Press Release No. 17/435

IMF Executive Board Concludes the 2017 Article IV Consultation with Mexico

November 13, 2017

On November 8, 2017, the Executive Board of the International Monetary Fund (IMF) Concluded the Article IV consultation with Mexico.^[1] 

The Mexican economy has exhibited resilience in the face of a complex external environment. Output has continued to grow at a moderate pace while inflation has temporarily risen above the central bank’s target. The flexible exchange rate is playing a key role in helping the economy adjust to external shocks. Fiscal consolidation is on track, monetary policy has maintained a tight stance, and financial supervision and regulation remain strong. The ambitious program of structural reforms is starting to bear fruit, although its full impact will take time to materialize. 

The economy is projected to grow by 2.1 percent in 2017. Private consumption remains the main driver of activity, supported by manufacturing exports, while investment has remained weak amid uncertainty about Mexico’s future trade relationship with the United States. Growth is expected to slow slightly in 2018 before picking up speed as the uncertainty is resolved. Year-on-year headline inflation has accelerated to more than 6 percent (with core inflation at almost 5 percent), reflecting mainly the recent liberalization of gasoline prices. Both headline and core inflation are expected to gradually converge toward the target by end-2018 as medium-term inflation expectations remain well anchored. 

The authorities have taken a more restrictive macroeconomic policy stance with the central bank proactively tightening monetary policy by increasing the policy rate by a cumulative 400 basis points since December 2015 and the government adhering to its fiscal consolidation plan. The public sector borrowing requirement is projected to fall to 1.4 percent of GDP this year, as the government has indicated that it will save the entirety of a 1.5-percent-of-GDP one-off profit transfer from the central bank. For the first time since 2010, the structural primary balance is projected to show a surplus. Moreover, the public debt-to-GDP ratio is projected to decline to 54 percent this year amid both the fiscal consolidation and the peso’s appreciation, from 58 percent in 2016. 

Mexico’s external position remains broadly consistent with medium-term fundamentals and desirable policy settings. The current account deficit is projected to narrow to 1.8 percent of GDP this year, on the heels of an improvement of the non-oil trade balance driven by very robust and broad-based manufacturing export growth, and continued strong remittances. The net international investment position is projected to continue to strengthen in 2017 and to remain just below 40 percent of GDP over the medium term.  

Executive Board Assessment^[2] 

Directors highlighted the resilience of the Mexican economy in the context of a challenging external environment. At the same time, they noted that Mexico continues to face external risks, given its strong financial and trade linkages with the rest of the world. Directors expressed confidence that Mexico’s very strong policies and institutional policy frameworks will continue to underpin the economy’s resilience, while the Flexible Credit Line arrangement provides additional insurance against tail risks. Directors emphasized that reinvigorating the structural reform agenda with a focus on strengthening the rule of law, fighting corruption, and reducing informality would help boost potential output and foster inclusiveness. 

Directors commended the authorities for adhering to their fiscal consolidation plan. They encouraged continued efforts to ensure that the public debt‑to‑GDP ratio is on a firmly downward trajectory. Directors highlighted the need to strengthen non‑oil tax collections, with emphasis on reducing the VAT compliance gap, improving the effectiveness of public administration and the efficiency of education and health spending, and consolidating and better targeting social assistance programs. They also underscored the importance of continued improvements in PEMEX’s profitability and efficiency. 

Directors recommended further strengthening the fiscal framework, including by giving more emphasis on the desired level of debt, and limiting the use of exceptional circumstance clauses. They also suggested that one‑off profit transfers from the Bank of Mexico to the budget should be entirely used to reduce the public sector borrowing requirement and public debt. 

Directors considered the current pause in monetary tightening to be appropriate. They broadly noted that monetary policy could be eased when inflation is firmly on a downward path and inflation expectations are well anchored, but urged the authorities to carefully weigh the risks and ensure that policy decisions remain data‑driven. They recommended continued improvements in monetary policy communication. Directors agreed that the flexible exchange rate should continue to play a key role in helping the economy adjust to external shocks. 

Directors welcomed the financial sector’s resilience and recommended that it be further strengthened through regulatory reform. They agreed that the new national strategy for financial inclusion would help improve access to financial services for low‑income households and small enterprises, although further efforts are needed to deepen the financial sector. 

Directors recommended perseverance in implementing the authorities’ structural reform agenda. They highlighted the need to prioritize reforms targeting governance, security, the rule of law, and informality. They noted the importance of enhancing the efficiency of judicial institutions, and urged implementation of the National Anti‑Corruption System. Directors stressed that strengthening the rule of law and improving the enforcement of anti‑discrimination laws could help reduce gender imbalances and raise female labor force participation. Directors urged the authorities to address any shortcomings that may be identified in the evaluation of the AML/CFT framework.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.