IMF NEWS

Female factory worker in Cuernavaca, Mexico: IMF says increasing the participation of women in the labor force would boost country's potential growth (Carlos Tischler/Newscom)

• IMF Country Focus

Strong Policies Helping Mexico Confront External Risks

November 22, 2016

• Economic policies are sound, fiscal deficit falling and inflation stable
• Main external risks: rising trade protectionism and financial market volatility
• Improving the business environment, raising female labor participation would boost potential growth

While Mexico’s economy continues to grow—although at a slower pace—the country will need to navigate an uncertain and complex external environment, with elevated risks of protectionism and heightened global financial market volatility, the IMF said in its latest annual assessment of the second-largest economy in Latin America.

Despite slowing growth as a result of weaker investment and manufacturing exports, other parts of the economy are doing well. A steady increase in jobs has kept the unemployment rate close to post-crisis lows of 4 percent, wages are rising, inflation is low, and there has been an uptick in private consumption and credit growth.

Mexico’s economy is highly affected by global developments because of its close production and financial links with other economies. According to IMF estimates, global factors, such as changes in risk aversion or commodity prices, explain about half of the variance in Mexico’s bond inflows. The large presence of foreign investors in Mexico’s real economy and financial markets make it even more important for policymakers to maintain strong macroeconomic policies.

Policies on track

To lower Mexico’s debt, the authorities are implementing a multi-annual deficit reduction plan to reduce the deficit to 2.5 percent of GDP by 2018. Having met the 2015 deficit goal, the authorities are on track to also meet this year’s target. A particularly important aspect of this consolidation pertains to reforms in PEMEX, the state-owned oil company. Earlier this month, PEMEX released a five-year business plan that aims at turning the company profitable by 2020, through efficiency improvements and a focus on high-return activities.

Monetary policy has been tightened through increases in the policy interest rate, as inflation rose from historic lows toward the 3 percent inflation target. Inflation expectations are close to the target, confirming the credibility of monetary policy.

The report notes that the financial system remains strong and resilient to severe shocks, given that financial institutions and non-financial corporations have high initial capital levels. Credit growth remains buoyant at 16 percent, contributing to financial deepening.

The exchange rate has depreciated by close to 50 percent against the U.S. dollar over the past two years, which is helping facilitate the adjustment of the economy to external shocks. Going forward, the exchange rate should remain the first line of defense. It can play this role precisely because of the central bank’s credibility.

Increasing potential growth

While Mexico has achieved macroeconomic stability, per capita output has grown slowly over the past two decades. Structural reforms implemented over the past few years addressed important bottlenecks, including in the energy, telecommunications, and the financial sectors, which have all been opened to more competition. These steps are expected to raise potential growth by about 0.5 percentage points to about 2¾ percent over the medium term.

But even higher growth could be achieved through further improvements to the investment climate, which would entail, among other measures, strengthening the rule of law and raising female labor force participation (see box). Action on this front, along with further efforts to improve the efficiency of social spending and access to financial services by low-income households would help reduce poverty and foster inclusive growth.

There is a lot of untapped potential regarding the participation of women in the labor force. Currently, only 45 percent of Mexican women work outside the home—one woman for every two men—compared to an average of around 50 percent in Latin America and in the Organisation for Economic Co-operation and Development members. To address this, child care services should be made more widely available and anti-discrimination laws more strictly enforced. The participation gap between men and women is particularly large at low levels of education. Improving education would therefore boost productivity and reduce this gap.