Public Information Notice: IMF Concludes Article IV Consultation with Mexico

March 22, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On March 17, 2000, the Executive Board concluded the Article IV consultation with Mexico.1


The Mexican economy has made important strides from the 1994-95 economic and financial crisis, with economic growth averaging 6 percent in 1996-97, and inflation declining from 52 percent in 1995 to 19 percent in 1998. The marked recovery in economic performance was disrupted somewhat in 1998 by unsettled conditions in international capital markets and a decline in world oil prices. However, the effects of the adverse shocks were mitigated by the authorities' prompt action taken to cut government expenditure by 0.7 percentage point of GDP and to tighten monetary policy on several occasions.

Economic performance in 1999 and early 2000 has been good. Annual real GDP growth accelerated from 2.6 percent in the last quarter of 1998 to 5.3 percent in the fourth quarter of 1999; real GDP is estimated to have increased by 3.7 percent for the year as a whole. The recovery in economic activity was initially driven by higher exports and investment, but more recently by a significant rebound in private consumption. The 12-month inflation rate fell to 12.3 percent in December 1999 (less than the official target of 13 percent) and declined further to 10.5 percent in February 2000.

The overall public sector deficit declined to 1.1 percent of GDP from 1.3 percent of GDP in 1998. Revenues increased as a share of GDP, owing to higher social security contributions and steps taken to improve the efficiency of the tax system, including by broadening the corporate income tax base, strengthening VAT collections, and reducing tax evasion. Expenditures also rose as a share of GDP, due in part to increased spending by public enterprises and higher social spending.

Notwithstanding a pick-up in imports, the external current account narrowed from 3.8 percent of GDP in 1998 to an estimated 2.9 percent of GDP in 1999 in response to improved terms of trade and increased non-oil exports. Capital inflows increased markedly in the second half of the year, led by foreign direct investment which covered more than 80 percent of the current account deficit, and net international reserves rose by US$3.9 billion. A continued improvement in labor productivity and wage restraint helped Mexico maintain external competitiveness, as indicated by the level of the real effective exchange rate based on relative unit labor costs and the buoyancy in non-oil exports. External debt as a share of GDP declined further in 1999 to 33 percent from 38 percent in 1998.

The government has adopted measures to strengthen the operating environment of the banking system and to facilitate the banking system recovery. The definition of regulatory capital has been significantly tightened and will be phased in through end-2002, coinciding with the lifting of the universal deposit guarantee (and replaced by a limited insurance scheme). In addition, loan-loss provisioning of credit card and mortgage loans has been tightened and the supervisory authorities have made progress in the areas of banks' internal controls, accounting procedures, and disclosure. Important steps have been taken to advance the bank restructuring process with preparations underway for the Bank Savings Protection Institute (IPAB) to liquidate its assets according to a specific timetable and to sell the large banks Serfin and Bancrecer. In addition, the recently-announced merger of Bancomer and BBV will include a large capital infusion and create Mexico's largest financial institution.

Executive Board Assessment

Directors commended the authorities for their prudent economic management, which had helped the Mexican economy to withstand the unsettled conditions in international capital markets and the decline of world oil prices in 1998 without major contagion effects.

Directors noted the good performance of the Mexican economy in 1999 and early 2000, in particular the continued growth momentum, the decline in inflation, and the rise in international reserves. While recognizing that improved international capital market conditions and higher oil prices had contributed to the favorable economic developments, Directors underscored the important role played by the government's perseverance in the pursuit of sound economic policies. They stressed the need for the authorities to safeguard these gains by steadfastly pursuing their prudent macroeconomic policies and agenda reform, particularly in the tax area and in the financial sector. Directors commended the government's intention to ensure a smooth transition to the next administration, noting that such a transition would signal a very positive departure from past trends.

Directors commended the authorities for their commitment to a prudent fiscal policy stance during 2000 and their intention to tighten fiscal policy in the event it is required to stabilize domestic demand. They supported the authorities' intention to maintain control over expenditures in the context of the recent rise in world oil prices and to improve further the control mechanisms over public sector finances generally, including through careful monitoring of public enterprise expenditure and providing quarterly projections to congress. In this connection, some Directors observed that a stronger fiscal adjuster for public enterprises would have enhanced control over the operations of those enterprises. They welcomed the newly created oil stabilization fund and encouraged the authorities to devise transparent rules for the operation of that fund.

Directors observed that monetary policy, within the context of a floating exchange rate regime, has contributed to reducing inflation. They expressed concern about the sharp rise in the monetary base in the latter part of 1999, but regarded the preemptive tightening of monetary policy in January 2000 as a further indication of the Bank of Mexico's commitment to reduce inflation. Directors supported the authorities' intention to gradually implement a policy of inflation targeting, which should aid in reaching the objective of reducing inflation to low levels by 2003.

Directors noted with satisfaction the recent improvement in international market sentiment towards Mexico, as evidenced by the recent upgrade by two major credit rating agencies and a decline in sovereign spreads. They indicated that large capital inflows associated with this improvement could result in a sizable increase in domestic demand and a further appreciation of the real exchange rate. Most Directors cautioned against an accommodative monetary policy, noting that this would make the Mexican economy more susceptible to sudden adverse shifts in market sentiment. Directors agreed that a tightening of fiscal policy would be the most effective means in such circumstances to contain demand and maintain competitiveness.

Directors commended Mexico's good progress in the area of structural reforms. They welcomed the measures that had been introduced in 1999 to improve tax efficiency, and supported the authorities' efforts to reach a national consensus that would facilitate submission of a tax reform bill in the near future. Reform of the tax system aimed at raising non-oil revenues was seen as essential in order to reduce over time the high dependency of the budget on oil revenues. The authorities were urged to reconsider the imposition of the extraordinary tariff introduced in 1999 on imports for countries without a free trade agreement with Mexico, as it had negligible fiscal impact and imposed costs in terms of distortion to trade flows. Directors welcomed the authorities' plan to increase social expenditure and encouraged them to improve the efficiency and broaden the coverage of their poverty alleviation strategy.

Notwithstanding the important progress made in reforming the banking system during the last few years, Directors expressed concern about the remaining fragility of the banking system and its undercapitalization. They welcomed the measures adopted to strengthen the regulatory framework, and stressed the importance of the authorities ensuring that banks comply with the new capital regulations and using the banks' consolidation plans as a guideline for compliance with the new standards and regulations. In this regard, they welcomed the authorities' recent actions that give incentives to banks to comply with required regulations ahead of schedule.

Directors were satisfied with the important steps taken to advance the bank restructuring process, and gave great importance to the authorities' plans to develop rapidly a market for the securities of IPAB, the Bank Savings Protection Institute. Directors urged that all needed steps are taken to ensure that additional bank restructuring operations and asset sales take place as scheduled.

Directors observed that the legislation currently before congress to enhance bankruptcy procedures and enforcement of creditors' rights is critical to strengthening further the banking system and facilitating financial intermediation. They supported the authorities' efforts to pass legislation that would grant greater autonomy to the supervisory authority.

Directors noted the considerable progress made by Mexico in improving the quality, timeliness, and coverage of data provided to the Fund and to the public, and endorsed the steps being taken to further improve the quality and availability of data on private sector external indebtedness.

Mexico: Selected Economic and Financial Indicators

  1996 1997 1998 1999

Real economy (annual percentage change)        
Real GDP 5.1 6.8 4.8 3.7
Real GDP per capita 3.3 5.0 3.0 1.9
Gross domestic investment (in percent of GDP) 23.2 26.0 24.3 23.2
Gross national savings (in percent of GDP) 22.5 24.2 20.6 20.3
Consumer prices (end of year) 27.7 15.7 18.6 12.3
External sector (annual percentage change)        
Exports, f.o.b.1 22.7 13.1 1.1 15.2
Imports, f.o.b. 27.4 24.6 12.7 10.7
External current account (in percent of GDP) -0.7 -1.9 -3.7 -2.9
Change in net international reserves
(in billions of U.S. dollars)
6.3 13.5 3.7 3.9
Outstanding external debt (in percent of GDP) 49.5 38.1 38.1 33.0
Total external debt service (in percent of exports
of goods, services, and transfers)
55.0 51.8 38.8 36.4
Nonfinancial public sector (in percent of GDP)        
Primary balance 4.3 3.5 1.7 2.5
Overall balance 0.0 -0.7 -1.2 -1.1
Net public external debt (including IMF) 24.3 18.1 19.6 16.1
Money and credit (annual percentage change)        
Monetary base 25.7 29.9 20.5 43.5
Broad money 38.3 27.2 24.0 13.4
Treasury bill rate (28-day cetes, in percent,
annual average)
31.4 19.8 24.8 21.4

Sources: National Institute of Statistics and Geography; Bank of Mexico; Secretariat of Finance and Public Credit; and IMF staff estimates.

1Includes net proceeds from in-bond industries

1Under 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. At the conclusion of the discussion, the Chairman of the Board summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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