## Mexico: staff report excerpt (content unit 1mexea2020001)

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### Context and macro snapshot
- Covid-19 impact and macro fallout:
  - Registered fatalities exceed 85,000.
  - Q2 2020 output fell by about 19 percent (y/y) over Q2 2019.
  - Staff projects the economy to contract by 9 percent in 2020 (IMF Staff: -9.0 percent) — “the most severe contraction in Mexico since the Great Depression.”
- Pre-pandemic structural context:
  - Real per capita GDP growth below 1 percent per year over past decades.
  - At end-2020, real per capita GDP estimated at pre-global financial crisis levels.
  - Pre-pandemic: around 36 percent of population in working poverty and a further 35 percent vulnerable; working poverty rising to 48 percent amid the pandemic.
- Key imperatives:
  - Near-term fiscal and monetary support.
  - Credible medium-term plans to anchor fiscal sustainability.
  - Structural reforms to boost investment and potential growth (extend rule of law, improve business climate, tackle labor market informality).

### COVID-19 developments, activity, and labor market
- Shock dynamics and activity:
  - Historic GDP contraction of 19 percent (y/y) in Q2 driven by large declines in consumption and investment.
  - Two-speed recovery: manufacturing/autos recover faster than domestic demand.
  - Mobility indicators through September 2020 were 10–40 percent below pre-pandemic levels; international flights 60 percent below normal.
  - Point-of-sale volumes from credit and debit cards down 5 percent.
- Labor market impacts:
  - Over 20 percent of workers fell out of the workforce in April and an additional 10 percent became underemployed.
  - Formal employment declined by 14 percent; informal employment declined by about 30 percent.
  - By June about half of informal jobs lost were recouped; formal jobs saw only a small recovery.
  - Unemployment rate risen to 5 percent (Table 1: National unemployment rate annual average 2020 = 5.2).
- Prices and external resilience:
  - Annual headline inflation slightly over 4 percent through August 2020; central bank target = 3 percent.
  - Core inflation near 4 percent; services inflation below 2.5 percent.
  - Exports and imports slumped by about 30 percent in Q2 with stronger recovery in manufacturing exports.
  - Remittances increased by 26 percent y/y in pesos in the first seven months of 2020.
  - Gross international reserves: $200 billion in early-October 2020, up from $183 billion at end-2019.
  - Reserves represented 130 percent and 117 percent of the Assessing Reserve Adequacy metric, respectively.
  - A 6-month swap line was established and renewed with the U.S. Federal Reserve for $60 billion.
  - Access to IMF Flexible Credit Line: over $60 billion (500 percent of quota).

### Central bank actions and facility use (Banco de México, early-September 2020)
- Policy easing:
  - Easing since mid-2019: 400 basis points; easing since March 2020: 275 basis points; policy rate brought to 4.25 percent.
- Facilities and uptake (Billions of Mexican pesos; totals and percent GDP):
  - Total Envelope: 800; Disbursed: 183; Percent Accessed: 23
  - Liquidity Support (examples):
    - Reduction of the Monetary Regulation Deposit: Envelope 50; Disbursed 50; Percent Accessed 100
    - Government securities term repurchase window: Envelope 100; Disbursed 100; Percent Accessed 100
    - Swap of government securities: Envelope 100; Disbursed 15; Percent Accessed 15
    - Corporate Securities Repurchase Facility: Envelope 100; Disbursed 10; Percent Accessed 10
  - Credit Support (examples):
    - Provision to banks to channel credit to micro and SMEs and individuals: Envelope 250; Disbursed 8; Percent Accessed 3
    - Total (percent GDP): 3.3; Total Disbursed (percent GDP): 0.8; Percent Accessed: 22.8

### Fiscal response, measures, and comparison
- Fiscal measures (total 1.7 percent of 2020 GDP; measures with budget impact: 0.7 percent of GDP):
  - Measures with budget impact = 0.7 percent of GDP:
    - Support for households: 0.0
      - Unemployment subsidy for 3 months to workers that hold a mortgage with the Housing Institute (MXN 7.3bn): 0.0
    - Support for businesses: 0.2
      - Loans with optional repayment to SMEs that maintain employees on payroll, self-employed, and domestic workers: 0.1
      - Loans with optional repayment to family businesses previously registered in the Welfare Census: 0.1
    - Supporting the health system: 0.2
    - Others (additional social spending): 0.2
  - Below-the-line measures = 1.1 percent of GDP:
    - ISSSTE loans to state workers: 0.2
    - Personal loans by Fonacot (MXN 3bn): 0.0
    - Loans by development banks, particularly to SMEs: 0.9
- Comparisons:
  - Mexico’s 0.7 percent of GDP budget-support versus 3.1 percent of GDP support on average in EMs.
  - Increase in health spending of 0.2 percent of GDP versus peer average 0.6 percent of GDP.

### Fiscal outlook, projections, and risks
- Growth projections and timing:
  - Output contraction 2020: -9.0 percent (IMF Staff).
  - Growth 2021: 3.5 percent (IMF Staff).
  - Medium-term growth close to potential of about 2 percent.
  - Output returning to pre-crisis levels by 2024; per capita incomes remain below pre-pandemic levels for a decade.
- Forecast table highlights (Real GDP growth forecast in percent):
  - Ministry of Finance: -8.0 (2020), 4.6 (2021)
  - Central Bank (range across three illustrative scenarios): -8.8,-11.3,-12.8 (2020); 5.6, 2.8, 1.3 (2021)
  - Consensus: -9.8 (2020), 3.3 (2021)
  - IMF Staff: -9.0 (2020), 3.5 (2021)
- Public finances:
  - 2020 fiscal deficit (PSBR) projected to widen to 5.8 percent of GDP (staff projection).
  - Authorities’ revised target for 2020 PSBR: 4.7 percent of GDP.
  - Public debt projected to rise to 65 percent of GDP in 2020 (Table 3: Gross public sector debt 2019 = 53.7; 2020 = 65.5).
- Downside risks:
  - New Covid-19 waves, renewed lockdowns, supply chain disruptions, weaker external demand, oil price falls, higher global risk aversion, institutional weakening, loss of sovereign investment grade status.
- Upside possibilities:
  - Swift medical breakthrough, advanced economy buoyancy from large policy interventions.

### Recommended macro-fiscal package and estimated payoffs
- Recommended near-term fiscal support:
  - Temporary and targeted support of 2½–3½ percent of GDP (relative to pre-pandemic settings) in the near term; phased out after one year.
  - Replace with a stimulus comprising a permanent increase in public investment and social spending thereafter.
- Estimated instrument mix (Estimated Costs of Key Recommended Measures, percent of GDP):
  - Total: 2.6–3.5
  - Healthcare (increase): 0.6–1.5
    - Staff estimates health spending should be increased by ½–1½ percent of GDP (relative to pre-pandemic levels).
  - Support to households: 1.2
    - To readily eligible beneficiaries: 0.6
    - To people at risk of poverty (3-month support of 2036 pesos per month): 0.3
    - To informal workers in hard-hit sectors (3-month support of 2036 pesos per month): 0.3
  - Support to firms: 0.4
    - Wage subsidies (6-month support of 2036 pesos per month to IMSS-insured workers of formal firms in construction, trade, and services): 0.4
  - Boost public investment: 0.4
- Operational notes:
  - Use existing databases for targeting (social census, SISI, national voter ID).
  - Liquidity support options: tax and social security deferrals, accelerated VAT refunds, deferred/reduced mortgages, utility bill payments, government-funded sick and family leave.
  - Micro loans with optional repayment to SMEs and family businesses: up to 0.2 percent of GDP; development bank loans up to 0.9 percent of GDP.
- Macroeconomic payoff (model simulations using GIMF):
  - Package could raise real GDP by about 4 percent by 2025 and lead to a firm decline in debt (¶32).
  - Illustrative simulations: output could increase by 3–4 percent over the medium term and over 5 percent in the long term; public debt would decline by 2–3 percent over the medium term if investment efficiency rises and investors anticipate implementation (assumed immediate 50 basis point fall in sovereign risk premium).

### Tax reform and revenue potential
- Overall revenue potential from policy and administrative actions: 3–4 percent of GDP.
- VAT:
  - Potential revenue increase: at least 2 percent of GDP from fundamental reforms and compliance improvements.
  - Foregone revenues from temporary border tax regime estimated at 0.3 percent of GDP.
- Income taxes:
  - Tax expenditures slightly below 1 percent of GDP; at least ½ percent of GDP could be rationalized.
  - Potential yield from personal income tax base broadening and top bracket threshold lowering: up to ¾ percent of GDP.
- Subnational taxes:
  - Property tax collections currently about 1½ percent of GDP below Latin American averages.
  - Aim to collect at minimum ¾ percent of GDP from property taxation.
- Gasoline excise:
  - Current formula guarantees retail fuel price growth below CPI inflation since November 30, 2018; disproportionate benefit to richer households — scope to increase gasoline excises in low oil price environments.

### Spending-side reforms, pensions, public investment, and Pemex
- Social protection:
  - No nationwide unemployment benefits system (Mexico City has a system that could be adapted nationally).
  - Need to reduce leakage and fragmentation across schemes; create single registry by matching databases.
- Pension reform (authorities' proposal and staff points):
  - Proposed: raise replacement rates by about 40 percent by increasing employer contributions from 5.15 percent to 13.875 percent over 8 years; broaden coverage by lowering required contribution period to about 15 years (rising to 20 years over time); increase minimum guaranteed pension by 1/3rd to about US$2,300 per year; cap fees for pension fund managers.
  - Staff caution: higher employer contributions could deter formal job creation; complementary measures needed to tackle informality (reduce Infonavit contribution rate, increase contribution period for full pension in old public-sector DB scheme, raise age limit to get a full pension in public sector).
- Public investment:
  - Non-Pemex capital spending about 1½ percent of GDP in 2019 — very low.
  - Need greater physical and human public investment (e.g., SDG health investment of ½ percent of GDP).
  - Improve public investment efficiency, coordination center-states, multi-year budgeting.
- Pemex:
  - Staff estimates free cash flow about –1 percent of GDP in 2020.
  - Financial support in 2020 budget about 0.6 percent of GDP (2019 = 0.8 percent).
  - Short-term debt ≈ 1½ percent of GDP; liquidity buffers under ½ percent of GDP in mid-2020.
  - Pemex lost investment-grade status; “fallen angel”; 10-year USD yield around 8 percent (peaked above 12 percent in April), remaining over 250 basis points above pre-pandemic levels.
  - Recommendations: focus production on profitable fields, sell non-core assets, curb loss-making refining expansion, postpone new refinery plans until profitable, partner with private firms, strengthen governance and procurement, condition fiscal support on strategy and governance changes.

### Financial sector, banks, and corporate financing
- Banking sector (end-July / June 2020 highlights):
  - Tier 1 capital ratio at end-July: 14.2 percent (another table: Regulatory capital to RWA 2019 = 16.0; 2020 June = 16.5).
  - Return on equity declined to 11.9 percent (lowest since 2009); return on assets 2019 = 2.2; 2020 (June) = 1.3.
  - Provisioning increased to 169 percent; reported NPLs remain low at 2.1 percent (2019) and 2.0 percent (2020 June).
  - Loan renegotiations until August covered only 17 percent of system loans (lowest among regional peers); CNBV announced measures to facilitate restructurings in September 2020.
  - Banco Ahorro Famsa (0.4 percent of total system assets) being liquidated due to related-party exposures.
- Corporate sector and credit:
  - Corporates drew on bank credit lines early in pandemic; commercial bank credit to non-financial corporates fallen at annualized rate of 15 percent.
  - Local corporate bond issuance in Q3 2020 at 64 percent of 2019 pace as of Q3.
  - Corporate loans affected by Covid-19 estimated at nearly 40 percent of banking portfolio.
  - Exposure concentration: many banks exposed to a small set of large corporates (e.g., Pemex).
- Supervisory advice and measures:
  - Continue upholding minimum regulatory and supervisory standards while using flexibility to cope with challenges.
  - Loan restructuring regulations should preserve capital, ensure reclassification of distressed loans and recognition of losses, and avoid diluting capital requirements.
  - Limit capital distributions (dividends, buybacks) until economy clearly recovering.
  - Close outstanding supervisory gaps (operational independence and budget autonomy of supervisor; definition of “common risk” and “related party”; resolution regime for financial holding companies; adequate access to IPAB funding).

### External sector, reserves, and capital flows
- Current account and reserves (selected figures and dynamics):
  - Current account (percent of GDP): 2019 = -0.3; 2020 = 1.2; 2021 = -0.1.
  - Gross international reserves (US$ billions): 2019 = 183.0; 2020 = 190.4 (Table 4a shows projected path 2021 = 192.1; 2025 = 208.2).
  - Financial Account (Net lending/borrowing, US$ billions): 2019 = -15.0; 2020 = 12.9; 2021 = -1.0.
  - Gross total external debt (percent of GDP): 2019 = 36.6; 2020 projection = 45.5 (Annex IV Table 1).
- External market access:
  - Overall external market access “comfortable” for large corporates (except Pemex); refinancing risks concentrated among smaller corporates and non-bank lenders.
  - More than a quarter of bank credit is short term — rollover capacity is crucial.
  - Policy recommendation: further provision of guarantees by development banks; vigilance on non-bank lenders.

### Debt sustainability, stress tests, and scenarios
- Public debt dynamics and risks:
  - Staff’s baseline: gross public sector debt projected to rise to 65 percent of GDP in 2020 (Table 3: 2019 = 53.7; 2020 = 65.5).
  - Fiscal gap absent additional measures: 1¼–2 percent of GDP during 2021–25.
  - If fiscal gaps persist, public debt could increase to 73 percent of GDP by 2025 (Annex IV / ¶).
- Stochastic simulations and stress tests:
  - Under symmetric distribution: probability ≈ 70 percent debt remains below 70 percent of GDP over medium term.
  - Under asymmetric distribution (no positive primary balance shocks): probability ≈ 60 percent debt remains below 70 percent of GDP.
  - Combined shock: debt would increase to 76 percent of GDP by 2025; gross financing needs reach 14.4 percent of GDP in 2025.
- External debt projections (Annex IV Table 1 baseline):
  - External debt (percent of GDP): 2019 = 36.6; 2020 = 45.5; 2021 = 44.6; 2025 = 41.8.
  - Change in external debt (percent of GDP): 2020 = 8.9; 2021 = -0.9.
  - Example shock: 30 percent depreciation → external debt above 55 percent of GDP.
- Debt coverage notes:
  - Marketed T-bonds held by central bank at end-2019: about 4.4 percent of GDP; some 20 percent of GDP not marketed.
  - Treasury securities held by central bank for liquidity management not included in general government debt per authorities’ statistics.
  - Staff net public debt (gross minus public assets) estimated to reach around 56 percent of GDP over medium term.

### Structural reforms, governance, and informality
- Structural priorities:
  - Steadfast implementation of reforms to boost investment and productivity: extend rule of law, improve business climate, reduce informality, foster financial inclusion, remove barriers to trade in services.
  - Energy sector: USMCA in force July 2020 could aid on-shoring; domestic policy uncertainty elevated due to reversals in energy reform and barriers to private renewable projects.
  - Staff view: reversals in past reforms could weaken recovery and limit USMCA gains.
- Labor market and informality:
  - Informality around 55–60 percent of workforce pre-pandemic (informality fell just 3 percentage points over past decade to about 56 percent at eve of shock).
  - Recommended reforms: lower hiring and firing restrictions, reduce costs of formalizing a business, make minimum wage increases gradual and productivity-aligned, establish unemployment insurance, improve labor dispute resolution and enforcement.
- Governance and AML/CFT:
  - Strengthen governance, transparency, AML/CFT, and anti-corruption — implement National Anticorruption Policy, appoint independent specialized anti-corruption prosecutor, introduce comprehensive criminal liability of legal persons, enhance beneficial ownership transparency.
  - Draft AML/CFT Law pending in Senate.

### Social indicators and scarring
- Social statistics and projections:
  - GDP per capita (U.S. dollars, 2019) = 10,024.
  - Poverty headcount ratio (% of population, 2018) = 41.9.
  - Income share highest 20% / lowest 20% (2018) = 9.7.
  - Infant mortality rate (per thousand, 2019) = 13.1.
  - Projection: potential output by 2025 projected about 9 percent below pre-pandemic projections (reflecting labor market scarring, diminished long-run growth, foregone investment).

### Staff appraisal and policy priorities (summary)
- Macro assessment:
  - Covid-19 fatalities among the highest globally; several million people out of work; working poor share spiked; 2020 growth among weakest in G20 EMs.
  - Macroeconomic response described as “very conservative”: muted fiscal support and gradual monetary easing.
  - Flexible exchange rate and comfortable reserves, plus access to Fed swap line and IMF FCL, bolster external resilience.
- Policy priorities recommended:
  - Limit pandemic damage, promote robust recovery, and pursue strong, durable, inclusive growth via:
    - Near-term fiscal and monetary support (temporary, targeted, 2½–3½ percent of GDP recommended).
    - Credible medium-term plans to anchor fiscal sustainability and finance public investment/social spending.
    - Steadfast implementation of structural reforms to boost investment and growth.

### Consultation timing and high-frequency indicators
- Next Article IV consultation proposed on standard 12-month cycle.
- Covid-19 indicators referenced through September 30, 2020; observations include declining confirmed cases with retrenchments, depressed mobility and flight traffic, slow card-based purchase recovery, low testing rates, high excess mortality indicating many missed cases, and that Mexico’s death toll is the fourth-largest in the world.

*International Monetary Fund. 2020. Mexico: staff report excerpt (content unit 1mexea2020001).*

### 2020. The mission comprised Rishi Goyal (head), Swarnali Ahmed

### 1mexea2020001 - 2020. The mission comprised Rishi Goyal (head), Swarnali Ahmed

### CONTEXT
- Mexico has been hit hard by Covid-19:
  - Registered fatalities exceed 85,000.
  - In Q2, output fell by about 19 percent over the same quarter in 2019.
  - Staff projects the economy to contract by 9 percent in 2020, the most severe contraction in Mexico since the Great Depression.
- Pre-pandemic social and growth context:
  - Real per capita GDP growth below 1 percent per year over the past few decades.
  - At end-2020, real per capita GDP is estimated at pre-global financial crisis levels.
  - Pre-pandemic, around 36 percent of the population were in working poverty, and a further 35 percent were vulnerable to income shocks or social deprivation.
  - Working poverty rate rising to 48 percent amid the pandemic.
- Longer-term risks and policy imperatives:
  - Large social and economic costs are expected to persist; scarring effects could compound persistent weak growth.
  - The report urges implementation of a package of near-term fiscal and monetary support, credible plans to anchor fiscal sustainability over the medium term, and structural reforms to boost investment and potential growth.
  - Structural reform priorities include extending the rule of law, improving the business climate, and tackling labor market informality (Annex I).

### COVID-19: DEVELOPMENTS AND RESPONSES
- Pre-pandemic macro posture and early 2020:
  - Mexico entered 2020 in a mild recession; real GDP shrank by 0.1 percent in 2019.
  - Monetary policy rates were hiked to 8.25 percent by mid-2019, then lowered gradually through 25 basis point cuts to 7 percent before the pandemic.
- Shock dynamics in March–April 2020:
  - Heightened global risk aversion, capital flight, unwinding of carry trades, and sharp currency depreciation.
  - Sudden stops in trading partners and an oil price collapse led to a collapse in exports.
  - Historic contraction in GDP by 19 percent (y/y) in Q2, driven by large declines in consumption and investment.
- Recovery pattern and activity indicators:
  - The economy bottomed out in May with signs of a two-speed recovery—manufacturing/autos recover faster than domestic demand.
  - Mobility indicators through September were 10-40 percent below pre-pandemic levels; international flights were 60 percent below normal.
  - Point-of-sale volumes from credit and debit cards were down 5 percent.
- Labor market impacts:
  - Over 20 percent of workers fell out of the workforce in April and an additional 10 percent became underemployed.
  - Formal employment declined by 14 percent while informal employment declined by about 30 percent.
  - By June about half of informal jobs lost were recouped; formal jobs witnessed only a small recovery.
  - The unemployment rate has risen to 5 percent.
- Inflation and prices:
  - Annual headline inflation was slightly over 4 percent through August, above the central bank’s target of 3 percent.
  - Core inflation near 4 percent; services inflation below 2.5 percent.
- External sector resilience and financing:
  - Exports and imports slumped by about 30 percent over the second quarter, with a stronger subsequent recovery in manufacturing exports.
  - Remittances increased by 26 percent y/y in pesos in the first seven months of 2020.
  - Gross international reserves were $200 billion in early-October, up from $183 billion at end-2019.
  - Reserves represented 130 percent and 117 percent of the Assessing Reserve Adequacy metric, respectively.
  - A 6-month swap line was established and renewed with the U.S. Federal Reserve for $60 billion.
  - Mexico has access to the IMF’s Flexible Credit Line for over $60 billion (500 percent of quota).
- Sovereign and corporate financing:
  - Authorities shortened maturity and limited issuance of local currency sovereign debt through Q3 2020; planning to increase issuance in Q4.
  - Mexico issued a sustainable sovereign bond linked to the UN Sustainable Development Goals for €750 million in September 2020.
  - Sovereign rating was downgraded by one notch to an average equivalent of BBB.
  - Sovereign dollar borrowing costs declined to historic lows of around 3.5 percent.
  - Pemex lost its investment-grade status and became the world’s largest “fallen angel.”
- Corporate sector funding and banks:
  - Corporates drew on bank credit lines early in the pandemic; commercial bank credit to non-financial corporates has fallen at an annualized rate of 15 percent.
  - Local corporate bond issuance in Q3 was at 64 percent of the pace in 2019 as of Q3.
  - Banking sector metrics:
    - Tier 1 capital ratio at end-July was 14.2 percent.
    - Return on equity declined to 11.9 percent, the lowest since 2009.
    - Provisioning increased to 169 percent, a new high.
    - Reported NPLs remain low at 2.1 percent.
  - Loan renegotiations until August covered only 17 percent of system loans, the lowest among regional peers.
  - In September 2020, the regulator (CNBV) announced new measures to facilitate loan restructurings, with easing in capital and loan loss provisioning.
  - Banco Ahorro Famsa (0.4 percent of total system assets) is being liquidated due to related-party exposures.

### POLICY RESPONSE DETAILS (CENTRAL BANK FACILITIES)
- Central bank easing and facility envelopes (Banco de Mexico, data as of early-September 2020):
  - Easing since mid-2019: 400 basis points; easing since March: 275 basis points; policy rate brought to 4.25 percent.
  - Central bank expanded or established facilities with access up to 3.3 percent of GDP; use has been limited.
- Facility uptake (Billions of Mexican pesos):
  - Liquidity Support:
    - Reduction of the Monetary Regulation Deposit: Envelope 50; Disbursed 50; Percent Accessed 100
    - Temporary securities swap window: Envelope 100; Disbursed N/A; Percent Accessed N/A
    - Government securities term repurchase window: Envelope 100; Disbursed 100; Percent Accessed 100
    - Swap of government securities: Envelope 100; Disbursed 15; Percent Accessed 15
    - Corporate Securities Repurchase Facility: Envelope 100; Disbursed 10; Percent Accessed 10
  - Credit Support:
    - Provision of resources to banking institutions to channel credit to micro and SMEs and individuals affected by the pandemic: Envelope 250; Disbursed 8; Percent Accessed 3
    - Collateralized financing facility for commercial banks with corporate loans to finance micro and SMEs: Envelope 100; Disbursed N/A; Percent Accessed N/A
  - Total: Envelope 800; Disbursed 183; Percent Accessed 23
  - Total (percent GDP): 3.3; Total Disbursed (percent GDP): 0.8; Percent Accessed: 22.8

### OBSERVATIONS AND STAFF ADVICE HIGHLIGHTED
- Immediate objectives:
  - Limit damage from the pandemic, promote a robust recovery, and pursue strong, durable, and inclusive growth.
- Recommended policy mix:
  - Implement near-term fiscal and monetary support.
  - Develop credible plans to anchor fiscal sustainability over the medium term.
  - Advance structural reforms to boost investment and potential growth, including measures to extend the rule of law, improve the business climate, and tackle labor market informality (Annex I).

*International Monetary Fund. 2020. Mexico: staff report excerpt (mission composition and selected sections).*

### 16.      The fiscal response has been muted and an outlier compared to G20 and regional

### 16.      The fiscal response has been muted and an outlier compared to G20 and regional peers

### Fiscal response and key measures
- Authorities increased health spending and direct budget support to households and firms by 0.7 percent of GDP (measures with budget impact).
- Total fiscal measures (including below-the-line) amounted to 1.7 percent of 2020 GDP, of which:
  - Measures with budget impact: 0.7
    - Support for households: 0.0
      - Unemployment subsidy for 3 months to workers that hold a mortgage with the Housing Institute (MXN 7.3bn): 0.0
    - Support for businesses: 0.2
      - Loans with optional repayment to SMEs that maintain employees on payroll, self-employed, and domestic workers: 0.1
      - Loans with optional repayment to family businesses previously registered in the Welfare Census: 0.1
    - Supporting the health system: 0.2
    - Others (additional social spending): 0.2
  - Below-the-line measures: 1.1
    - Institute for Social Security and Services (ISSSTE) loans to state workers: 0.2
    - Personal loans by the Institute of the National Fund for the Consumption of Workers (Fonacot) (MXN 3bn): 0.0
    - Loans by development banks, particularly to SMEs: 0.9
- Comparisons:
  - Mexico’s 0.7 percent of GDP budget-support compares with 3.1 percent of GDP support on average in EMs.
  - The increase in health spending of 0.2 percent of GDP is lower than G20 and regional peers’ average of 0.6 percent of GDP.

### Outlook, growth projections, and risks
- Staff projects:
  - Output contraction in 2020: 9 percent (IMF Staff: -9.0 percent).
  - Growth in 2021: 3½ percent (IMF Staff: 3.5 percent).
  - Over the medium term, growth close to potential of about 2 percent.
  - Output returning to pre-crisis levels by 2024; per capita incomes remain below pre-pandemic levels for a decade.
- Forecast table (Real GDP Growth Forecast in percent):
  - Ministry of Finance: -8.0 (2020), 4.6 (2021)
  - Central Bank (range across three illustrative scenarios): -8.8,-11.3,-12.8 (2020); 5.6, 2.8, 1.3 (2021)
  - Consensus: -9.8 (2020), 3.3 (2021)
  - IMF Staff: -9.0 (2020), 3.5 (2021)
- Public finances and balance-sheet projections:
  - 2020 fiscal deficit (PSBR) projected to widen to 5.8 percent of GDP (staff projection).
  - Authorities’ revised target for 2020 PSBR: 4.7 percent of GDP.
  - Public debt projected to rise to 65 percent of GDP in 2020.
- Risks:
  - Downside risks include new waves of Covid-19 necessitating renewed lockdowns, renewed supply chain disruptions, weakness in external demand, a fall in the oil price, a rise in global risk aversion, further weakening in institutions, and loss of sovereign investment grade status.
  - Upside possibilities include a swift medical breakthrough on an effective vaccine or therapy, or advanced economy buoyancy from large policy interventions.

### Policy assessment and recommended macro-fiscal package
- Policy priorities: preserve lives and livelihoods, safeguard medium-term sustainability, boost potential growth.
- Recommended near-term fiscal support:
  - Temporary and targeted near-term fiscal support of 2½–3½ percent of GDP (relative to pre-pandemic settings) to alleviate current distress and limit scarring.
  - This support should be phased out after one year and replaced with a stimulus comprising a permanent increase in public investment and social spending.
  - Emergency lifelines should be timely, temporary, targeted, progressive, cost-effective, and embedded in medium-term budget frameworks.
  - Triggering escape clauses in the Fiscal Responsibility Law and using the structural current spending rule can allow additional expenditure.
- Complementary policies:
  - Further near-term monetary accommodation, given well-anchored inflation expectations, to support the recovery and market access.
  - Structural reforms and governance improvements to amplify growth payoffs, reduce scarring, and improve inclusion.
- Estimated macroeconomic payoff:
  - Implementation of the package (temporary fiscal support, growth-friendly adjustments from 2022, monetary accommodation, higher public investment efficiency) could raise real GDP by about 4 percent by 2025 and lead to a firm decline in debt (¶32).
- Specific recommended fiscal instrument mix (Estimated Costs of Key Recommended Measures, percent of GDP):
  - Total: 2.6-3.5
  - Healthcare (accommodate additional health spending): 0.6-1.5
    - Staff estimates health spending should be increased by ½–1½ percent of GDP (relative to pre-pandemic levels), using the IMF WP/20/145 framework and country-specific calibration.
  - Support to households: 1.2
    - To readily eligible beneficiaries (offer benefits to those who were eligible but did not receive any social assistance in 2019): 0.6
    - To people at risk of poverty (3-month support of 2036 pesos per month): 0.3
    - To informal workers in hard-hit sectors (3-month support of 2036 pesos per month): 0.3
  - Support to firms: 0.4
    - Wage subsidies (6-month support of 2036 pesos per month to IMSS-insured workers of formal firms in construction, trade, and services): 0.4
  - Boost public investment: 0.4
- Operational notes:
  - Social safety net expansion should rely on existing databases (social census, Sistema de Información Social Integral (SISI), national voter ID database) to identify beneficiaries.
  - Consider liquidity support for firms: tax and social security deferrals, accelerated VAT refunds, deferred/reduced mortgages, utility bill payments, government-funded sick and family leave; and cost-reduction assistance such as lower social security contributions, forgivable loans, and wage subsidies.
  - Micro loans with optional repayment to SMEs and family businesses amounting to up to 0.2 percent of GDP; development bank loans up to 0.9 percent of GDP.

### Structural and policy environment considerations
- USMCA entered into force July 2020, potentially benefiting Mexico via on-shoring, but domestic policy uncertainty is elevated due to reversals in energy reforms and barriers to private renewable providers and projects.
- Pandemic-specific structural concerns:
  - High labor market informality (55–60 percent of the workforce), low financial inclusion, and gaps in social safety net coverage.
  - Pre-pandemic lower health capacity (lower health expenditure, fewer beds and physicians).
  - High incidence of co-morbidity factors (obesity, diabetes).
- Scarring:
  - Potential output by 2025 projected about 9 percent below pre-pandemic projections, reflecting labor market scarring, diminished long-run growth, and foregone investment.

_Italicized line: Source: IMF staff report content provided in the supplied PDF content unit._

### 0.4 percent of GDP, including investing in maintenance and restarting good projects that were

### 1mexea2020001 - 0.4 percent of GDP, including investing in maintenance and restarting good projects that were

### Fiscal position, gaps, and risks
- Staff’s view: authorities’ medium-term deficit targets (PSBR) would stabilize gross public debt around 65 percent of GDP (10 percentage points above pre-pandemic levels).
- Fiscal gap: absent additional measures, there is a fiscal gap of 1¼–2 percent of GDP during 2021–25, based on staff’s assumptions of nominal GDP growth, oil production, and tax administration gains.
- Risk scenario: if fiscal gaps persist, public debt could increase to 73 percent of GDP by 2025 (Annex IV).
- Concern: disruptive expenditure cuts to narrow gaps could undermine quality of public services.
- Concern: low levels of non-Pemex capital spending in authorities’ plans could be crowded out by large priority projects and continued Pemex support.
- Recommendation: credibly announce pro-growth and inclusive measures to close gaps and lower debt over the medium term to underpin debt sustainability and create near-term policy space.

### Tax reform: objectives and estimated revenue potential
- Overall estimate: policy and administrative actions could raise revenues by 3-4 percent of GDP.
- Value Added Taxes (VAT)
  - Potential revenue increase: at least 2 percent of GDP from fundamental reforms to reduce policy and compliance gaps.
  - Policy reforms: eliminate domestic zero-rate items, except for a few key foodstuffs, and curtail exemptions — could boost revenues by more than 1 percent of GDP.
  - Compliance measures: improve tax agency’s organizational structure, simplify small taxpayer regime, move toward high-coverage audit process for VAT returns, increase electronic means, strengthen sanctions against fraud.
  - Border tax regime: not renewing temporary special regime for 2019-20 would limit distortions; foregone revenues estimated at 0.3 percent of GDP (including from corporate income taxes).
- Income taxes
  - Problem: personal income tax collections lag; high informality and inequality; large low-wage sector pays very little tax.
  - Measures: broaden base by including income on personal business activities and independent services; rationalize tax expenditures.
  - Tax expenditures: slightly below 1 percent of GDP; authorities consider at least ½ percent of GDP are inefficient or regressive and could be rationalized.
  - Top bracket: threshold increased by 5 percentage points in 2014; should be lowered.
  - Potential yield: up to ¾ percent of GDP.
- Subnational taxes
  - Property tax collections are currently 1½ percent of GDP below Latin American averages.
  - Aim: at minimum, collect at least ¾ percent of GDP from property taxation.
  - Recommendation: create a federal agency to update cadaster and coordinate subnational policies; redesign local vehicle tax via simplification and stricter enforcement to reduce transfers to states and municipalities.
- Gasoline excise tax
  - Current formula guarantees cumulative retail fuel price growth below CPI inflation since November 30, 2018.
  - Policy disproportionately benefits richer households and should be reconsidered.
  - In a low oil price environment, there is scope to increase gasoline excises.

### Spending-side reforms and public investment
- Historical pattern: fiscal discipline enforced by cutting programmable spending, shifting spending away from investment and functions such as health, education, housing and community services; spending shifted toward pensions and social safety nets.
- Need: rebalance spending toward essential services and high-quality public investment; reform pensions and social safety nets.

- Social protection
  - Gaps: no nationwide unemployment benefits system; Mexico City has such a system that could be adapted nationally.
  - Leakage: relatively large leakage of benefits to higher-income groups (IMF WP/20/215) — improved targeting needed.
  - Fragmentation: overlaps and gaps across many schemes at different government levels — reduce duplications by matching beneficiary databases to create a single registry and strengthen administrative capacity.
  - Instruments for informality: consider mobile money, in-kind transfers for education and health, community-based methods to identify those in need.

- Pension system
  - Current adequacy: very low replacement rates (26 percent for a full career average earner) and limited coverage due to high informality and job transitions between formal and informal work.
  - Government proposed reform:
    - Raise replacement rates by about 40 percent notably by increasing contributions from private employers from 5.15 percent to 13.875 percent over 8 years; contributions from employees and the state remain broadly unchanged.
    - Broaden coverage by lowering required period of contributions to about 15 years, which will be increased over time to 20 years.
    - Increase minimum guaranteed pension by 1/3rd to about US$2,300 per year.
    - Cap fees for pension fund managers.
  - Staff recommendations: reform can improve adequacy and eligibility but higher employer contributions could deter formal job creation; complementary measures needed to tackle informality and increase contribution densities, including reducing contribution rate to the housing fund (Infonavit), increasing contribution period required for a full pension in the old public-sector defined benefit scheme, and raising the age limit to get a full pension in the public sector.

- Public investment
  - Non-Pemex capital spending: about 1½ percent of GDP in 2019 — very low.
  - Needs: greater physical and human public investment to improve productivity, meet the Sustainable Development Goal in healthcare (½ percent of GDP in investment), and enhance inclusion.
  - Measures: reform Pemex, improve public investment efficiency, enhance coordination between center and states, emphasize national and sector strategies to guide project planning, and strengthen multi-year budgeting (see 2019 Public Investment Management Assessment).

- Pemex
  - Current strategy: prioritizes raising oil production and refining throughput but entails ever widening operational losses, burdening the budget and risking crowding out resources for essential spending.
  - Advice: focus production only in profitable fields, sell non-core assets, curb loss-making refining expansion, postpone new refinery plans until profitable, partner with private firms to increase efficiency, and consider fiscal support operations conditional on business strategy changes and governance reforms (Annex VII).
  - Rationale: upfront action would reduce fiscal strains and lower refinancing risks.

### Comprehensive fiscal package and model simulations
- Package components:
  - One-off emergency lifelines during the pandemic of 2½ percent of GDP in the first year.
  - Stimulus of 2 percent of GDP over the following two years to support growth and inclusion.
  - A 2 percent of GDP permanent increase in taxes in the second year (to close fiscal gaps), rising further in the third year and combined with spending efficiencies to finance permanently higher public investment and needed social spending.
- Model: illustrative simulations using the IMF’s GIMF model suggest:
  - Output could increase by 3–4 percent over the medium term and over 5 percent in the long term.
  - After an initial small increase in public debt from near-term support, public debt would decline by 2–3 percent over the medium term.
  - Raising investment efficiency would bolster these effects.
- Assumption: as investors anticipate implementation of the package, the sovereign risk premium is assumed to fall immediately by 50 basis points below the baseline.

### Authorities’ views (as reported)
- Priority: commitment to an effective health response to the pandemic to allow safe reopening and support recovery.
- Stance on fiscal policy: need to “keep the powder dry” for potential recurrence of outbreaks and not to burden future generations.
- Legal constraints: debt can only be used for public investment, monetary and debt management operations, and emergencies; changes to the constitution not considered feasible in current political environment.
- Measures emphasized: safeguard social spending and priority public investment projects, seek spending efficiencies, and combat tax evasion (which has yielded benefits).
- On tax collections: agreement on need to increase collections over medium term, focused on enhancing collection efficiency; noted temporary border tax regime had beneficial economic effects despite forgone revenues.
- On pensions: proposed changes have minimal fiscal cost in near term and limited impact on informality; complementary reforms required to tackle informality.
- On Pemex: authorities noted Pemex is profitable but faces high tax burden and high debt; steps taken include lowering the profit-sharing duty and increasing capital transfers.

### Monetary and exchange rate policies
- Central bank actions: cut the policy rate significantly and supported financial market functioning; maintained freely floating peso with limited use of non-deliverable forwards.
- Recommendation: maintain exchange rate flexibility; restrict foreign exchange intervention to instances of disorderly market conditions.
- Monetary stance: staff considers stance modestly accommodative with further room to ease.
  - Pre-pandemic real neutral rate: estimated in the range of 1.8 and 3.4 percent.
  - Ex-ante real policy rate (based on 1-year ahead inflation expectations) is below the lower bound of this range.
  - Real neutral rate likely declined in the pandemic (October 2020 GFSR estimated U.S. monetary easing lowered long-term bond yields in EMs by 30-60 basis points).
  - Policy rate remains above trough in previous easing cycle, despite very weak growth and sizable output gap.
  - Policy rate high relative to most large EMs.
- Role for further easing:
  - Potential benefits: lower real cost of borrowing, alleviate debt servicing pressures, possibly boost investment, increase attractiveness of central bank credit facilities.
  - Exposure: 80 percent of non-financial corporate credit is floating rate: about 85 percent for large corporates and over 65 percent for SMEs.
  - Tradeoffs: recent inflation uptick due to merchandise goods passthrough from peso depreciation, temporary Covid-19 supply shocks, and weather shocks — expected to be transitory given weak demand and low services inflation; anchored 1-year ahead and medium-term inflation expectations.
  - Capital flow risk: capital outflow and peso depreciation risks given deep and liquid local currency markets and prior sudden stop in March-April; outflows in local currency bond markets driven largely by external factors.
  - Alleviation: implementing staff’s fiscal and Pemex recommendations could lower risk premia.
  - Staff analysis (including U.S. policies and credit spreads) suggests room to further lower rates (Annex VIII).
- Monetary policy framework review:
  - Suggestion: consider an independent review of the monetary policy framework to explore inflation determinants, inflation measures, and the policy toolkit.
  - Review should consider role of financial stability, capital flow dynamics, expanding financial inclusion, and sustainable employment in pursuing low and stable inflation within existing legal framework.

*Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mexea2020001.pdf*

### 38.      Consideration could be given to enhancing the attractiveness of the central bank’s

### 1mexea2020001 - 38.      Consideration could be given to enhancing the attractiveness of the central bank’s

### Central bank financing facilities and MSME credit
- Facilities aimed to improve the functioning of financial markets and channel credit to MSMEs (¶15).
- Market-functioning facilities: limited use due to improving liquidity conditions; contributed to extending the maturity of government repo operations.
- MSME-credit facilities: have seen limited use9 despite significant stress in several sectors impacted by Covid-19 and an ongoing contraction in credit.
- Staff view:
  - Development banks could provide larger MSME guarantees to support an increase in lending volumes; this will require additional support from the government and a greater tolerance for risk taking.
  - Scope to reduce funding costs that are linked to the policy rate, relax collateral requirements, and encourage banks to engage with potential recipients more vigorously.

### Authorities’ views on monetary policy and market support
- Authorities noted significant easing of monetary policy over the past year, leaving less margin for future maneuver.
- Headline and core inflation have increased sharply over the last few months and are around 100 basis points above the 3 percent inflation target.
- This contrasts with the negative inflation gap prevailing in most G20 countries.
- Authorities highlighted:
  - High uncertainty and significant prevailing risks.
  - Unsettled global financial conditions that affect risk appetite for EM assets.
  - Importance of fostering an orderly adjustment of interest rates along the yield curve and containing risk premia at longer tenors for domestic financing conditions.
  - Need for monetary policy to be mindful of factors influencing capital flows and investor confidence, given the peso’s full convertibility and large non-resident participation in the local government debt market.
  - Liquidity and credit facilities provide an important backstop to banks and have had a material and signaling impact on markets, even if not currently needed by most banks.
- Note: One of two SME facilities announced in April was not available for use until late September, given technical delays.9

### Financial sector policies — risks and supervisory stance
- Stress tests10 revealed most banks—except a small share—remain above regulatory capital requirements.
- Initial conditions:
  - Current NPL levels and coverage ratios rank favorably compared to peers.
  - Banks’ allowances for loan losses (as a percent of total loans) rank low.
- Corporate loans affected by Covid-19 are estimated at nearly 40 percent of the banking portfolio; as a percent of capital they are more significant in smaller banks.
- Riskier consumer loans show similar concentration in smaller banks.
- Downside risks accentuated by limited fiscal support to the private sector.
- Banking system concentration risks: most banks exposed to a small set of large corporates, sometimes via supply chains (e.g., Pemex).
- Liquidation of Banco Ahorro Famsa highlighted difficulty assessing creditworthiness of banks with large related party exposure, a common feature among several smaller banks.

Recommendations and prudential measures:
- Continue upholding minimum regulatory and supervisory standards while using flexibility within the framework to cope with challenges.
- Loan restructuring regulations should:
  - Preserve the quality and level of bank capital.
  - Ensure appropriate reclassification of distressed loans and recognition of losses.
  - Avoid diluting capital requirements and disincentivizing borrowers from resuming repayments.
- Limit capital distributions given uncertainty:
  - Up until Q2 2020, banks respected the regulator’s recommendation to voluntarily limit dividend payouts, share buybacks, bonus payments, and the like.
  - Some banks intend to resume such payments; authorities should consider suspending capital distributions until the economy is clearly recovering to preserve capital resources and allow healthy credit provision.
- Close key regulatory and supervisory gaps (outstanding recommendations from 2016 FSAP), including:
  - Increasing the operational independence, budget autonomy, and legal protection of the banking and securities supervisor.
  - Enhancing the definition of “common risk” and “related party” in the area of bank exposures.
  - Improving the resolution regime for financial holding companies and strengthening authorities’ power to request pre-emptive actions (e.g., regarding issuing loss absorbing capacity instruments).
  - Ensuring adequate access to funding for deposit insurance (Institute for the Protection of Bank Savings, IPAB), with consideration to transferring legacy debt to the government to free up resources.

Authorities’ implementation notes:
- Authorities highlighted the strength and stability of the financial sector, implementation of the Basel III framework, and close monitoring of potential risks, including restructured loans.
- Additional initiatives to preserve capital resources are being considered if needed.
- Implementation of some regulatory measures (Net Stable Funding Ratio and Total Loss Absorbing Capacity requirements) has been delayed until financial and economic conditions improve.
- CNBV and the central bank are working on a consensual final proposal for complete implementation of large exposures in international standards in line with the Basel III framework.

### Structural reforms — strategy and recommended priorities
- Authorities’ strategy elements:
  - USMCA reduces trade-related uncertainty and positions Mexico to benefit from potential on-shoring to North America.
  - Government pursuing energy self-sufficiency, overturning the 2014 energy reform, refocusing on Pemex and CFE (¶17, ¶31, Annex VII).
  - Emphasis on fighting corruption, austerity, safeguarding priority public investment projects (¶29), and raising minimum wages by a further 20 percent at the start of 2020.
  - Announced early October series of investment projects in conjunction with the private sector that could amount to 1¼ percent of GDP in the coming years.
- Staff view: lasting productivity improvements require tackling long-standing impediments—pervasive informality, limited access to financial services, entry barriers limiting competition, and crime (see IMF WP/18/112, IMF WP/19/87, IMF WP/19/257).
- Suggested modifications and broadened strategy:
  - Steadfast implementation of reforms; where past reforms are overturned they should be replaced with measures of equal or better quality.
  - Improve transparency and engagement with the private sector to reduce policy uncertainty and stimulate investment.
  - To reap USMCA benefits: improve business climate and reduce informality (Annex IX).
  - Successful energy strategy requires significant investments in oil production and electricity grid improvements, efficient integration of variable renewable supply, and promoting private sector involvement (e.g., risk-sharing, restarting energy auctions).
  - Enhance independence and quality of regulation and remove barriers to trade in services (e.g., transportation and logistics).
  - Foster financial inclusion, including leveraging novel instruments to deliver social assistance (¶31), to offset ongoing credit contraction.
  - Consider reviewing the bankruptcy framework to facilitate efficient resource reallocation and strengthen incentives for risk-averse investors and banks to extend credit.

Labor market and informality:
- Recommend a determined and comprehensive approach to tackling labor market informality.
- Informality fell just 3 percentage points over the past decade to about 56 percent at the eve of the Covid-19 shock.
- Informal employment historically recovers quickly after shocks, but uncertain how swiftly demand will recover in sectors with high informality (services, trade, construction).
- Policies that increase social security contributions (¶31), taxes (¶30), and non-contributory benefits (¶28, 31) could unintentionally hinder formalization.
- Recommended reforms:
  - Lower hiring and firing restrictions.
  - Reduce costs of formalizing a business.
  - Make future increases in minimum wages gradual and aligned with labor productivity growth.
  - Establish a more efficient labor dispute resolution mechanism, improve enforcement of worker rights, and establish an unemployment insurance scheme (financed at least in part by non-labor taxes).

Governance, anti-corruption, and AML/CFT:
- Strengthen governance, transparency, AML/CFT, and anti-corruption initiatives with focus on effective implementation within a strong preventive and enforcement framework.
- Anti-corruption measures:
  - Appointment of an independent specialized anti-corruption prosecutor.
  - Preparation of legal amendments to introduce comprehensive criminal liability of legal persons.
  - Enhanced transparency requirements for public officials.
  - Need swift implementation of National Anticorruption Policy, broaden initiatives at state level, improve coordination across agencies, allocate responsibilities, provide resources and positions, and promote enhanced monitoring for accountability.
  - Continue efforts in investigation, prosecution and confiscation where progress is low.
- AML/CFT measures:
  - Authorities enhancing the preventive and supervisory regime with a risk-based focus, increasing financial disseminations from the Financial Intelligence Unit to prosecution.
  - An update to the ML/TF National Risk Assessment was adopted recently.
  - Follow-up needed on recommended legislative changes from the 2018 Fund-led AML/CFT assessment, including transparency of legal persons to ensure accurate, verified, and up-to-date basic and beneficial ownership information.
  - A draft AML/CFT Law aimed at addressing existing gaps is pending in the Senate.

Authorities’ views on structural reforms:
- Authorities agreed on the need to reduce informality, tackle corruption, and promote investment.
- They view promotion of Pemex and key public investment projects as both long-run energy independence/growth and short-term stimulus to provide jobs in hard-hit regions.
- Efforts on informality include stepping up enforcement and introducing greater flexibility in types of workers that can contribute to social security.
- Fostering financial inclusion emphasized via digital banking and fintech in urban areas, increasing access to youth, lower-income households, and the most vulnerable, including through subsidies.
- Agreed on need to focus on implementation of anti-corruption and AML/CFT frameworks and timely adoption of pending legal reforms; noted need to adopt additional reforms to enhance law enforcement performance (e.g., broaden some competencies of the specialized anti-corruption prosecutor and increase the range of sanctions).

### Staff appraisal — macroeconomic assessment and policy priorities
Key assessments:
- Covid-19 impacts:
  - Fatalities among the highest in the world.
  - Several million people remain out of work.
  - Share of the working poor in the population spiked.
  - Growth in 2020 is one of the weakest among G20 EMs.
  - With a modest recovery forecast, it could take several years for employment, income, and poverty to return to pre-pandemic levels.
- Macroeconomic response has been very conservative:
  - Very muted fiscal response risks weakening growth, including over the long run.
  - Monetary policy eased gradually.
  - Flexible exchange rate has helped absorb shocks; comfortable international reserves, access to the U.S. Federal Reserve swap line, and the IMF’s Flexible Credit Line have bolstered external resilience.
  - Structural reform reversals before the pandemic could further weaken the recovery and limit USMCA gains.

Policy priorities recommended:
- Limit the damage from the pandemic, promote a robust recovery, and pursue strong, durable, and inclusive growth through a comprehensive package comprising:
  - Near-term fiscal and monetary support to alleviate current distress and limit pandemic damage.
  - Credible medium-term plans to anchor fiscal sustainability, increase space for providing near-term support, and generate resources for public investment and social spending.
  - Steadfast implementation of structural reforms to boost investment and growth.

Fiscal policy recommendations:
- Larger near-term fiscal support would support the recovery and reduce poverty.
  - Mexico has some fiscal space and comfortable market access that could be used for temporary support of 2½–3½ percent of GDP by triggering the escape clauses in the Fiscal Responsibility Law.
  - Support could be used for enhancing health care services, increasing social safety net coverage to include eligible individuals not receiving benefits, people likely to fall into poverty due to the pandemic, and informal workers in hard-hit sectors.
  - Could also provide liquidity support (e.g., tax and social security contribution deferrals) and cost-reduction assistance (e.g., wage subsidies) to viable firms.
- Announce a credible medium-term tax reform to be implemented once the recovery is well in hand; imperative to help close fiscal gaps, lower public debt, and finance public investment and social spending.
  - A well-designed tax reform could raise revenues by 3–4 percent of GDP by:
    - Broadening the personal income tax base and reducing the threshold of the top tax bracket to make the system more progressive.
    - Raising subnational property and vehicle registration taxes.
    - Reconsidering the policy of retail gasoline price growth below inflation, which is regressive.
    - Reducing VAT gaps while strengthening social safety nets to mitigate distributional concerns.
  - Recent steps to improve tax administration are welcome; consideration could be given to:
    - Improving the tax agency’s organizational structure.
    - Moving toward a high-coverage audit process for VAT returns.
    - Further increasing the use of electronic means.
    - Strengthening sanctions against tax fraud.
  - Allowing the border tax regime to expire would limit distortions and raise collections.

Public spending and social protection:
- Reprioritization of public spending would promote inclusive growth.
- Medium-term reforms to strengthen social protection include introducing a nation-wide unemployment benefits system and strengthening social safety nets by increasing coverage cost-effectively while reducing overlaps, duplications, and leakages.
- Government’s proposed reform can improve adequacy and eligibility of the pension system; complementary reforms advisable due to frequent movement between formal and informal arrangements.
- Higher public investment would improve productivity and inclusion.

Pemex recommendations:
- Pemex’s business strategy is crowding out resources for essential spending and should be revisited.
  - Given widening losses, advisable to focus production only in profitable fields, sell non-core assets, curb plans to increase refining output at a loss, and postpone new refinery plans until profitable.
  - Partnering with private firms would supply needed capital and know-how.
  - Conditional on changes to business strategy and governance, consideration could be given to fiscal support that eases Pemex’s high financing needs.

*Italic: Source — IMF staff report content unit 1mexea2020001 (selected paragraphs 38–57).*

### 58.      With 1-year ahead inflation expectations well anchored, consideration could be given

### 58.      With 1-year ahead inflation expectations well anchored, consideration could be given

### Monetary policy and inflation
- With 1-year ahead inflation expectations well anchored, consideration could be given to cutting monetary policy rates further.
- The recent edge-up in inflation largely reflects transitory factors that should give way to sustained downward demand pressures.
- Lower rates would provide further relief to the economy, against the backdrop of a sizable shortfall in output.
- The central bank will need to successfully navigate challenging tradeoffs, including maintaining external financial stability.

### Banking sector risks and supervision
- Close monitoring of risks in the banking sector is crucial.
- Continue to uphold minimum regulatory and supervisory standards and use the inherent flexibility of the framework to cope with challenges.
- Loan restructuring regulations should ensure reclassification of distressed loans and recognition of losses.
- Given the still considerable uncertainty over the outlook, limiting capital distribution (e.g., suspending dividends) would be prudent until the economy is clearly recovering.
- Closing regulatory and supervisory gaps in line with the 2016 FSAP recommendations would help boost financial resilience.

### Investment, productivity, and structural reforms
- Boosting investment and delivering lasting improvements in productivity requires steadfast implementation of reforms.
- Consideration should be given to a comprehensive approach to tackling informality.
- Encouraging private sector participation in the energy sector would help finance urgent needs in investment and expertise.
- Enhancing regulator independence along with ensuring quality and removing barriers to trade in services would support competition.
- Promoting financial inclusion would improve welfare and help offset ongoing credit contraction.
- Focusing on swift and effective implementation of anti-corruption measures and enacting pending legislation of the AML/CFT framework would support governance.

*Source: IMF staff text.*

### 61.      It is proposed that the next Article IV consultation with Mexico take place on the

### 1mexea2020001 - 61.      It is proposed that the next Article IV consultation with Mexico take place on the

### Consultation timing
- It is proposed that the next Article IV consultation with Mexico take place on the standard 12-month cycle.

### Covid-19 indicators and high-frequency activity (findings)
- Confirmed Covid-19 cases: data referenced through September 30, 2020. (Figure 2 note: "Data as of September 30, 2020.")
- Stringency index: Oxford University Stringency index recorded on a scale from 0 to 100 (100 = more stringent).
- Observed patterns:
  - "Confirmed Covid-19 cases have begun to decline with periods of retrenchment..."
  - "Individual mobility remains depressed."
  - "Flight traffic remains substantially suppressed."
  - "Sea-based imports reflect depressed demand."
  - "Card-based purchases have recovered slowly on average but lag in contact-intensive sectors."
  - "High-contact services are recovering in some industries but are still low."
  - "New job posting reflect continued uncertain demand prospects unlike other large countries in the hemisphere."
- Testing and mortality:
  - "Despite high number of cases, Mexico significantly lags in testing."
  - "Excess mortality in Mexico City (and other states) suggests most cases are being missed due to low testing rates."
  - "Mexico has one of the highest number of cases in the world" and "The COVID-19 death toll is the fourth-largest in the world."

### Real sector: recession and recovery patterns (findings & projections)
- Q2 2020: "Growth declined across the board in Q2 led by manufacturing."
- Private consumption: "Private consumption points to lingering demand shortfalls..."
- Investment: "Gross fixed capital formation has fallen sharply..."
- Employment:
  - "Job losses have been deep with formal jobs recovering slowly."
  - Employment indicators: Formal sector employment (IMSS-insured workers) showed declines in 2020 (Table 1).
- External demand and exports:
  - "Exports contracted dramatically on top of weakening in 2019."
  - Automotive exports helped current account (Figure 6).
- Baseline medium-term GDP projections (Table 7, contributions to growth):
  - GDP: 2019 = -0.1; 2020 = -9.0; 2021 = 3.5; 2022 = 2.3; 2023 = 2.2; 2024 = 2.1; 2025 = 2.1
  - Consumption: 2019 = 0.3; 2020 = -8.2; 2021 = 3.2; 2022 = 2.3; 2023 = 1.8; 2024 = 1.8; 2025 = 1.8
  - Investment (contribution): 2019 = -1.2; 2020 = -4.0; 2021 = 1.8; 2022 = 1.4; 2023 = 0.9; 2024 = 0.5; 2025 = 0.4
  - Exports of goods and services: 2019 = 1.0; 2020 = -3.8; 2021 = 5.0; 2022 = 1.2; 2023 = 1.3; 2024 = 1.0; 2025 = 0.8
- Output gap (Table 7 memorandum):
  - 2019 = -0.9; 2020 = -5.7; 2021 = -4.1; 2022 = -2.8; 2023 = -1.6; 2024 = -0.4; 2025 = 0.0

### Prices, inflation, and monetary stance (findings & projections)
- Inflation (Table 7, consumer prices):
  - End of period: 2019 = 4.8; 2020 = 3.7; 2021 = 2.9; 2022 = 3.0; 2023 = 3.0; 2024 = 3.0; 2025 = 3.0
  - Average: 2019 = 3.6; 2020 = 3.4; 2021 = 3.3; 2022 = 3.0; 2023 = 3.0; 2024 = 3.0; 2025 = 3.0
- Policy rate and expectations (Figure 5 summary statements):
  - "The policy rate has eased considerably but remains higher than the bottom of the previous cycle..."
  - "Medium-term expectations have barely responded to cuts."

### Fiscal sector: shock, response, and projections (findings & projections)
- Fiscal impact of the pandemic:
  - "Public debt is expected to rise by about 12 percent of GDP in 2020, due to the GDP decline and peso depreciation" (Figure 8 caption).
  - "The fiscal balance is projected to widen in 2020 following the sharp growth decline owing to COVID-19."
  - Authorities using trust funds: "The authorities are utilizing resources from various trust funds."
- Key fiscal numbers (Table 2, authorities' presentation; Table 3, GFSM 2014):
  - Budgetary revenue (percent of GDP): 2019 = 22.2; 2020 = 22.4; 2021 = 21.3; 2022 = 21.3; 2023 = 21.0; 2024 = 21.1; 2025 = 21.2
  - Budgetary expenditure (percent of GDP): 2019 = 23.9; 2020 = 26.4; 2021 = 24.2; 2022 = 23.4; 2023 = 23.0; 2024 = 23.1; 2025 = 23.1
  - Public Sector Borrowing Requirements (percent of GDP): 2019 = 2.3; 2020 = 5.8; 2021 = 3.4; 2022 = 2.6; 2023 = 2.5; 2024 = 2.5; 2025 = 2.5
  - Overall fiscal balance (GFSM 2014, percent of GDP): 2019 = -2.3; 2020 = -5.8; 2021 = -3.4; 2022 = -2.6; 2023 = -2.5; 2024 = -2.5; 2025 = -2.5
  - Gross public sector debt (GFSM 2014, percent of GDP): 2019 = 53.7; 2020 = 65.5; 2021 = 65.6; 2022 = 65.4; 2023 = 65.2; 2024 = 65.0; 2025 = 64.9
- Table 1 selected highlights:
  - GDP per capita (U.S. dollars, 2019) = 10,024
  - Poverty headcount ratio (% of population, 2018) = 41.9
  - National unemployment rate (annual average) 2019 = 3.3; 2020 = 5.2; 2021 = 5.8 (Table 1 row)
  - Overall fiscal balance (in percent of GDP, Table 1) 2019 = -2.3; 2020 = -5.8; 2021 = -3.4; 2022 = -3.4 (Table 1 displays projections consistent with Table 3)

### External sector: current account, reserves, and capital flows (findings & projections)
- Current account and trade:
  - Current account (Table 4b, percent of GDP): 2019 = -0.3; 2020 = 1.2; 2021 = -0.1; 2022 = -0.9; 2023 = -1.5; 2024 = -1.8; 2025 = -2.0
  - "The current account balance turned into a surplus... helped by the depreciation of the peso and a boom in automotive exports." (Figure 6)
- Reserves and flows:
  - Gross international reserves (Table 4a, US$ billions): 2019 = 183.0; 2020 = 190.4; 2021 = 192.1; 2022 = 194.0; 2023 = 197.1; 2024 = 202.4; 2025 = 208.2
  - Change in reserves assets (Table 4a): 2019 = 2.6; 2020 = 7.4; projected positive accumulations in following years.
  - Capital flows: Financial Account (Net lending (+)/Net borrowing (-), Table 4a): 2019 = -15.0; 2020 = 12.9; 2021 = -1.0; 2022 = -10.6; 2023 = -18.0; 2024 = -22.5; 2025 = -25.9 (US$ billions)
  - Foreign direct investment (Table 4a, US$ billions): 2019 = -23.3; 2020 = -14.5; projections of continued negative net FDI flows in projections.
- External debt and vulnerability metrics (Table 6):
  - Gross total external debt (percent of GDP): 2019 = 36.6; 2020 = 45.5 (projection)
  - Gross international reserves (end-year, US$ billions): 2019 = 183.0; 2020 = 197.1 (June-20 listed in Table 6)
  - GIR to ARA Metric (percent): 2019 = 116.8; 2020 = 124.3 (projection in Table 6)
  - Months of imports of goods and services (Table 6): 2019 = 4.4; 2020 = 4.2; projection = 4.4–5.4 range depending on metric

### Financial sector, markets, and banking (findings & indicators)
- Market developments (Figure 9 and Table 6):
  - Peso: "The peso has stabilized since April at a higher level."
  - Sovereign credit spreads: "Credit spreads on sovereign dollar-denominated debt spiked but have eased since April..."
  - Foreign holdings of local currency sovereign debt declined over past 6 years; inflows returned in August after record outflows in Q2 2020.
- Banking system soundness (Figure 10; Table 5 Financial Soundness Indicators):
  - Regulatory capital to risk-weighted assets: 2019 = 16.0; 2020 (June) = 16.5
  - Nonperforming loans to total gross loans: 2019 = 2.1; 2020 (June) = 2.0
  - Return on assets: 2019 = 2.2; 2020 (June) = 1.3
  - "Non-performing loans at commercial banks... and development banks remain low."
  - "The banking sector entered 2020 profitable... and remains well capitalized."
- Credit dynamics:
  - Financial system credit to non-financial private sector (Table 7 memorandum): 2019 = 3.0 (year-on-year percent change); 2020 = -1.4; projected 2021 = 6.1; 2022 = 6.9; 2023 = 7.7; 2024 = 8.0; 2025 = 8.0
  - Table 8 monetary aggregates: Broad money percent change 2020 = 8.3 (monetary base and currency in circulation growth also reported).

### Nonfinancial corporate sector (findings)
- Leverage and liquidity:
  - "Nonfinancial corporate leverage rose sharply in Q2 2020."
  - "Corporate liquidity remains strong."
  - Interest coverage ratios deteriorated but remained at multiples above distressed levels (Figure 11 series).
  - Hard currency issuance: bond issuance and market access has been strong (Figure 11).
- Maturity profile:
  - The maturity structure of corporate borrowing "was largely at longer maturities."

### Social indicators (findings)
- Poverty and inequality (Table 12 / Figure 12 and Table 1 highlights):
  - GDP per capita (U.S. dollars, 2019) = 10,024
  - Poverty headcount ratio (% of population, 2018) = 41.9
  - Income share of highest 20 perc. / lowest 20 perc. (2018) = 9.7
  - Infant mortality rate (per thousand, 2019) = 13.1
  - "The homicide rate remains high."
  - "A large share of youth is excluded from education or employment."
  - "Still, poverty in Mexico remains higher than the LAC6 average. Extreme poverty has declined over the past 25 years."

### Key summary statistics and projections (select exact figures)
- GDP annual growth (Table 1 / Table 7):
  - 2019 = -0.1
  - 2020 = -9.0
  - 2021 = 3.5
  - 2022 = 2.3
- Consumer prices (end-of-period, Table 7):
  - 2019 = 4.8; 2020 = 3.7; 2021 = 2.9
- Gross public sector debt (GFSM 2014, percent of GDP, Table 3):
  - 2019 = 53.7; 2020 = 65.5
- Gross international reserves (Table 4a):
  - 2019 = 183.0 (US$ billions); 2020 = 190.4 (US$ billions)
- Current account (percent of GDP, Table 4b):
  - 2019 = -0.3; 2020 = 1.2; 2021 = -0.1
- Net international reserves reported (Table 8, Banco de México, in billions of Pesos):
  - Net international reserves 2019 = 3,471; 2020 = 4,135

*Source: International Monetary Fund staff estimates and national authorities as presented in the document (figures and tables cited).*

### Annex I. Progress Against IMF Recommendations

### Annex I. Progress Against IMF Recommendations

### Fiscal Policy
- 2019 Article IV Policy Advice:
  - Specify more ambitious fiscal targets to lower public debt.
  - Increase non-oil tax revenues, strengthen revenue administration, rationalize tax expenditures, raise subnational taxes, make the tax system more progressive, enhance spending efficiency, and establish a fiscal council.
  - Improve pension adequacy by increasing the contribution rate, raising the effective retirement age, and consolidating federal and local non-contributory pension pillars.
  - Revise Pemex’s business plan to strengthen its financial position and reduce budget risks, sell non-core assets, reduce operating costs, and increase cooperation with private firms.
- Actions Since 2019 Article IV:
  - The outbreak of Covid-19 has led to a reprioritization. The government increased spending in 2020 by 0.7 percent of GDP and reallocated and frontloaded some items.
  - The draft 2021 budget continues the tight policy settings aimed at limiting debt issuance. There are no medium-term tax reforms, and stabilization and trust funds buffers are expected to be drawn down.
  - The government has proposed a pension reform to increase replacement rates through private employer contributions, broaden coverage, and raise the minimum guaranteed pension. Fund management fees could be capped.
  - Given lower oil prices and ratings downgrade, production was cut slightly as was capital spending. The business plan continues to prioritize raising oil production and refining throughput. There has been limited private sector interest in service contracts.
- Next Steps:
  - Enhance near-term fiscal support by 2½-3½ percent of GDP to save lives, preserve livelihoods, and limit scarring.
  - Announce credible medium-term tax reforms to finance quality non-oil public investment, enhance social protection, close fiscal gaps, and lower public debt.
  - As higher employer pension contributions could deter formal job creation, complementary measures are needed to tackle informality and increase contribution densities, including reducing the contribution rate to the national housing fund, increasing the contribution period required for a full pension in the old public-sector defined benefit scheme, and raising the age limit to get a full pension in the public sector.
  - Revise Pemex’s business plan: focus production on profitable fields, curb plans in the downstream sector, postpone new refinery plans until it is profitable to do so, and partner with private firms to leverage expertise, manage investment costs and increase efficiency.

### Monetary and Exchange Rate Policy
- 2019 Article IV Policy Advice:
  - Ease monetary policy if inflation stays close to target and inflation expectations remain anchored.
  - Maintain exchange rate flexibility as a key shock absorber. Limit FX intervention to incidences of disorderly market conditions.
- Actions Since 2019 Article IV:
  - The central bank cut the policy rate by 400 basis points since mid-2019 to 4.25 percent. It launched new financing and credit facilities after the Covid-19 outbreak for a total of up to 3.3 percent of GDP.
  - The flexible exchange rate has facilitated absorption of shocks. FX intervention of US$2 billion was conducted through local non-deliverable forwards during peak market stress.
- Next Steps:
  - Consider lowering the policy rate further to support the economy, while anchoring inflation expectations and safeguarding external financial stability. Refine credit facilities to enhance their attractiveness and support the economy.
  - Continue maintaining exchange rate flexibility to facilitate shock absorption. Limit FX intervention to instances of disorderly market conditions.

### Financial Sector Policies
- 2019 Article IV Policy Advice:
  - Further enhance financial sector resilience by closing regulatory and supervisory gaps.
  - Prioritize further boosting competition and inclusion.
- Actions Since 2019 Article IV:
  - Several regulatory initiatives related to Basel III implementation have been delayed given the pandemic and new crisis-related regulations have been issued.
  - A new financial inclusion strategy was announced in March 2020.
- Next Steps:
  - Uphold minimum regulatory and supervisory standards, while using flexibility within the framework to cope with pandemic challenges.
  - Close key regulatory and supervisory gaps to boost financial resilience.

### Structural Policies
- 2019 Article IV Policy Advice:
  - Re-invigorate the reform agenda with an emphasis on strengthening the rule of law, fighting corruption, and reducing labor market informality.
  - Strengthen AML/CFT and implement the national anti-corruption system.
  - Address informality by reducing entry costs for formal firms, strengthening enforcement, and replacing hiring and firing restrictions with an unemployment insurance scheme. Lower participation barriers for women.
  - Remove constraints to trade in services.
- Actions Since 2019 Article IV:
  - On AML/CFT, the authorities have concluded and adopted a revised ML/TF National Risk Assessment and prepared draft legislation to improve the legal framework in line with the recommended actions from the 2018 Fund-led AML/CFT assessment. A draft law is pending approval in Congress.
  - On anti-corruption, the authorities adopted enhanced transparency requirements for public official and adopted a National Anti-corruption Policy.
- Next Steps:
  - Take a comprehensive approach to tackling informality.
  - Encourage private sector involvement in the energy sector.
  - Enhance the independence and ensure the capacity of regulators to support competition and remove barriers to trade in services.
  - Promote financial inclusion.
  - Strengthen governance by focusing on swift and effective implementation of anti-corruption measures and enacting pending legislation of the AML/CFT framework.

*Source: Annex I. Progress Against IMF Recommendations*

### 2.      Rollover and exchange rate risks: the long maturity structure of public debt reduces

### 2.      Rollover and exchange rate risks: the long maturity structure of public debt reduces

### Rollover and exchange rate exposure
- The long maturity structure of public debt reduces rollover risks, including for the large share of public debt held by non-residents.
- The real interest rate and exchange rate shocks have a moderate impact on the debt stock, given the gradual interest rate pass-through to the budget and the large share of debt denominated in local currency (around 66 percent).

### Stochastic simulations and fan charts
- Fan charts illustrate the possible evolution of public debt over the medium term and are based on symmetric and asymmetric distributions of risk.
- Under a symmetric distribution, there is a probability of around 70 percent that debt will remain below 70 percent of GDP over the medium term.
- Under an asymmetric (restricted) distribution where it is assumed that there are no positive shocks to the primary balance, there is a probability of around 60 percent that the debt path will remain below 70 percent of GDP over the projection horizon.

### Stress tests — individual and combined shocks
- Individual shocks:
  - The debt ratio would remain below the threshold 70 percent of GDP under all individual shock scenarios.
  - The impact on debt is highest for growth and exchange rate shocks.
  - If fiscal gaps of 1¼–2 percent of GDP are not closed, debt will rise to 73 percent of GDP by 2025.
  - If marketed Treasury securities held by the central bank for liquidity management purposes are added to debt statistics, debt would reach 69 percent of GDP under the baseline, without additional fiscal risks.
  - If fiscal gaps are not closed and marketed Treasury securities held by the central bank are added to the debt statistic, debt would rise to 76 percent of GDP by 2025.
- Combined shock:
  - A combined shock incorporates the largest effect of individual shocks on real GDP growth, inflation, primary balance, exchange rate and interest rate.
  - Under this scenario, debt would increase to 76 percent of GDP by 2025.
  - Gross financing needs would reach 14.4 percent of GDP in 2025.

### Debt coverage and treatment of central bank–held Treasury securities
- Treasury securities held by the central bank for liquidity management purposes are not included in general government debt.
- At end 2019, a stock of about 4.4 percent of the GDP in T-bonds had been marketed (some 20 percent of GDP had not been marketed).
- Proceeds from the securities are held in a special government Monetary Regulation Deposit (MRD) that is ringfenced according to Art. 7 and 9 of Banco de México’s Law; the government cannot access the MRD before the bonds mature.
- The government earns no financing benefit from these securities; it also incurs no direct cost given that the central bank remunerates the MRD with the exact payment terms as is the case for the securities.
- In the authorities’ official debt statistics, these securities are not considered general government (GG) debt while, in the Cuenta Pública, they are reported under a specific liability line item (but not under the debt heading).
- Mexico received technical assistance in 2017 from the IMF’s Statistics Department to bring the fiscal and debt statistics to international standards.
- Coverage note: The coverage of debt statistics in Mexico is limited to two of the required six debt instruments, namely, debt securities and loans.

### Net public debt
- Authorities focus on the concept of Historical Balance of the Public Sector Borrowing Requirements (HBPSBR), analogous to a net debt concept.
- Staff estimates that net public debt (defined as gross debt minus public assets) would reach around 56 percent of GDP over the medium term.

### External debt sustainability — baseline and risks
- Baseline projections:
  - Gross external debt remained unchanged at 37 percent of GDP in 2019 from 2018.
  - In the baseline, gross external debt is projected to increase to around 46 percent of GDP in 2020 driven by the decline in nominal GDP and peso depreciation vis-à-vis the U.S. dollar.
  - Over the medium term, it is expected to decrease gradually towards 42 percent of GDP.
- Risks and mitigating factors:
  - Major downside risk: protracted pandemic-related stress that lowers growth, raises the country risk premium, and weakens the peso.
  - Currency depreciation example: a 30 percent depreciation is estimated to raise external debt above 55 percent of GDP.
  - Rollover risks for the public sector (around two-thirds of Mexico’s external debt) are mitigated by:
    - A favorable maturity structure (around 85 percent of debt has maturity above one year).
    - Currency composition (around 1/4th of debt is denominated in peso).
    - Prudent debt management by the government.
  - Private sector external debt, concentrated in the non-financial corporate sector, is mostly medium and long term and foreign exchange risks are well-covered by natural and financial hedges.
  - The banking sector is well-capitalized and liquid and assessed to be resilient to large shocks.

### Key quantitative projections and indicators (selected)
- Probability debt remains below 70 percent of GDP under symmetric distribution: around 70 percent.
- Probability debt remains below 70 percent of GDP under asymmetric (no positive primary balance shocks): around 60 percent.
- Fiscal gap not closed leads to debt of 73 percent of GDP by 2025.
- Marketed T-bonds held by central bank at end 2019: about 4.4 percent of GDP; not marketed: some 20 percent of GDP.
- Net public debt (gross minus public assets) over medium term: around 56 percent of GDP.
- Gross external debt:
  - 2019: 37 percent of GDP.
  - 2020 projection: around 46 percent of GDP.
  - Medium-term projection: towards 42 percent of GDP.
- Example shock: 30 percent depreciation → external debt above 55 percent of GDP.
- Rollover structure: around 85 percent of external debt has maturity above one year.
- Currency composition: around 1/4th of external debt denominated in peso.
- Combined macro-fiscal shock result: public debt 76 percent of GDP by 2025; gross financing needs 14.4 percent of GDP in 2025.

*Source: IMF staff (as presented in the provided content).*

### Annex IV. Table 1. Mexico: External Debt Sustainability Framework

### Annex IV. Table 1. Mexico: External Debt Sustainability Framework

### Projections — baseline and debt dynamics
- Baseline: External debt (In percent of GDP)
  - 2015: 35.5
  - 2016: 38.3
  - 2017: 37.7
  - 2018: 36.6
  - 2019: 36.6
  - 2020: 45.5
  - 2021: 44.6
  - 2022: 43.9
  - 2023: 43.2
  - 2024: 42.5
  - 2025: 41.8
- Debt-stabilizing non-interest current account 6/: -2.6

- Change in external debt (In percent of GDP)
  - 2015: 3.1
  - 2016: 2.7
  - 2017: -0.6
  - 2018: -1.1
  - 2019: 0.0
  - 2020: 8.9
  - 2021: -0.9
  - 2022: -0.7
  - 2023: -0.7
  - 2024: -0.7
  - 2025: -0.7

- Identified external debt-creating flows (4+8+9) (In percent of GDP)
  - 2015: 2.1
  - 2016: 0.6
  - 2017: -4.0
  - 2018: -2.2
  - 2019: -3.5
  - 2020: 0.4
  - 2021: -4.1
  - 2022: -2.9
  - 2023: -2.2
  - 2024: -1.9
  - 2025: -1.7

- Current account deficit, excluding interest payments (In percent of GDP)
  - 2015: 1.0
  - 2016: 0.4
  - 2017: -0.1
  - 2018: 0.2
  - 2019: -1.7
  - 2020: -3.7
  - 2021: -2.1
  - 2022: -1.2
  - 2023: -0.6
  - 2024: -0.3
  - 2025: 0.0

- Deficit in balance of goods and services (In percent of GDP)
  - 2015: -7
  - 2016: 1.0
  - 2017: -7.5
  - 2018: -7.7
  - 2019: -8.0
  - 2020: -6.6
  - 2021: -5.5
  - 2022: -4.6
  - 2023: -4.3
  - 2024: -4.2
  - 2025: -4.1

- Exports (In percent of GDP)
  - 2015: 34.5
  - 2016: 37.0
  - 2017: 37.7
  - 2018: 39.3
  - 2019: 38.8
  - 2020: 40.9
  - 2021: 46.3
  - 2022: 46.2
  - 2023: 46.3
  - 2024: 46.2
  - 2025: 45.8

- Imports (In percent of GDP)
  - 2015: -36.5
  - 2016: -39.0
  - 2017: -39.5
  - 2018: -41.3
  - 2019: -39.1
  - 2020: -40.6
  - 2021: -46.7
  - 2022: -47.7
  - 2023: -48.6
  - 2024: -48.9
  - 2025: -48.8

- Net non-debt creating capital inflows (negative) (In percent of GDP)
  - 2015: -2.5
  - 2016: -2.9
  - 2017: -3.0
  - 2018: -2.2
  - 2019: -2.5
  - 2020: -2.4
  - 2021: -2.7
  - 2022: -2.8
  - 2023: -2.8
  - 2024: -2.8
  - 2025: -2.8

### Automatic debt dynamics and contributions
- Automatic debt dynamics 1/ (In percent of GDP)
  - 2015: 3.6
  - 2016: 3.1
  - 2017: -0.9
  - 2018: -0.2
  - 2019: 0.7
  - 2020: 6.5
  - 2021: 0.7
  - 2022: 1.2
  - 2023: 1.2
  - 2024: 1.2
  - 2025: 1.1

- Contribution from nominal interest rate (In percent of GDP)
  - 2015: 1.7
  - 2016: 1.9
  - 2017: 1.9
  - 2018: 1.9
  - 2019: 2.1
  - 2020: 2.4
  - 2021: 2.2
  - 2022: 2.2
  - 2023: 2.1
  - 2024: 2.1
  - 2025: 2.0

- Contribution from real GDP growth (In percent of GDP)
  - 2015: -1.2
  - 2016: -1.0
  - 2017: -0.8
  - 2018: -0.8
  - 2019: 0.0
  - 2020: 4.0
  - 2021: -1.5
  - 2022: -1.0
  - 2023: -0.9
  - 2024: -0.9
  - 2025: -0.9

- Contribution from price and exchange rate changes 2/
  - 2015: 3.1
  - 2016: 2.3
  - 2017: -2.0
  - 2018: -1.3
  - 2019: -1.4
  - 2020–2025: ..................  

- Residual, incl. change in gross foreign assets (2-3) 3/ (In percent of GDP)
  - 2015: 1.1
  - 2016: 2.1
  - 2017: 3.4
  - 2018: 1.1
  - 2019: 3.5
  - 2020: 8.6
  - 2021: 3.2
  - 2022: 2.1
  - 2023: 1.5
  - 2024: 1.2
  - 2025: 1.0

### Ratios and financing needs
- External debt-to-exports ratio (in percent)
  - 2015: 103.1
  - 2016: 103.5
  - 2017: 99.8
  - 2018: 93.1
  - 2019: 94.1
  - 2020: 111.2
  - 2021: 96.4
  - 2022: 95.0
  - 2023: 93.2
  - 2024: 91.9
  - 2025: 91.2

- Gross external financing needs (in billions of US dollars) 4/
  - 2015: 136.1
  - 2016: 120.5
  - 2017: 95.9
  - 2018: 96.5
  - 2019: 66.5
  - 2020: 65.3
  - 2021: 79.8
  - 2022: 90.2
  - 2023: 105.6
  - 2024: 108.8
  - 2025: 107.1

- Gross external financing needs in percent of GDP (as presented in source)
  - 11.6 11.2 8.3 7.9 7.6 10-Year 10-Year 6.3 7.3 7.9 8.8 8.7 8.2

### Scenario with key variables at their historical averages 5/
- Scenario outcome (In percent of GDP)
  - 45.5 48.0 49.7 50.8 51.6 52.1 -1.6

### Key macroeconomic assumptions underlying baseline (Historical, Average, Standard Deviation)
- Real GDP growth (in percent)
  - Historical: 3.3
  - Average: 2.6
  - Deviation: 2.1 2.2 -0.1 2.7 1.4 -9.0 3.5 2.3 2.2 2.1 2.1

- GDP deflator in US dollars (change in percent)
  - Historical: -13.7
  - Average: -10.3
  - Deviation: 5.2 3.2 3.9 1.1 7.9 -9.9 1.6 2.4 2.3 2.3 2.2

- Nominal external interest rate (in percent)
  - Historical: 4.7
  - Average: 4.8
  - Deviation: 5.2 5.3 5.9 5.5 0.5 5.5 5.2 5.1 5.0 5.0 4.9

- Growth of exports (US dollar terms, in percent)
  - Historical: -3.6
  - Average: -1.3
  - Deviation: 9.8 9.8 2.6 7.6 9.3 -13.6 19.0 4.5 4.9 4.2 3.5

- Growth of imports (US dollar terms, in percent)
  - Historical: -1.5
  - Average: -1.8
  - Deviation: 8.9 10.2 -1.8 7.0 9.0 -14.9 21.1 6.9 6.5 5.0 4.2

- Current account balance, excluding interest payments (In percent of GDP)
  - Historical: -1.0
  - Average: -0.4
  - Deviation: 0.1 -0.2 1.7 0.0 0.8 3.7 2.1 1.2 0.6 0.3 0.0

- Net non-debt creating capital inflows (In percent of GDP)
  - Historical: 2.5
  - Average: 2.9
  - Deviation: 3.0 2.2 2.5 2.3 0.6 2.4 2.7 2.8 2.8 2.8 2.8

### Selected methodological footnotes (as presented)
- 1/ Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.
- 2/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).
- 3/ For projection, line includes the impact of price and exchange rate changes.
- 4/ Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period, excluding reserve accumulation.
- 5/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
- 6/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

*Source: Annex IV. Table 1. Mexico: External Debt Sustainability Framework.*

### 3.      The authorities’ plans to attract much needed private sector involvement are likely to

### 3.      The authorities’ plans to attract much needed private sector involvement are likely to

### Private sector involvement and Pemex production prospects
- Given Pemex’s over-indebted balance sheet, it could struggle to meet its goals without private sector expertise and sharing of investment costs.
- Increasing production will require additional investment in highly specialized technologies and success in developing smaller and more technically complex fields.
- The government’s cancellation of all licensing rounds and farmouts risks leaving a large gap in production growth and fiscal revenues in the medium term, given the multi-year lag in developing new fields.
- The authorities’ desire to rely on service contracts has not attracted private sector interest, because these contracts are more attractive to service companies rather than oil operators willing to take risks.
- The authorities’ actions in the energy sector (e.g., initiatives toward maintaining Pemex’s and CFE’s monopolies) may be contributing to reducing overall private sector interest in the Mexican energy sector.
- Private analysts are pessimistic on Pemex’s production with some expecting production to fall to 1.5-1.6 mbpd in 2024 and some as low as 1.13 mbpd.

### Refining strategy and execution risks
- Lack of investment for preventive maintenance has led to recurrent shutdowns and low capacity utilization.
- With limited investment envisaged for maintenance, plans underway to build the large new Dos Bocas refinery that will subsume the bulk of downstream investment expenditure, and significant pressures in refining margins, the current refining strategy will likely augment financial losses further.

### Risks to the budget, liquidity, and market access
- Staff estimates free cash flow at about –1 percent of GDP in 2020.
- Financial support in the 2020 budget is about 0.6 percent of GDP, compared to 0.8 percent of GDP in 2019.
- Short-term debt is around 1½ percent of GDP and liquidity buffers under ½ percent of GDP in mid-2020.
- Pemex may need additional fiscal support to refinance maturing debt if it is unable to rollover its debt.
- Pemex’s ability to rely on large external issuances going forward has been impaired by the loss of investment grade status.
- Its 10-year USD yield is around 8 percent, after having peaked above 12 percent in April, but it remains over 250 basis points above pre-pandemic levels.

### Governance, procurement, and oversight recommendations
- Consideration should be given to strengthen Pemex’s governance and procurement processes, given ongoing challenges in meeting financial objectives and past corruption scandals.
- The procedure to nominate independent board members should be aligned with international best practice (OECD, 2017).
  - The nomination procedure should be competitive, merit-based, and formalized (e.g., through a nominating committee and/or use of headhunting firms).
  - The voting power of the independent board members should be enhanced.
- Cost reductions achieved through recent changes in procurement process should be benchmarked against savings achieved by competitors internationally and assessed over the life of the project.
- Further measures should be taken to enhance reporting and oversight on activity under PEMEX entitlements (see 2018 Fiscal Transparency Evaluation for specific recommendations).
- Financial oversight can be enhanced through the establishment of a single government unit pooling experts from different areas to identify, disclose, and mitigate fiscal risks (IMF Fiscal Monitor April 2020).

---

*Prepared by Dimitris Drakopoulos (MCM).*

### 3.      External market access remains comfortable, but

### 3.      External market access remains comfortable, but

### Overall assessment of external market access
- External market access for Mexican corporates is described as "comfortable."
- The bulk of foreign currency debt is in the form of bonds where refinancing risks "appear low."
- Foreign currency debt maturities are "small in 2020-21."
- Many of the large issuers (except Pemex) "enjoy market access at similar or lower spreads than the sovereign."

### Risks concentrated among smaller corporates and non-bank lenders
- Refinancing risks are higher for smaller corporates reliant on:
  - bank credit, and
  - local bond markets where activity "has been subdued in 2020."
- Regulated and non-regulated non-bank entities that provide some credit to corporates face:
  - more unstable sources of funding, and
  - higher delinquency rates in their portfolios (e.g., owing to higher exposures to more vulnerable segments of the population).

### Short-term bank credit and liquidity rollover risks
- "More than a quarter of bank credit is short term," making the ability of companies facing temporary liquidity pressures to rollover bank debt crucial.
- The ability to rollover bank debt is a key channel through which corporate liquidity strains could propagate.

### Policy recommendations and mitigating actions
- "Further provision of guarantees by development banks during the pandemic can help."
- "Vigilance and prompt action are also needed" with respect to regulated and non-regulated non-bank entities that provide credit to corporates.

### Supporting references and contextual notes from the text
- Developments in 2020 are "in line with past Article IV stress tests (2018, 2019)" that found corporate balance sheets largely resilient to adverse shocks and low spillovers to the banking sector.
- The note was "Prepared by Dimitris Drakopoulos (MCM)."

*Source: 1mexea2020001 - 3.      External market access remains comfortable, but*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mexea2020001.pdf_