-driven credit flows remains robust over many possible choices.

D. Current Trends and Policies

22. Measures taken in response to the 1994 foreign currency crisis, as well as more recent reforms can be expected to increase trust in the banking system.

  • The Bank of Mexico tightened the regulation on net open foreign currency positions following the 1994 crisis to close the loophole that allowed banks circumventing it by using derivatives or off-balance sheet positions.

  • Financial regulation has been strengthened over the years, and Mexico has been fast in adopting Basel III accord standards, with both the risk-based capital and the liquidity rules assessed as compliant (Basel Committee on Banking Supervision, 2015). The Liquidity Coverage Ratio applies from 2015 and is phased in according to the Basel implementation schedule reaching the final value of 100 percent in 2019.

  • A new deposit insurance institution (IPAB) was set up in 1999. This now insures deposits of up to MXN 2.1 million,9 which is clearer and more credible than the previous system, which did not have an explicit limit.

23. Difficulties in monitoring credit quality and obtaining access to collateral are being addressed.

  • The 2014 financial reform created a new legal instrument to allow for quicker execution of client collateral in case of default. As a result of this and other changes, in the World Bank’s (2014) Doing Business data, Mexico’s distance to frontier indicator for resolving bankruptcy improved by 6.5 percentage points.

  • More mercantile matters, such as loans involving physical collateral, will be shifted to federal courts, but this is not implemented yet.

  • Information sharing between the private credit bureaus is improved and will contain information from the public mortgage lenders (Infonavit and FOVISSSTE) in addition to information from private banks.

24. Financial education is being strengthened.

  • CONDUSEF, the financial consumer protection agency provides various online tools. A new Financial Entities Bureau will facilitate product comparisons across financial entities. It already allows a broad comparison of banks and lists abusive clauses and bad practices.

  • The move toward cashless salaries and benefits10 familiarizes recipients with financial services.

  • A more general education reform aims at improving the quality of education.

25. Competition in the banking sector is supported by various measures of the 2014 financial reform. These include new provisions that facilitate the portability of bank accounts and mortgages between banks. Moreover, transparency has been improved by obliging banks to publish comparable interest rates.

26. The Secretary of Finance has been given the mandate to assess compliance of banks with their objective to support and promote productive sectors and domestic economic growth in accordance to best practices and banking guidelines. The first report will be prepared during 2016 and contain recommendations. Banks which are assessed as providing insufficient credit will have to prepare action plans to address this.

27. At current credit growth rates, credit depth is increasing gradually and this pace seems appropriate.

  • The current growth rate of around 10 percent exceeds the rate of nominal GDP growth. While rising credit to GDP shares are sometimes considered a warning sign, in the case of Mexico this is welcome after years of weak credit. According to estimates by Arcand and others (2015), increasing the share of bank credit by 1 percentage point of GDP to 18 percent of GDP (as forecast for 2016), would boost growth by 0.03 percentage points. Increasing the ratio of bank credit to GDP to 60 percent, would boost growth rates by 0.8 percentage points.

  • At the current credit growth rate of around 10 percent, and assuming nominal growth of 6.4 percent over the medium term (potential growth of 3.3 percent and 3 percent inflation), the predicted bank credit ratio of 60 percent of GDP would be reached in 37 years. Boosting the credit growth rate to 15 percent would reduce this time frame to 16 years. An even faster growth rate would be risky. Sahay and others (2015) shows that financial deepening at a fast pace leads to increased growth volatility and financial instability.

28. Despite the overall low level of credit depth, some sectors have seen excessive growth and subsequent problems. Consumer credit—especially credit cards—has seen large growth rates between 2004 and 2007, but standards were low and the quality of credit fell. A rise in nonperforming loans put a stop to the expansion in 2008. In annual terms, credit contracted every month from September 2009 through March 2011. Nonperforming credit card loans rose from 3.1 percent of credit in January 2004 to a peak of 12.6 percent in May 2009.


Credit Card Debt

(Y/Y monthly growth, in percent)

Citation: IMF Staff Country Reports 2015, 314; 10.5089/9781513593432.002.A007

Sources: National authorities; and IMF staff calculations.

E. Conclusions

29. Credit depth has been exceptionally low in Mexico for decades, but credit growth is recovering. The key challenge going forward will be to encourage further credit expansion without jeopardizing financial stability. This will require a continuation of tight regulation, maintaining high credit standards, and avoiding excessively rapid credit growth.

30. Given the history of bank crises, it is paramount to build up a resilient financial sector in which lenders and borrowers have full trust. The strong financial regulation should therefore be maintained and must not be sacrificed in an attempt to boost credit.

31. Empirical evidence supports the idea that structural aspects of the banking sector are behind the low degree of financial intermediation. This is suggested both by results showing that credit growth has been supply-driven in recent years, and by the apparent lagging of credit cycles with respect to real cycles.

32. The financial reforms over the last few years address the weaknesses, but must be strongly implemented and further evolutionary changes will be needed.

  • The shifting of more mercantile matters to federal courts, which is essential for improving bankruptcy procedures and collateral recovery, has been delayed and should be urgently implemented.

  • The IPAB needs to be put on a stronger financial footing to strengthen its credibility, as the fund now contains just a very small percentage of the insured deposits.

  • The new mandate that allows the Finance Secretary to scrutinize banks’ compliance with their mandates could be risky depending on its implementation. The perception of putting pressure on banks to increase lending could have negative financial stability consequences, although the strong regulatory standards provide protection.

  • The international financial system is undergoing continuous reform, with Basel III still not completely agreed among the Basel Committee members. Mexico will have to follow these developments and ensure that Mexican law evolves in line.


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Prepared by A. Klemm and A. Herman


The financial development index was developed in Sahay and others (2015). It covers markets and institutions, and looks in each of them for variables that proxy for access, depth, and efficiency. The data used here are from the October 2015 Western Hemisphere REO (Heng and others, 2015) which calculates this index for Latin American economies.


In addition to the regression based on fundamentals, a regressions relating bank credit to deposits reveal the long-run relationship between both. Similar to Hansen and Sulla (2013) a long-run relationship between bank credit and deposits was estimated using pooled mean regression: BCPSGDP=α+βDepositsGDP+ui+ɛit. As in equation (1), the coefficient was estimated using international panel data on countries other than Mexico. Then, predicted bank credit ratios were estimated using Mexico’s deposit ratio. Credit and deposits are both low, but the long-run relationship between them is in line with other emerging markets. Given the level of deposits, credit provision is very close to what would be expected based on coefficients from other emerging markets. With coefficients estimated on the full sample, however, credit is below expectations, although to a much smaller extent than in the regressions based on fundamentals.


This paragraph draws heavily on Graf (1999), which contains further details on the post 1994 banking crisis.


The H-statistic is a measure of industry competitiveness, where one equals perfect competition, and is calculated by estimating the change in a bank’s marginal costs given its equilibrium total revenues.


This is defined as Σi=1nai2, where ai corresponds to a bank’s market shares based on total gross credit provision.


Nevertheless, indicators of informality came out insignificant in the regressions estimating expected credit depth.


Based on a methodology originally proposed by Laffont and Garcia (1977).


Legally it is fixed in the inflation-adjusted units of account (Unidad de Inversion, UDI) at a level of 400,000 UDIs.


See Babatz (2013) for details on this shift.

Mexico: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.