Mexico: Review Under the Flexible Credit Line Arrangement
Author:
International Monetary Fund. Western Hemisphere Dept.
Search for other papers by International Monetary Fund. Western Hemisphere Dept. in
Current site
Google Scholar Close
Publication Date:
24 Nov 2015
eISBN:
9781513503158
Language:
English
Keywords:
ISCR; CR; FCL resource; IMF's Executive Board; FCL arrangement; Mexico; GDP; EMBIG Mexico; government effectiveness rank; nominal interest rate; emerging market volatility index; oil-price cycle; Global; term debt; asset price shock
Download PDF (4.3 MB)

This paper discusses Mexico's Review Under the Flexible Credit Line (FCL) Arrangement. Mexico has navigated successfully a complex external environment, characterized by falling commodity prices, a sharp appreciation of the U.S. dollar, and heightened volatility in international financial markets. The economy continues to grow at a moderate rate and inflation is close to the target. Looking ahead, activity should be supported by strengthening external demand and by the implementation of the structural reforms. The IMF staff's assessment is that Mexico continues to meet the qualification criteria for access to FCL resources

Abstract

This paper discusses Mexico's Review Under the Flexible Credit Line (FCL) Arrangement. Mexico has navigated successfully a complex external environment, characterized by falling commodity prices, a sharp appreciation of the U.S. dollar, and heightened volatility in international financial markets. The economy continues to grow at a moderate rate and inflation is close to the target. Looking ahead, activity should be supported by strengthening external demand and by the implementation of the structural reforms. The IMF staff's assessment is that Mexico continues to meet the qualification criteria for access to FCL resources

Context

1. The Mexican economy has been resilient in the context of a complex global environment. International oil prices declined by more than 50 percent since mid-2014. In addition, emerging market asset prices have been affected by a rise in global financial volatility and a portfolio shift away from emerging markets, driven by slowing growth in key economies and uncertainty related to the path of U.S. monetary policy. Along with other emerging market currencies, the Mexican peso depreciated sharply against the U.S. dollar over the last year. Nonetheless, the yields on local-currency government bonds have increased only mildly, economic activity continues to grow at a steady pace, and inflation remains low and stable.

2. Mexico’s macroeconomic policies and policy frameworks remain very strong. The flexible exchange rate has helped the economy adjust to external shocks. Monetary policy is guided by an inflation-targeting framework, and the financial regulatory and supervisory framework is strong. Fiscal policy is guided by the fiscal responsibility law, and the authorities are committed to a consolidation path that would lead to a gradual reduction of public debt over the medium term. The external current account deficit is low and stable, and there are no restrictions on capital flows. Steady implementation of the structural reform agenda would help raise the economy’s potential growth in the medium term. At the conclusion of the 2015 Article IV Consultation, Executive Directors expressed confidence in Mexico’s very strong economic fundamentals and policy frameworks.

3. Mexico’s successive FCL arrangements have supported the authorities’ policies by providing a buffer against tail risks. Mexico is deeply integrated into the global economy through both trade and financial channels, with particularly strong links to the United States. International investors held 45 percent of total public debt and 36 percent of local-currency-denominated sovereign bonds in 2015. Total foreign portfolio investment in Mexico reached US$ 478 billion (37 percent of GDP) at the end of 2014. High foreign participation in domestic financial markets brings substantial benefits, such as lower cost of finance and a more diversified investor base. However, it also exposes Mexico to abrupt shifts in investor sentiment toward emerging markets. Based on BIS data, the Mexican peso is the most actively traded emerging market currency in the world, with a daily global trading volume of US$135 billion. The authorities consider the FCL arrangement a valuable insurance against tail risks and continue to treat it as precautionary.

Recent Economic and Policy Developments

4. The economy continues to grow at a moderate pace. Growth is projected to be 2¼ percent in 2015, and to accelerate over the medium term (Figure 1). Stronger U.S. growth and the real depreciation of the currency should support Mexico’s manufacturing production and exports, with positive spillovers to domestic demand. The boost to activity from lower electricity prices should largely offset the growth effects of lower public spending. Private consumption growth would continue to be supported by steady wage growth and rising employment. Inflation is low, and is expected to remain close to the 3-percent target over the next year. The structural reforms are expected to raise potential growth over the medium term. Some of the benefits of the reform are already visible: private investment in gas pipelines, electricity generation, and telecommunications has picked up, the first auctions of oil fields have been completed, and the financial reform has helped spur competition in the banking sector.

Figure 1.
Figure 1.

Mexico: Recent Economic Developments

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

Sources: National authorities; Haver Analytics; Bloomberg; and IMF staff calculations.

5. Asset prices in Mexico have been affected by the rise in volatility in global financial markets. The peso had depreciated 30 percent against the U.S. dollar, and by 15 percent in real effective terms between mid-2014 and September 2015. Foreign exchange bid-ask spreads and stock market volatility increased to levels last seen during the euro area sovereign debt crisis in November 2011 and the taper tantrum, respectively. In response, the Foreign Exchange Commission reactivated two foreign exchange intervention schemes intended to reduce the risk of disorderly market conditions by increasing liquidity in exchange rate markets.1 In contrast, the sovereign bond market has been relatively calm: the long end of the domestic-currency yield curve has shifted up only modestly over the last year. Total non-resident ownership of sovereign debt has been broadly stable since the end of 2014, though there has been a decline in non-resident holdings of short-term paper (Figure 2). Portfolio capital inflows moderated, but stayed positive in the first half of the year. Higher frequency partial data from ETF’s and mutual funds suggest that outflow pressures intensified in July and August, and corporate bond issuance in foreign currency trailed off in the third quarter.

Figure 2.
Figure 2.

Mexico: Recent Financial Developments

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

Sources: National authorities; Haver Analytics; Dealogic; EPFR; Bloomberg; and IMF staff calculations.
uA01fig01

Bid-Ask Spread and Financial Market Volatility

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

Sources: Bloomberg L.P.; and IMF staff calculations.

6. Monetary policy remains appropriately accommodative. Year-on-year inflation has fallen below the 3-percent target in 2015. The pass-through from the currency depreciation to inflation has been very low and limited only to durable goods prices, with no signs of spillovers to other prices or wages so far. Inflation expectations remain well anchored. Real wage growth has been modest and broadly in line with productivity gains. Slack in the economy is expected to diminish only gradually going forward, keeping inflation pressures in check.

7. The authorities are committed to a gradual fiscal consolidation over 2015–18, as announced last year. The public sector borrowing requirement (PSBR) is projected to decline to 4.1 percent of GDP this year (from 4.6 percent in 2014). It would be reduced further by about ½ percentage point per year to reach 2½ percent of GDP in 2018, despite a significant decline in oil prices and a downward revision of oil production forecasts. This plan will help set the public debt-to-GDP ratio on a downward path. Delivering on this commitment would be important to restore fiscal buffers and keep financing costs low. Mexico’s sovereign debt ratings are high, with a stable outlook.

8. Mexico’s external sector position remains strong. The current account deficit is projected to widen to 2¼ percent of GDP in 2015 (from 1.9 percent in 2014), reflecting a reduction in the hydrocarbons trade balance. The non-hydrocarbon trade balance should benefit from the depreciation of the currency going forward. Over the medium term, the current account deficit could increase temporarily due to higher FDI related to the structural reforms, and then improve as oil production and exports pick up. The current account deficit in 2015 is broadly in line with fundamentals and desirable policy settings. The real effective exchange rate is assessed to be temporarily undervalued (by 3–12 percent), reflecting an overshooting of the nominal exchange rate related to heightened volatility of the prices of risky assets. The net international investment liability position is broadly stable at around 33 percent of GDP. Foreign exchange reserves remain adequate according to a range of indicators, although the recent intervention has led to a decline in the level of gross reserves from US$195.7 billion at end-2014 to US$177 billion in October 2015 (Figure 5 and Table 7).

Figure 3.
Figure 3.

Mexico: Qualification Criteria

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

Sources: Bloomberg L.P.; Datastream; EMED; Haver Analytics; and IMF staff calculations.1/ Combined permanent 1/4 standard deviation shocks applied to interest rate, growth, and current account balance.2/ Red bar shows ratio for end-year 2010, when FCL was approved.3/ Not taking into account offsetting measures required under the balanced budget rule.4/ Combined permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.5/ One-time 10 percent of GDP increase in debt-creating flows.
Figure 4.
Figure 4.

Mexico: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2014.
Figure 5.
Figure 5.

Mexico: Reserve Coverage in an International Perspective, 2014 1/

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

Sources: World Economic Outlook, Balance of Payments Statistics Database, and IMF staff estimates.1/ The assessing reserve adequacy (ARA) metric for emerging markets comprises four components reflecting potential balance of payment drains: (i) export income, (ii) broad money, (iii) short -term debt, and (iv) other liabilities. The weight for each component is based on the 10th percentile of observed outflows from emerging markets during exchange market pressure episodes, distinguishing between fixed and flexible exchange rate regimes.
Figure 5.
Figure 5.

Mexico: Reserve Coverage in an International Perspective, 2014

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

Sources: World Economic Outlook, and IMF staff estimates.
Table 1.

Mexico: Indicators of Fund Credit

article image
Sources: IMF Finance Department; Mexican authorities, and Fund staff estimates

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

Based on the rate of charge as of October 22, 2015. Includes GRA charges, surcharges under the system currently force and service charges.

Table 2.

Mexico: External Financing Requirements and Sources, 2011–20

article image
Sources: National authorities and IMF staff estimates.
Table 3.

Mexico: Selected Economic, Financial, and Social Indicators

article image
Sources: World Bank Development Indicators; CONEVAL; National Institute of Statistics and Geography; National Council of Population; Bank of Mexico; Secretariat of Finance and Public Credit; and IMF staff estimates.

CONEVAL uses a multi-dimensional approach to measuring poverty based on a “social deprivation index,” which takes into account the level of income; education; access to health services; to social security; to food; and quality, size, and access to basic services in the dwelling.

Percent of population enrolled in primary school regardless of age as a share of the population of official primary education age.

Contribution to growth. Excludes statistical discrepancy.

2015 based on data available through July 2015.

2015 based on data available through September 2015.

Includes public sector deposits.

Data exclude state and local governments and include state-owned enterprises and public development banks.

Table 4a.

Mexico: Financial Operations of the Public Sector, Authorities’ Presentation 1/

(In percent of GDP, except where noted)

article image
Sources: Mexican authorities and IMF staff estimates.

Data exclude state and local governments and include state-owned enterprises and public development banks.

From 2015 onwards, in line with the 2015 Income Law, gasoline and diesel excises are classified as non-oil tax revenue.

For 2015, it includes estimated inflows from the oil-price hedge for 107 billion pesos.

Includes pensions and social assistance benefits.

Due to lack of disaggregated data this item includes both financing and capital transfers.

The 2014 amendment to the FRL introduced a cap on the real growth rate of structural current spending. The latter is defined as total expenditure, excluding: (i) interest payments; (ii) non-programable spending; (iii) cost of fuels for electricity generation; (iv) direct physical investment of the federal government; and expenditure by state productive enterprises and their subsidiaries.

The cap on structural current spending real growth was set at 2.0 percent for 2015 and 2016.

Adjusting revenues for the economic and oil-price cycles.

Table 4b.

Mexico: Financial Operations of the Public Sector, GFSM 2001 Presentation 1/

(In percent of GDP, except where noted)

article image
Sources: Mexico authorities; and Fund staff estimates and projections.

Data exclude state and local governments and include state-owned enterprises and public development banks.

Revenue and expenditure figures differ from official data, because gasoline and diesel subsidies have been classified as expense in this table.

For 2015, it includes estimated inflows from the oil-price hedge for 107 billion pesos, which are treated as revenues arising from an insurance claim.

Interest payments differ from official data due to adjustments to account for changes in valuation and interest rates.

Includes revenue sharing between federal government and state and local governments.

Includes pensions and social assistance benefits.

Includes Adefas and other expenses, as well as the adjustments to the “traditional” balance not classified elsewhere.

This category differs from official data on physical capital spending due to adjustment to account for Pidiregas amortizations included in budget figures.

Adjusting revenue for the economic and oil-price cycles.

Corresponds to the gross stock of PSBR. It is calculated as the net stock of PSBR as published by the authorities, plus adjustments (to reflect additional public sector’s liabilities not included in the headline official figures) plus public sector financial assets.

Corresponds to the net stock of PSBR (i.e., gross stock net of public sector financial assets) as published by the authorities.

The 2014 amendment to the FRL introduced a cap on the real growth rate of structural current spending. excluding: (i) interest payments; (ii) non-programable spending; (iii) cost of fuels for electricity generation; (iv) government; and expenditure by state productive enterprises and their subsidiaries. The latter is defined as total budgetary expenditure, direct physical and financial investment of the federal

The cap on structural current spending real growth was set at 2.0 percent for 2015 and 2016, and equal to potential growth thereafter.

Table 5.

Mexico: Summary Balance of Payments

article image
Sources: Bank of Mexico; Secretariat of Finance and Public Credit; and Fund staff projections.

Total exports are defined net of imports by the maquila sector. Correspondingly, total imports do not include maquila sector imports.

Goods procured in ports by carriers.

Oil, oil derivatives, petrochemicals and natural gas.

Table 6.

Mexico: Financial Soundness Indicators 1/

(In percent)

article image
Sources: Financial Soundness Indicators

End of period, unless otherwise noted.

Data for end-August.

Table 7.

Mexico: Financial Indicators and Measures of External Vulnerabilities

article image
Sources: Bank of Mexico; National Banking and Securities Commission; National Institute of Statistics and Geography; Secretary of Finance and Public Credit; and IMF staff estimates

Excludes balances under bilateral payments accounts. For 2009, includes the allocation of SDR 2.337 billion in the general allocation implemented on August 28, 2009, and another SDR 0.224 billion in the special allocation on September 9.

The ARA metric was developed by the Strategy and Policy Review Department at the IMF to assess reserve adequacy. Weights to individual components were revised in December 2014 for the whole time series.

9. The financial sector remains sound, and domestic credit growth is close to trend. The commercial banking system remains well capitalized, liquid, and profitable. The authorities’ stress tests and staff analysis suggest that banks and the corporate sector would be resilient to negative shocks to growth, interest rates, and asset prices. Annual nominal growth of bank credit to the nonfinancial private sector was around 10 percent in the first half of 2015, consistent with trend increase in financial intermediation.

10. External risks for Mexico remain high one year into the FCL arrangement. The updated external stress index (Box 1) shows that the external conditions have deteriorated only slightly since the approval of the FCL arrangement, but could worsen sharply in a downside scenario. Some of the risks identified last year have already materialized: asset price volatility increased significantly and oil prices fell. Given continued uncertainty about the path of U.S. monetary policy, a renewed increase in financial markets volatility is a distinct possibility. The downside scenario in the external stress Index does not assume a further fall in oil prices, as the risk of that has diminished. It is based on a financial shock including a negative shock to emerging market asset prices, and a rise in U.S. interest rates not driven by positive growth prospects in the United States. The Global Financial Stability Map shows that emerging market risks, and market and liquidity risks, have increased over the last year.

The Updated External Economic Stress Index

The external economic stress index was initially presented Mexico’s staff report on the arrangement under the Flexible Credit Line, November 2014 (based on the methodology in The Review of Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument, IMF Policy Paper, May 2014). The calculation of the index required three main choices: (i) selection of relevant external risks, (ii) selection of proxy variables capturing these risks, and (iii) choice of weights for these variables. The updated index is presented below (using the same risk variables with updated weights based on the latest data).

Risks. Mexico’s exports, remittances, and inward FDI are closely related to economic developments in the United States. The open capital account and the significant stock of debt and equity portfolio investment expose Mexico to changes in global financial conditions. Finally, oil production and fiscal revenues depend on world energy price developments.

Variables. Risks to exports, remittances and inward FDI are all proxied by U.S. growth. Risks to debt and equity portfolio flows are proxied by the emerging market volatility index (VXEEM) and the change in the U.S. Treasury 10-year yield. Risks to the oil industry are proxied by the change in world oil prices.

Weights. The weights were estimated using balance of payment and international investment position data, all expressed in shares of GDP. The weight on U.S. growth (0.47) corresponds to the sum of exports, FDI, and remittances; the weights on the change in the U.S. long-term yield (0.33) and the VXEEM (0.16) correspond to the stocks of foreign debt and equity; and the weight on the change in the oil price (0.04) corresponds to oil exports.

Baseline scenario. This scenario corresponds to the WEO projections for U.S. growth, oil prices, and the U.S. 10-year bond yield. The VXEEM is assumed to remain unchanged at its end-September 2015 level.

Downside scenario. This scenario is the same as considered last year because the main risks are the same. The specific assumption is that U.S. long-term interest rates rise by 100 basis points in the absence of a positive U.S. growth shock (for example due to a decompression of term premium, financial stability concerns, shifts in investor confidence, or an inflationary shock). The tightening of financial conditions leads to a reduction in U.S. growth by 0.5 percentage points and an abrupt surge in global financial market volatility, with the VXEEM rising by 2 standard deviations (for comparison, the VXEEM increased by 4 standard deviations between 2008Q4 and 2011Q3). The associated volatility surge prompts sharp capital outflows from emerging markets. The downside scenario is illustrated in the chart by dots, which represent the level to which the index would fall if the described shock materialized in any given quarter.

uA01fig02

External Economic Stress Index

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

uA01fig03

Global Financial Stability Map

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

Source: Global Financial Stability Report.Note: Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite.

11. The authorities highlighted that the FCL arrangement continues to play an important role as insurance against tail risks, and noted that Mexico has no intention of using the facility on a permanent basis. They consider that external risks remain elevated in the context of uncertainty about U.S. monetary policy normalization and continued geopolitical tensions amid a weaker outlook for global growth. Conditional on a reduction of global risks affecting Mexico, including risks related to the normalization of U.S. monetary policy, they intend to phase out the use of Fund resources in any subsequent FCL arrangements, with a view to eventually exit the facility. The ongoing fiscal consolidation and the implementation of structural reforms to boost growth would help improve resilience. The authorities are using foreign exchange interventions only on a temporary basis in response to heightened market volatility, and are committed to rebuilding reserve buffers in the future.

Review of Qualification

12. Mexico continues to meet the qualification criteria for an FCL arrangement according to staffs assessment (Figure 3). Mexico has very strong economic fundamentals and institutional policy frameworks. Monetary policy is guided by a credible inflation-targeting framework in the context of a flexible exchange rate regime, and fiscal policy is guided by the fiscal responsibility law.

  • Sustainable external position. The external current account deficit is small and is envisaged to remain close to its current level over the medium term. The updated external debt sustainability analysis shows that Mexico’s external debt is relatively low, and would rise only moderately over the medium term even under negative shocks (Figure 4).

  • Capital account position dominated by private flows. The bulk of Mexico’s external debt is owed to private creditors. Private portfolio flows (debt and non-debt creating) and FDI continue to be large relative to the overall balance of payments flows.

  • Track record of steady sovereign access to international capital markets at favorable terms. Mexico is among the highest-rated emerging markets. The 10-year sovereign bond (EMBIG) spread has risen to 275 basis points and five-year CDS spreads have also risen to around 152 basis points (as of end-October, 2015), but both remain lower than the spreads for most other emerging markets. Public debt has average maturity of close to 8 years, and Mexico continues to place successfully sovereign bonds in international capital markets at low yields.2

  • Relatively comfortable international reserve position. Gross international reserves stood at US$177 billion at end-October 2015. This level is comfortable relative to most reserve coverage indicators.

  • Sustainable public debt position and sound public finances. Fiscal policy remains prudent. The authorities have started to reduce the PSBR in 2015, and plan to bring it down further in the coming years, which would put the debt-to-GDP ratio on a downward path. The updated debt sustainability analysis shows that the debt trajectory is overall robust to standard shocks (Figure 7 and Table 9). The debt projection is sensitive to growth and the evolution of oil prices, but debt would remain contained even under severe negative shocks.

  • Low and stable inflation. Annual inflation is slightly below the permanent target of 3 percent and well within the 2-4 percent range. Inflation expectations are firmly anchored.

  • Sound financial system and the absence of solvency problems that may threaten systemic stability. The capital adequacy ratio for the banking system stood at 15.4 percent in July 2015. Corporate balance sheets remain resilient to growth and asset price shocks. The broader financial system is also sound. Private pension funds, which hold assets of about 16 percent of GDP, have a conservative investment profile. All insurance companies comfortably satisfy the capital requirements under a Solvency II-type regime adopted in April 2015. Real estate investment trusts have grown since 2011, but remain small and are financed mostly by equity, with statutory limits on their leverage.

  • Effective financial sector supervision. The latest FSAP concluded that Mexico’s financial sector supervision framework remains effective. Mexico adopted the Basel III capital rules in 2013, and the Basel Committee has assessed it as compliant earlier this year. Liquidity coverage ratio (LCR) minimum requirements have been in place since January 2015. The regulation of financial groups was enhanced in January 2014 through the implementation of supervision at the group level. The authorities monitor closely the operations of foreign bank subsidiaries—about 70 percent of banking system assets—to ensure compliance with regulatory norms and restrict potential funding drains.

  • Data transparency and integrity. The overall quality of Mexican data continues to be high and adequate to conduct effective surveillance as described in the June 2015 data ROSC update. Mexico remains in observance of the Special Data Dissemination Standards (SDDS).

Figure 6.
Figure 6.

Mexico: Public DSA - Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

Source: IMF staff.
Figure 7.
Figure 7.

Mexico: Public DSA - Stress Tests

Citation: IMF Staff Country Reports 2015, 322; 10.5089/9781513503158.002.A001

Source: IMF staff.
Table 8.

Mexico: Baseline Medium-Term Projections

article image
Sources: Bank of Mexico; National Institute of Statistics and Geography; Secretary of Finance and Public Credit; and IMF staff projections.

Contribution to growth. Excludes statistical discrepancy.

Reported numbers may differ from authorities’ due to rounding.

Table 9.

Mexico: External Debt Sustainability Framework

article image

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period, excluding reserve accumulation.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

13. International indicators of institutional quality show that Mexico has above average government effectiveness. The institutional quality of economic policy is underpinned by the inflation-targeting framework (anchored by a strong, independent central bank), the fiscal responsibility law, and the strong prudential and regulatory framework for financial supervision. According to the World Bank’s Governance Indicators, Mexico’s government effectiveness ranks at the 61st percentile among all countries in 2014. A weaker area is control of corruption, where Mexico stands at the 26th percentile. However, a recent constitutional reform (from May 2015) further empowers the federal government to investigate, prosecute, and sanction corrupt activity in Mexico. The Reform creates a National Anticorruption System, increases transparency requirements in the use of public funds, and raises the statute of limitations.

Safeguards Assessment

14. Staff has completed the safeguards procedures for Mexico’s 2014 FCL arrangement. The authorities provided the necessary authorization for Fund staff to communicate directly with the Bank of Mexico’s external auditor, PricewaterhouseCoopers (PwC) México. PwC issued an unqualified audit opinion on the Bank of Mexico’s 2013 financial statements on April 25, 2014. Staff reviewed the 2013 audit results and discussed these with PwC. No significant safeguards issues emerged from the conduct of these procedures.

Staff Appraisal

15. The FCL arrangement for Mexico provides protection against tail risks and is likely to have contributed to financial stability in Mexico. Uncertainty surrounding the global outlook, including risks related to the tightening of monetary policy in the United States, remains high. Mexico, with its open capital account and a large stock of foreign portfolio investment is exposed to changes in investors’ preferences. Mexico’s resilience to the recent bouts of emerging market volatility and the collapse of oil prices attests to its strong policies and fundamentals. The FCL has supported this resilience by serving as insurance against tail risks and authorities intend to treat it as precautionary. Conditional on a reduction of global risks affecting Mexico, including risks related to the normalization of U.S. monetary policy, they intend to phase out the use of Fund resources in any subsequent FCL arrangements, with a view to eventually exit the facility.

16. The staff’s assessment is that Mexico continues to meet the qualification criteria for access to FCL resources. As noted in the board assessment of the 2015 Article IV consultation, Mexico has a very strong policy framework and economic fundamentals. The authorities have a successful record of sound policy management and remain committed to prudent policies going forward. Staff therefore recommends completion of the review under the FCL arrangement for Mexico.

1

The first scheme, activated last December, is a minimum price FX auction of US$200 million triggered when the currency depreciates by 1.5 percent vis-a-vis the US dollar with respect to the previous day (the threshold has been 1 percent since July 30). The second scheme, in place since March 2015, is a preannounced daily FX auction (initially of US$52 million, raised to US$200 million since July 30) with no minimum price. The two schemes will be active through the end of November. Both intervention modalities have been used in the past.

2

In April 2015 Mexico issued its third century bond for EUR 1.5 billion with a yield of 4.2 percent.

1

Amount based on the Special Drawing Right (SDR) quote of November 23, 2015 of 1 USD = SDR 0.726977

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Mexico: Review Under the Flexible Credit Line Arrangement-Press Release; and Staff Report
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2015: Issue 322
Publisher:
International Monetary Fund
ISBN:
9781513503158
ISSN:
1934-7685
Pages:
30
DOI:
https://doi.org/10.5089/9781513503158.002
Figure 1.

Mexico: Recent Economic Developments
Figure 2.

Mexico: Recent Financial Developments

Bid-Ask Spread and Financial Market Volatility
Figure 3.

Mexico: Qualification Criteria
Figure 4.

Mexico: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)
Figure 5.

Mexico: Reserve Coverage in an International Perspective, 2014 1/
Figure 5.

Mexico: Reserve Coverage in an International Perspective, 2014

External Economic Stress Index

Global Financial Stability Map
Figure 6.

Mexico: Public DSA - Composition of Public Debt and Alternative Scenarios
Figure 7.

Mexico: Public DSA - Stress Tests