Transcript of a Conference Call on Article IV Consultation with Mexico

February 13, 2009

Washington, D.C.
Friday, February 13, 2009

MS. LOTZE: Welcome everybody. My name is Conny Lotze from the External Relations Department at the IMF. We have here with me for this Article IV Consultation on Mexico, the 2008 consultation, the Deputy Director of the Western Hemisphere Department Mr. David Robinson, and the Mission Chief for Mexico Mr. Vikram Haksar. Mr. Robinson will make a short introductory statement. So I will turn it over to Mr. Robinson and we'll go from here. Thank you.

MR. ROBINSON: Good morning, and thank you very much for participating in this morning's press conference. As Conny mentioned, about one week ago the IMF Executive Board had its annual discussion of the economic situation in Mexico, and as has become traditional, a little bit later we make a presentation to the press. I think she said you have available to you the Fund's staff report and a short supplement which brought it up to date on what we call a Public Information Notice which has a sort of shorter summary of the background and the conclusions and recommendations made by the Fund's Executive Directors. And obviously the themes of the discussion this year not surprisingly were the implications of the global economic crisis and the policies available to smooth the impact, reduce the impact of the crisis on Mexico, but also I would say the medium-term challenges facing Mexico to boost growth which remains very important.

I just really want to make three points but start with one piece of background. The one piece of background is I think this is true for Latin American in general but it's particularly true for Mexico, that over the last decade or so there has been a really tremendous improvement in Mexico's macroeconomic fundamentals and its policy frameworks in a whole variety of areas including just the conduct of fiscal and monetary policies, but also strengthened public, corporate and banking sector balance sheets, and a more flexible exchange rate system. The reason I mention this is because as a result of these things, Mexico's faces the current crisis from a much more robust position than it has in the past, and very importantly, for the first time ever the authorities have been able to respond to a crisis with what we call countercyclical policies, fiscal and monetary policies, to offset the impact which is only possible if you start from such a strong position.

Here are the three points I just want to focus on beyond that. The first is that, one, Mexico clearly as I've just said is much more resilient than it ever has been. It is being seriously affected by the global slump. And the weakening outlook for U.S. growth and remittances and the tightening financial conditions across the globe all weigh on prospects for Mexico as they do for other emerging-market countries. I would like to say here that the 2009 growth projection which we put in our reports of minus 0.3 percent was a projection that was done in early January and a month is a fairly long time in the current crisis. And as we say in the little supplement that I mentioned, the recently released data on developments in the last part of 2008 suggest that the Mexican economy is slowing faster than we anticipated in our report, and correspondingly that growth in 2009 will be lower than our current forecast.

The second point I would like to make is that there has been a strong and prompt policy response by the Mexican authorities to the situation that they face, and we can talk about this in more detail as you like. But I would just like to say that in the financial sector where the banking system remains very well capitalized and supported by a strong regulatory framework, the authorities have taken a variety of measures I think very quickly and nimbly to provide liquidity in the financial markets as and when necessary and this has been very important in helping to contain stresses over the last few months.

Second, on the macroeconomic side, fiscal policy has provided, I would say, quite timely support to the economy, and with the most recent measures we see an overall stimulus of about 1 1/2 percent of GDP in 2009, along with other measures such as increased development bank lending and guarantees, this is very important in cushioning the impact of the global slowdown on Mexico, protecting employment and helping augment infrastructure, and at the same time we have seen as you know the central bank has started to reduce interest rates. So all this I think is a very positive response to the crisis.

The third point I want to make is that the crisis underlines once again the importance of continuing to make progress to boost Mexico's growth potential over the medium term which, while it's not the immediate focus, does remain the key long-term challenge facing the economy. And I think two areas that we discussed in the consultation were, first, to continue to move forward with structural reforms, and here we see the energy sector reform as a positive step forward but there are other areas, production and labor markets, infrastructure and education and competition where there is room to make further progress along the lines I think already set out in the National Development Plan a couple of years back. And second, on the fiscal side, steps to offset the decline in oil-related revenues that are expected to continue over the coming years including through continued strengthening of tax administration and restraint on nonpriorities, I would say particularly noninvestment expenditure.

Let me with that sort of brief introduction stop here and Vikram and I would be very glad to respond to any questions that you may have. Thank you.

QUESTIONER: Good morning. I was going through the report and there's a paragraph which struck me. It's that it seems that the IMF--I got the Spanish version, but I will translate it, Mexico acknowledges, or the authorities are acknowledging the existence of some possible limitations of financing and implementation and that they may need to consider carefully some impacts. Do you think you could say that Mexico is acknowledging that they might need some external financing from multilateral institutions quite soon?

MR. ROBINSON: Let me answer that question along the following lines. First, I think Mexico has obviously already raised some money from international institutions, for instance the World Bank and the IDB, and that has already happened. But what I want to say more fundamentally is that when we look at Mexico's balance of payments we see a current account deficit of around $20 billion or so in this coming year. But as you also see from our projections, we see the financing to finance it. But we would see that there's certainly going to be a reduction in private-sector inflows, but that is very largely compensated by an increase in public-sector inflows including from the sources that I have mentioned. So we don't see immediate external financing problems for Mexico this year, although as we say in the report, the financing situation for corporates remains quite tight and needs to be watched.

The only other point I would make in terms of the role of the Fund, I think we are quite clear on this in the report and the authorities have been quite clear on it, the authorities already have a swap line from the Federal Reserve but they have not so far found it necessary to utilize that swap line and that's around $30 billion. They have a relatively high level of reserves of around $83 billion, and I think that they have said quite clearly in public and to us that while they see for instance the creation of the Fund's new facilities as a potentially useful tool for countries with strong policy records, they do not see Mexico using this facility at this time. So that's the basic message that I want to get across to you on that.

QUESTIONER: Good morning. My question is about a part of the staff report that said that Mexico's peso appears to be undervalued from a medium-term perspective. Is this talking about the economic fundamentals, projected exports of say manufacturing and oil, and how much might it be undervalued? Thank you.

MR. ROBINSON: Thank you very much for that question. You are quite right that this is an exercise that we do for every country and it is an exercise where we try and make an assessment of the appropriate value of each country's currency is over the medium-term, and it's very important to understand that it's over the medium term. In fact, we do it looking five years ahead, and that assessment is based on exactly the sorts of things you're talking about, the sorts of fundamentals that we think drive the exchange rate in a country over the medium-term. So for instance it would include things like terms of trade, the price of your exports and your imports. It would include things like productivity growth. It would include things like the level of your debt and the level of your reserves and so on.

So the point is that when we do that exercise for Mexico, we find, and I think that that's probably not surprising given that the peso has fallen quite significantly over the last six to eight months as indeed have the currencies of most emerging-market countries, we find that the peso at the moment is somewhat undervalued, somewhat undervalued from a medium-term perspective, and I'm not going to put a precise number on that because I think these calculations are always subject to fairly large margins of uncertainty, but somewhat undervalued. And as I say, I don't think that's surprising because in this kind of environment that we have now, I think you tend to expect some overshooting of currencies and I think we're seeing that in many emerging markets.

QUESTIONER: Thank you. I have a pre-question first. On your website you posted an opening statement by Vikram Haksar. He is according to your website the IMF's Mission Chief to Mexico. My question is if that opening statement is valid or not because I haven't heard Mr. Haksar speak in this conference call. If the statement is valid, I have a question on one statement in that paper.

It says that the '90 growth projection for Mexico in the IMF report is minus 0.3 percent, but Mr. Haksar says in recently released data on developments in late 2008 suggests that the Mexican economy is slowing faster than we anticipated in our report. My question is deep can we expect the Mexican economy to fall?

MR. ROBINSON: Let me first say that Mr. Haksar is sitting right next to me, and we had actually divided up the topics of the questions and so it's been basically been me who has spoken to far, but everything that he wrote in that notice is completely valid, and maybe Vikram to show that you're still here, maybe you would like to answer the gentleman's question.

MR. HAKSAR: Thank you very much, and thank you for your question. We are very much working as a team out here, Mr. Robinson, myself and other colleagues, so as David was explaining, we have agreed to divide up questions amongst ourselves. And David's opening remarks actually are very much based upon the statement that was posted for you on our internal website.

In terms of your question, I would say that the recent indicators that we were focusing on which were suggesting to us that the growth outlook for 2009 would be weaker than we had presented in the report are looking at indictors such as the monthly activity index which has slowed more than we had anticipated in the last months of 2009, as well as some of the more recent data as well on other aspects of industrial production. Our sense is that if you were to take the growth projections from the authorities, the initial projections that were presented for the last quarter of 2008 and were to adjust the outlook that we have for 2009 using that new base of projections for the 2008 last quarter, this would probably take off anywhere from about 1 percentage point from growth in 2009 relative to the projections presented in our staff report, but this is something which is one way of illustrating what an exercise might look like.

At the same time we will be reducing our growth outlook for 2009 more fully in the next months, and you can imagine there are many factors that are going to affect this outlook including what ultimately happens with the United States and the stimulus package as well as how the tightening of financial conditions which we view as quite important for growth prospects in Mexico how the tightening of financial conditions actually continues to unfold. So I hope that provides you some clarification on the growth outlook. Thanks.

QUESTIONER: I have two questions if I may. One is on the issue of remittances. You have this extra report there in the package that you sent us. I wonder if you could tell us a little bit of the impact of the slowdown on the Mexican economy and I guess this will be felt sort of in the lower classes and poor people who spend the money. So I wonder if you could return a little bit to that and whether you think if the government should do anything to compensate for that.

My second question is on corporates in Mexico. You say in the report that they lost a lot of money with the fall of the currency and the credit market is pretty bad. So I wonder if you could give us an assessment of whether you think the big Mexican companies are in real trouble and how do you see the outlook there. Thank you.

MR. HAKSAR: Thank you very much for your question. Let me start first with your question on remittances. You point to the study in one of our accompanying papers that basically shows that many remittances to Mexico from the United States come from states and people working in sectors in those states which have been particularly hard hit by the recession ongoing in the United States. So clearly this is something which as is discussed in our report is likely to have an impact on Mexico and we feel this is something which is going to put some downward pressure on consumer demand and the ability to finance consumer demand in 2009. I think this is something that is also reflected in part in the policy response as well, the fact that part of the slowdown that is envisaged for 2009 is going to affect especially people in the very low-income household groups, the most vulnerable to the kind of slowdown that we are seeing and the policy response from the authorities, the fiscal package, is very much designed taking this kind of consideration into account. A large part of it is focused on trying to preserve employment including through increased infrastructure spending, including at the state level.

There is also contemplated increased lending through development banks as well as guarantee operations through developments banks to provide financing for companies, especially small and medium companies so that they are able to preserve employment levels. So these are aspects of the policy response from the authorities which we think have been very much designed in line with offsetting the social impact as well of the economic slowdown. But I think more broadly the fact that Mexico now has the room for a pretty sizable fiscal response in order to offset the impact of the slowdown is something which is going to offset the impact on growth and also the impact on the lower-income households as well.

Moving on to your second question on corporates and the prospects of corporates, I think here it's probably important to note from the outset that the Mexican corporate sector as the corporate sector in many other parts of Latin America as well is entering into this particular global downturn from a fast stronger position. We have a paper in one of our accompanying papers that looks at corporate-sector foreign exchange exposure, for example, in Mexico and also in other markets in Latin America, and you will see there that debt levels amongst corporates have been substantially reduced, foreign currency debt levels have also been substantially reduced, so the vulnerability of the corporate sector to the kinds of pressures that are currently going on is-the sector is starting from a far stronger position, though of course there have been vulnerabilities and risks as pointed out by the loss of unanticipated investments in derivative operations.

With the strong starting position, certainly our report acknowledges that there are going to be substantial pressures on corporate financing. We are already seeing this with the pressures in external financing. But the reality also is that large Mexican corporates have quite strong cashflows which should allow some room for maneuver in order to adjust to additional financing pressures.

Also while there may be some pressures in perhaps the external financing markets and there have also been pressures in the domestic financing markets, the government has responded with some policy actions including the provision of credit guarantees through development banks which we feel will offset this part of tightening of financial conditions in the domestic market and reduce some of the pressure on corporates as well. So in sum, the outlook is for tightening of financing conditions but we feel there is room to absorb this and also that the government actions that have been taken would help reduce the pressures on these large corporates.

QUESTIONER: Good morning. I have two questions. Actually I was looking for two confirmations. Number one, when Mr. Haksar said revising the numbers for Mexico, the growth numbers for Mexico, considering all those last data from 2008, he talks about 1 percentage point. Would that be correct then to assume that it's my understanding that it is not a proper full forecast like in the World Economic Outlook, it would be correct to assume then Mexico's growth for 2009 at the moment would be in or around minus 1.3 percent?

The second question is about when Mr. Robinson mentioned about the government measures in Mexico, and if I understood correctly, and that's why I'm looking for the confirmation, is that the measures taken by the Mexican government saved 1.5 percent of growth in GDP in the last year or in 2009. Thank you.

MR. HAKSAR: Thank you. Let me just clarify what the outlook for growth in 2009 might be. I don't think that we want to be giving you a very specific point estimate at this stage because as I was stating to you, this is our initial impression. We do think that the growth outlook will be revised downward, but as to how much it will be revised downward exactly is something that we need to do a full exercise and assess also the outlook in the United States and how the fiscal stimulus package here will work and especially the timing of all this which has important implications for Mexico.

But what I was saying just to be very clear about that was that if you take the growth outlook that we had for 2009 as presented in our staff report and if you were to do a very simple update of this outlook by putting in the latest data for the forth quarter of 2008, that this would take off about 1 percent from the growth outlook for 2009. What the final outlook will be is going to be a function as I said of other factors including the outlook for the United States, of the fiscal stimulus in the United States, and also how the financial conditions in Mexico evolve over the next six to nine months.

MR. ROBINSON: We forgot the second question. I think what I was referring to in that answer is that the budgetary measures that the government has taken will provide what we call a fiscal stimulus. That's sort of roughly speaking, very roughly speaking, the boost to domestic demand of around 1 1/2 percent of GDP. So the larger government expenditures in short will provide support to growth in 2009 and so that's what I was trying to refer to.

QUESTIONER: Yes, please. Sorry to come back to my initial question. I just wanted to check with you, particularly with you, David. You said that you don't expect Mexico to need some external financing needs for this year. So does it mean that this line that you set up in October, I think the Short-Term Liquidity Facility, would you say that the IMF does expect Mexico to apply for this facility during 2009?

MR. ROBINSON: Let me be very clear and repeat what I said. Let me make two points. First of all, we see Mexico's balance-of-payment situation as being manageable this year. That's the first point I want to make. There will be pressures in some areas such as on the corporate sector. That's discussed in the report. But overall we see Mexico's situation as being manageable. In terms of the second question, I think the authorities have made their position very clear and they are the ones whose opinion is the important thing here, that they do not see Mexico using the SLF at this time although they have said also that they think it's a potentially useful tool for countries with strong policy records. So I think those are the two basic points that I want to underline to you.

QUESTIONER: Yes, actually a follow-up on the last question. You say that this stimulus package will stimulate the economy, accumulate the 1.5 percent of GDP, and I was wondering if you have an estimate of the cost. How much is this costing the government?

MR. HAKSAR: Let me just clarify on the stimulus package. What we're talking about basically is the 1.5 percent of GDP figure on fiscal stimulus is very close to the additional cost as well of the fiscal stimulus and the components of this cost are largely explained in the budget in the statements of the authorities are made also with the new strategy that was discussed in January. The main components are the reduction in energy prices, the freeze in energy prices that are going to have on fiscal costs for this year, the additional spending on investment projects by the state government as well as by PEMEX.

And also very importantly, one point that I did not mention earlier, there is also a new program which is going to provide unemployment support to people who lose their jobs, sort of unemployment benefits in the form of the costs associated with allowing people who have lost their jobs to be able to withdraw funds from their retirement accounts in order to be able to have some money in order to manage their situations while they are without a job. So there are many components of this, but the overall impact of the packages that we have seen presented by the authorities is going to be on the order of about 1 1/2 percent of GDP and that's the figure which is presented in the report and also underlines the bulk of the analysis in debt sustainability and is presented in the tables in the report as well.

MS. LOTZE: Thank you very much everybody for participating. Good-bye.


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