Public Information Notice: IMF Concludes 2003 Article IV Consultation with Mexico

October 30, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On October 15, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mexico.1


After a strong performance from 1997 to 2000, output fell in 2001 in response to the U.S. downturn. While growth rebounded in the first half of 2002, it has stalled since, reflecting both the delayed U.S. recovery and sluggish domestic spending. In spite of lower wage growth, higher administered and agricultural prices pushed up headline inflation to 5.7 percent at end-2002, compared with the Bank of Mexico's (BOM) target of 4.5 percent. Stagnant non-oil export volumes since 2001 have been more than offset by higher oil exports and a contraction in imports, leading to a narrowing in the current account deficit. The current account deficit has been almost entirely financed by FDI inflows.

Real GDP remained subdued in the first half of 2003, with growth of 1.4 percent (seasonally adjusted) in the four quarters ending in the second quarter. While recent indicators of activity have been mixed, most observers still expect the economy to recover in the second half of the year, in line with U.S. recovery. Headline inflation also continued to rise in the first months of 2003, but then dropped significantly to 4 percent in August and September, as inflation expectations declined and earlier price shocks unwound. Core inflation fell to 3.5 percent in April, and then stabilized around that level through September. The current account deficit continued to moderate in the first half of 2003. Private external borrowing also declined in the first half of the year, as firms increasingly switched from foreign to domestic capital markets to meet their financing needs.

During 2002 and the first quarter of 2003, net international reserves increased by US$9.3 billion, largely due to the impact of high oil prices on PEMEX receipts. A new mechanism was implemented in May to slow the pace of reserve accumulation and lower the cost associated with carrying those levels of reserves. Gross international reserves amounted to 106 percent of short-term debt by residual maturity at end-September 2003.

The pace of fiscal consolidation, viewed in terms of the broad public sector deficit, has been slower than envisaged in the authorities' 2002 medium-term plan. While the budget target of an augmented deficit of 3.4 percent of GDP for 2003 is likely to be met, higher oil revenues are expected to offset shortfalls in other revenues, increasing the sensitivity of the fiscal situation to swings in oil prices. Expenditures are also expected to exceed budget estimates.

The BOM tightened its monetary stance starting September 2002 in response to rising inflation expectations. With the subsequent reduction in both headline inflation and inflation expectations, prospects are favorable for bringing end-year headline inflation below 4 percent. After rising to about 10 percent in early March, short-term interest rates fell below 5 percent in July, but have increased in recent weeks in response to the weakness in the peso. At the same time, the recent depreciation of the peso implies that monetary conditions have eased further, providing support to activity.

Market sentiment toward Mexico remains positive, as reflected in its investment-grade status. Turbulence in emerging markets in 2002 was weathered well, and sovereign bond spreads have declined to a historical low of 200 basis points in recent weeks.

The government has made significant progress in strengthening the structure of public debt. Public external debt, for instance, has fallen further from 15 percent of total debt in 2000 to 13½ percent in 2002. The government successfully issued five bonds with collective action clauses this year. The latest issue (US$1 billion of 10-year bonds) would pre-fund part of the 2004 financing requirements on terms favorable to Mexico. In addition, Mexico became the first country to redeem all of its Brady bonds. Nevertheless, some public debt vulnerabilities remain, with a large portion of domestic debt either short-term or linked to short-term interest rates, and a significant gross financing need of the public sector.

Executive Board Assessment

Executive Directors commended the Mexican authorities for their substantially strengthened policies, which have helped underpin macroeconomic stability and investor confidence and enabled Mexico to successfully weather the difficult global and regional conditions of recent years. They welcomed in particular the continued modernization of the financial sector, the strengthened structure of the public debt, the reduction in inflation to low levels, and the progress made in reducing poverty. The key challenges going forward will be to diversify the sources of economic growth, and strengthen medium-term growth prospects sufficiently to achieve significant further reductions in poverty.

Against this background, Directors urged the authorities to restart quickly the process of fiscal consolidation and reinvigorate the implementation of productivity-enhancing structural reforms—areas in which recent progress has been disappointing owing to difficulties in forging the needed political consensus. Of particular importance will be rapid approval and implementation of structural reforms with respect to the tax system, the energy sector, the labor market, and the judicial system, which together will help boost private investment and employment and maintain competitiveness in an environment of heightened global competition. It was noted in this context that further efforts to build greater public awareness of the importance of these reforms will be helpful for achieving the appropriate degree of ambition in their scope and speed. Directors supported the authorities' efforts to improve governance, fight corruption, and enhance transparency, and they encouraged them to persevere in these efforts.

Directors endorsed the authorities' medium-term fiscal framework, which calls for further fiscal adjustment to lower the public debt-to-GDP ratio. To achieve this objective, the authorities will need to give renewed impetus to the consolidation process in 2004, while ensuring effective management of oil revenues. Over the medium term, they will also need to address the challenges posed by the significant reliance of public sector revenues on oil prices and the growing spending pressures. Fiscal reforms based on measures that increase efficiency and boost confidence in sustainability will help strengthen the foundations for faster medium-term growth while limiting any near-term negative consequences.

Directors welcomed the authorities' recent efforts to renew tax reform discussions. A broad-based tax reform would enhance the efficiency of the tax system and promote fiscal stability. Directors agreed with the view that formally linking the annual budget discussions to a medium-term plan that incorporates a comprehensive view of fiscal developments would serve to strengthen the fiscal framework. In addition, a fiscal responsibility law would provide a useful framework for setting medium-term targets, including for the debt path, and for reconciling the tax, expenditure, and social sector policy objectives. Directors suggested that the authorities set and regularly update specific medium-term objectives for the augmented deficit and debt to underpin the annual budget discussions.

Directors commended the Bank of Mexico for implementing a prudent and forward-looking monetary policy, which has served to boost market confidence and promote financial stability. They considered that declining inflation expectations and economic slack will contribute to the convergence of inflation toward the target by end-2003, while the recent easing in monetary conditions will help support activity in the period ahead.

In discussing the operating procedures for monetary policy, Directors noted that the corto has allowed for large and rapid adjustments in interest rates, and contributed to Mexico's impressive record in reducing inflation. Many Directors considered, however, that as inflation and interest rates stabilize at low levels, a short-term interest rate target would provide a greater degree of monetary control and increase transparency, thereby helping to keep inflation within a narrow target range and communicating the authorities' monetary policy intentions more clearly. At the same time, given the importance of correct timing and careful management of the transition process, they considered that the authorities are best qualified to define the appropriate timing.

Directors observed that Mexico's flexible exchange rate regime has been effective in cushioning the economy from external shocks. They agreed that the new rules-based mechanism to reduce the pace of accumulation of foreign reserves does not change the authorities' transparent approach to reserves management and the commitment to a market-determined exchange rate. Directors encouraged the authorities to ensure that reserves remain adequate.

Directors welcomed the authorities' efforts to further strengthen the financial regulatory framework. Important challenges in the period ahead will be to deepen financial intermediation without excessive risk-taking, and to streamline financial rules and regulations to encourage innovation and competition. In this regard, Directors welcomed the high priority attached by the authorities to strengthening oversight of the rapidly growing nonbank institutions. They commended Mexico's continued efforts to combat money laundering and the financing of terrorism.

Directors endorsed the authorities' commitment to continue to reduce vulnerabilities relating to the public debt through increasing issuance of fixed-rate, domestic-currency instruments and extending the yield curve. Directors commended Mexico's leadership in debt management, including its recent inclusion of collective action clauses in sovereign debt contracts and the early redemption of all outstanding Brady bonds. Directors were encouraged by Mexico's efforts to deepen the domestic bond market, which will foster the diversification of financing sources for the private sector and reduce reliance on foreign currency-denominated private debt, thus alleviating a potential risk factor.

Directors recognized that Mexico's data are generally of high quality, and are adequate to conduct surveillance effectively. They encouraged the authorities to implement the recommendations of the 2003 statistical Report on the Observance of Standards and Codes.

Mexico: Selected Economic and Financial Indicators










(Annual percentage changes, unless otherwise indicated)


National accounts and prices


Real GDP






Real GDP per capita 1/






Gross domestic investment (in percent of GDP)






Gross national savings (in percent of GDP)






Consumer price index (end of period)







External sector


Exports, f.o.b. 2/






Imports, f.o.b.






External current account balance (in percent of GDP)






Change in net international reserves (end of period, in billions of U.S. dollars)






Outstanding external debt (in percent of GDP)






Total debt service ratio


(in percent of exports of goods, services, and transfers)







Nonfinancial public sector (in percent of GDP)


Augmented overall balance






Traditional overall balance






Net public sector debt







Money and credit


Monetary base






Broad money (M4)






Treasury bill rate (28-day cetes, in percent, annual average)






Sources: National Institute of Statistics and Geography; Bank of Mexico; and Ministry of Finance and Public Credit.


1/ IMF staff estimates.


2/ Includes net proceeds from in-bond industries.


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. 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.


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