## 1. Recent Price Pressures in Mexico Appear Mostly Transitory ## Source details **Canonical URL:** [1. Recent Price Pressures in Mexico Appear Mostly Transitory](https://www.imf.org/-/media/files/publications/cr/2021/english/1mexea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1mexea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1mexea2021001.pdf.json) --- ### Recovery from the pandemic and growth - Growth in 2020 was -8.3 percent. - Two-speed recovery since second half of 2020: manufacturing buoyed by strong U.S. growth; construction and services lagged due to pandemic-related closures and reduced demand in contact‑intensive sectors. - Supply chain shortages (notably semiconductors) have constrained manufacturing strength. - Starting in Spring 2021, improvements in health metrics and rising vaccination rates supported a broadening recovery and an improvement in services. - Vaccination coverage and expectations: - Over 77 percent of adults are partially vaccinated, with over 55 percent fully vaccinated. - Vaccines in use include AstraZeneca, Pfizer, Sinovac, Sputnik, Moderna, and Johnson & Johnson. - Vaccines are expected to be widely available to all adults by the end of the year. - Staff estimates output will be around 4 percent below potential in 2021. ### Labor market and social impacts - Employment: - Employment in manufacturing is above its pre-pandemic level; employment in services remains about 3 percent below its pre-pandemic level as of mid-2021. - Informal employment has recovered quickly and now exceeds its pre-pandemic level. - Underemployment remains above the peak rate witnessed during the global financial crisis. - The U6 unemployment rate (includes unemployed, under‑employed, and those available to work) is around 6½ percentage points, or 4.6 million people, above the pre-pandemic level. - Human and social costs: - Since early 2020, there have been over 555,000 excess deaths. - Poverty is about 44 percent of the population, up from 42 percent in 2018 (CONEVAL, 2021), including 8½ percent in extreme poverty. - An additional one‑third of the population remains vulnerable to social or income deprivation; the share without access to health services rose by 12 percentage points. - Distributional impacts: - Women disproportionately affected due to increased child and family care demands, larger representation in the informal labor market, and higher likelihood of falling into poverty. ### Inflation dynamics and monetary policy - Inflation status: - Inflation has risen above the central bank’s target of 3 percent ± 1 percent variability interval. - Drivers of inflation: - Initial surge in energy prices, sustained agricultural price increases, base effects. - Processed food (a quarter of the core consumption basket) elevating core inflation. - Non‑food price increases from a shift toward goods consumption and supply constraints. - Services inflation rising above 3 percent in mid-2021. - Box 1 conclusions: - Price pressures in 2021 are largely global and appear mostly transitory. - Key factors: global energy prices, tradable merchandise supply pressures (notably semiconductors), and processed food price contributions. - Processed food prices are contributing up to 2 percent to the overall index’s exceedance of the target. - Key expectations from Box 1: - Input shortages in manufacturing expected to persist through 2022 but their contribution to inflation should ease and subsequently reverse as supply disruptions subside. - Agricultural commodity inflation expected to slow under the latest WEO assumptions. - Services price pressures associated with pent-up demand are unlikely to recur in the coming months as supply adjusts and restrictions are relaxed with vaccination progress. - Central bank actions and expectations: - Since June 2021, the central bank has raised the policy rate by 75 basis points to 4.75 percent. - Survey-based expectations of the policy rate for end-2022 have increased from 4.5 to 5.5 percent. - Market-implied policy rate pricing is higher, with the market-implied policy rate above 7 percent in 2023. - Inflation expectations for end-2021 are well above the target; 2-year-and-beyond expectations remain well anchored at around 3.5 percent (their average over several years). ### External sector, reserves, and financing - Current account and reserves: - Current account in 2020: surplus of 2.4 percent of GDP; assessed as stronger than implied by medium-term fundamentals and desirable policies (Annex I). - The current account is expected to return to deficit over the medium term as domestic demand rebounds. - Gross international reserves increased to USD 212 billion at end-September (134 percent of the Reserve Adequacy metric). - External financing and buffers: - General SDR allocation amounted to USD 12.1 billion or 1 percent of GDP. - The USD 60 billion swap line with the Federal Reserve was extended until end-2021. - Mexico has access to USD 12 billion in other pre-existing swap lines with U.S. entities and USD 63 billion (500 percent of quota) from the IMF’s Flexible Credit Line. - External financing conditions favorable: spreads on U.S. dollar government bonds returned near pre‑pandemic levels despite sovereign downgrades in early 2020. - Government borrowing and debt management: - Government borrowed a record USD 15 billion externally in 2020 and USD 10 billion so far in 2021 (including about USD 2 billion in SDG issuances in 2020–21). - Through issuances and debt management operations, authorities extended average maturity and reduced bonds maturing through 2023 by nearly 80 percent (to just over USD 2 billion). - Private sector flows: - Net portfolio capital inflows have been anemic; private Mexican issuers have maintained market access. ### Pemex: government support, financial position, and recommended reforms - Financial position and vulnerabilities: - Recurrent financing problems; structural weaknesses include declining production from a few large mature fields and low expected life of reserves (under nine years). - Investments in an expensive new refinery have crowded out exploration and upgrading existing refineries; inadequate preventive maintenance has led to shutdowns and low capacity utilization. - Government support and liabilities: - Government support during 2019–21 amounted to about 3 percent of GDP through tax relief, financing for debt repayments, and funding for the Dos Bocas refinery. - Pemex external debt maturities are about USD 4¼ billion in each of 2022 and 2023. - Since 2018, Pemex financial debt increased by US$9 billion to US$115 billion; debt to suppliers increased by US$5 billion to US$13 billion; pension liabilities increased by US$11 billion to US$66 billion. - Based on the current business plan, analysts and rating agencies expect Pemex is likely to continue running a negative free cash flow (FCF) of around 1–1.5 percent of GDP. - Illustrative scenarios (selected highlights): - Fitch estimate to upgrade Pemex to sovereign level would require: (i) reduce the tax take by 75 percent; (ii) increase capital expenditure to US$13–18 billion to achieve a 100 percent reserve replacement ratio; and (iii) lower Pemex’s debt stock to around $100 billion. - Even with substantial budget support (1½ percent of GDP tax relief and nearly 3 percent of GDP debt reduction), FCF could remain somewhat negative; debt-to-proved-reserves would remain high relative to peers. - Recommended strategy and governance changes: - Increase investment for replacing reserves (current capital expenditure plans fall below required investment for full replacement). - Scale down investments with low returns on capital (e.g., new refinery when existing refineries run below capacity). - Encourage greater private sector participation using tools such as farmouts and migrations to bring in experienced operators for complex fields. - Sell non-core assets. - Strengthen Pemex’s governance and procurement processes. - Historical cash support totals: - Total cash support: USD 9.8 bn (2019), USD 11.7 bn (2020), USD 14.4 bn (2021), Sum 35.9 bn; Total (% GDP): 0.8% (2019), 0.9% (2020), 1.0% (2021), Sum 2.7%. ### Energy sector policy and investment climate - Policy stance and implications: - Government actions have privileged state-owned energy producers and reversed aspects of the 2013 energy reforms, weighing on the investment climate. - Actions favoring Pemex: easing revocation of licenses to the private sector, imposing onerous storage capacity constraints on competitors, and declaring Pemex the operator of an oil field spanning private and public claims. - For the state electricity company CFE: privileging CFE’s brown energy generation over cheaper green energy sources and stalling permits for new green installations. - A proposed constitutional amendment seeks to overhaul the institutional framework for electricity generation by significantly enhancing CFE’s role, limiting private participation, and dissolving regulatory bodies overseeing competition and permits; this could raise costs, hamper competitiveness, and complicate climate change mitigation commitments. - Government announced plans for a public liquefied petroleum gas (LPG) distributer and imposed a ceiling on LPG prices. *International Monetary Fund staff summary based on the chapter "1. Recent Price Pressures in Mexico Appear Mostly Transitory" from the source PDF.* ### 1. Recent Price Pressures in Mexico Appear Mostly Transitory ________________________________________ 6 ### 1. Recent Price Pressures in Mexico Appear Mostly Transitory ### Recovery from the pandemic and growth - Growth in 2020 was -8.3 percent. - Mexico experienced a two-speed recovery starting in the second half of 2020: manufacturing buoyed by strong U.S. growth, while construction and services lagged due to pandemic-related closures and reduced demand in contact-intensive sectors. - Supply chain shortages (notably semiconductors) have constrained manufacturing strength. - Starting in Spring 2021, improvements in health metrics and rising vaccination rates supported a broadening recovery and an improvement in services. - Over 77 percent of adults are partially vaccinated, with over 55 percent fully vaccinated. Vaccines in use include AstraZeneca, Pfizer, Sinovac, Sputnik, Moderna, and Johnson & Johnson. Vaccines are expected to be widely available to all adults by the end of the year. ### Labor market and social impacts - Employment in manufacturing is above its pre-pandemic level; employment in services remains about 3 percent below its pre-pandemic level as of mid-2021. - Informal employment has recovered quickly and now exceeds its pre-pandemic level. - Underemployment remains above the peak rate witnessed during the global financial crisis. - The U6 unemployment rate—which includes the unemployed, under-employed, and those available to work—is around 6½ percentage points, or 4.6 million people, above the pre-pandemic level. - Staff estimates output will be around 4 percent below potential in 2021. - COVID-19 human and social costs: since early 2020, there have been over 555,000 excess deaths. Poverty is about 44 percent of the population, up from 42 percent in 2018 (CONEVAL, 2021), including 8½ percent in extreme poverty. An additional one-third of the population remains vulnerable to social or income deprivation; the share without access to health services rose by 12 percentage points. - Women have been disproportionately affected due to increased child and family care demands, larger representation in the informal labor market, and higher likelihood of falling into poverty. ### Inflation dynamics and monetary policy - Inflation has risen above the central bank’s target of 3 percent ± 1 percent variability interval. - Drivers: initial surge in energy prices, sustained agricultural price increases, base effects, processed food (a quarter of the core consumption basket) elevating core inflation, non-food price increases from a shift toward goods consumption and supply constraints, and services inflation rising above 3 percent in mid-2021. - Box 1 conclusions: price pressures in 2021 are largely global and appear mostly transitory; key factors include global energy prices, tradable merchandise supply pressures (notably semiconductors), and processed food price contributions. Processed food prices are contributing up to 2 percent to the overall index’s exceedance of the target. - Key expectations from Box 1: - Input shortages in manufacturing are expected to persist through 2022 but their contribution to inflation should ease and subsequently reverse as supply disruptions subside. - Agricultural commodity inflation is expected to slow under the latest WEO assumptions. - Services price pressures associated with pent-up demand are unlikely to recur in the coming months as supply adjusts and restrictions are relaxed with vaccination progress. - Central bank actions: - Since June 2021, the central bank has raised the policy rate by 75 basis points to 4.75 percent. - Survey-based expectations of the policy rate for end-2022 have increased from 4.5 to 5.5 percent. - Market-implied policy rate pricing is higher, with the market-implied policy rate above 7 percent in 2023. - Inflation expectations for end-2021 are well above the target; 2-year-and-beyond expectations remain well anchored at around 3.5 percent (their average over several years). ### External sector, reserves, and financing - Current account in 2020: surplus of 2.4 percent of GDP; assessed as stronger than implied by medium-term fundamentals and desirable policies (Annex I). - The current account is expected to return to deficit over the medium term as domestic demand rebounds. - The general SDR allocation amounted to USD 12.1 billion or 1 percent of GDP. - Gross international reserves increased to USD 212 billion at end-September (134 percent of the Reserve Adequacy metric). - The USD 60 billion swap line with the Federal Reserve was extended until end-2021. - Mexico has access to USD 12 billion in other pre-existing swap lines with U.S. entities and USD 63 billion (500 percent of quota) from the IMF’s Flexible Credit Line. - External financing conditions have been favorable: spreads on U.S. dollar government bonds returned near pre-pandemic levels despite sovereign downgrades in early 2020. - The government borrowed a record USD 15 billion externally in 2020 and USD 10 billion so far in 2021 (including about USD 2 billion in SDG issuances in 2020–21). - Through issuances and debt management operations, authorities extended average maturity and reduced bonds maturing through 2023 by nearly 80 percent (to just over USD 2 billion). - Net portfolio capital inflows have been anemic; private Mexican issuers have maintained market access. ### Pemex: government support, financial position, and recommended reforms - Pemex has faced recurrent financing problems; key structural weaknesses include declining production from a few large mature fields and low expected life of reserves (under nine years). - Investments in an expensive new refinery have crowded out exploration and upgrading existing refineries; inadequate preventive maintenance has led to shutdowns and low capacity utilization. - Government support during 2019–21 amounted to about 3 percent of GDP through tax relief, financing for debt repayments, and funding for the Dos Bocas refinery. - Pemex external debt maturities are about USD 4¼ billion in each of 2022 and 2023. - Since 2018, Pemex financial debt increased by US$9 billion to US$115 billion; debt to suppliers increased by US$5 billion to US$13 billion; pension liabilities increased by US$11 billion to US$66 billion. - Based on the current business plan, analysts and rating agencies expect Pemex is likely to continue running a negative free cash flow (FCF) of around 1–1.5 percent of GDP. - Illustrative scenarios (summarized): - Fitch estimate to upgrade Pemex to sovereign level would require: (i) reduce the tax take by 75 percent; (ii) increase capital expenditure to US$13–18 billion to achieve a 100 percent reserve replacement ratio; and (iii) lower Pemex’s debt stock to around $100 billion. - Even with substantial budget support (1½ percent of GDP tax relief and nearly 3 percent of GDP debt reduction), FCF could remain somewhat negative; debt-to-proved-reserves would remain high relative to peers. - Recommended changes to strategy and governance: - Increase investment for replacing reserves (current capital expenditure plans fall below required investment for full replacement). - Scale down investments with low returns on capital (e.g., new refinery when existing refineries run below capacity). - Encourage greater private sector participation using tools such as farmouts and migrations to bring in experienced operators for complex fields. - Sell non-core assets. - Strengthen Pemex’s governance and procurement processes. - Historical support summary (cash support totals): - Total cash support: USD 9.8 bn (2019), USD 11.7 bn (2020), USD 14.4 bn (2021), Sum 35.9 bn; Total (% GDP): 0.8% (2019), 0.9% (2020), 1.0% (2021), Sum 2.7%. - Stylized scenarios table highlights (selected figures): - Total crude oil production: 1,720 (2019), 1,725 (2020), 1,773 (2021). - Mexican crude oil basket (USD/bbl): 56 (2019), 36 (2020), 60 (2021). - Upstream Free Cash Flow: -17 (2019), -14 (2020), -11 (2021). - Total Free Cash Flow: -22 (2019), -22 (2020), -4 (75% tax reduction scenario), -2 (75% tax reduction + 30bn capital scenario). ### Energy sector policy and investment climate - Government actions have privileged state-owned energy producers and reversed aspects of the 2013 energy reforms, weighing on the investment climate. - Actions favoring Pemex: easing revocation of licenses to the private sector, imposing onerous storage capacity constraints on competitors, and declaring Pemex the operator of an oil field spanning private and public claims. - For the state electricity company CFE: privileging CFE’s brown energy generation over cheaper green energy sources and stalling permits for new green installations. - A proposed constitutional amendment seeks to overhaul the institutional framework for electricity generation by significantly enhancing CFE’s role, limiting private participation, and dissolving regulatory bodies overseeing competition and permits; this could raise costs, hamper competitiveness, and complicate climate change mitigation commitments. - Government announced plans for a public liquefied petroleum gas (LPG) distributer and imposed a ceiling on LPG prices. *International Monetary Fund staff summary based on the chapter "1. Recent Price Pressures in Mexico Appear Mostly Transitory" from the source PDF.* ### 12. Mexican banks’ capital positions have remained strong and profitability is recovering. ### 12. Mexican banks’ capital positions have remained strong and profitability is recovering. ### Banking sector condition and performance - The banking sector is concentrated in a few banks whose balance sheets are mostly comprised of loans to large corporates and sovereign-related entities that generally are viewed to be low risk. - The tier 1 capital ratio improved to a record high of 16.8 percent in May 2021, driven by larger sovereign debt holdings and lower credit to the private sector. - Most of the central bank’s liquidity and credit support facilities have expired; the credit facilities provided a useful backstop but have seen little use. - System-wide liquidity has increased. - Nonperforming loans peaked at the beginning of 2021 following the expiration of credit relief programs and remain very low at 2.4 percent of loans despite the downturn. - The average return on equity is 11 percent after declining in 2020, largely because of higher loan loss provisions. - Lending conditions for corporations remain tight, especially for smaller entities: - Credit to small and medium-sized enterprises (SMEs) contracted 6 percent (year-over-year) as of July 2021 due to the risk of such credits given the pandemic-related strains. - Despite overall strength, there are pockets of weakness related to some small institutions. ### Outlook and macro-financial risks - COVID-19 and variants: - The Delta variant caused infections to rise above the January 2021 peak but now appears to be waning. - Peak excess mortality of the third wave was less than half that of the second wave. - Growth projections: - Staff projects the economy to grow by 6¼ percent in 2021 and 4 percent in 2022. - Projected growth in 2022 is above consensus, reflecting the Fund’s above-consensus U.S. growth forecast for 2022 (of over 5 percent). - Real GDP per capita is projected to return to the pre-pandemic peak only in 2025. - Relative to pre-pandemic projections, real GDP per capita over the medium term is about 4 percent lower. - Labor market and external sector: - Unemployment is expected to converge to its historical average; underemployment and wages could lag. - The re-opening and recovery of domestic demand, including re-stocking of intermediate goods (which make up 80 percent of imports), is expected to lead to a broadly balanced external current account in 2021–22. - Inflation and monetary policy: - Inflation is expected to converge from above to the central bank’s target over the next 1½ years, although risks are to the upside. - Forecast assumes a further 50 basis point increase in the policy rate by mid-2022. - If policy rates evolve on a steeper path consistent with current market expectations, inflation would be expected to fall below the target by 2023. - Downside and upside risk factors: - Principal downside risk: a renewed and more intense COVID-19 wave. - Other downsides: disappointing U.S. growth, less-supportive U.S. fiscal or monetary policy, de-anchoring of U.S. inflation expectations leading the Federal Reserve to bring forward rate increases (tightening international financial conditions and raising Mexican credit spreads and inflation), and a worsening of Pemex’s financial situation (e.g., lower oil prices or production or announcements of additional loss-making investments). - Upsides: stronger U.S. growth (even if accompanied by higher U.S. and Mexico interest rates), faster progress on vaccinations, and early resolution of supply bottlenecks. - Authorities’ views: - Authorities foresee significant catch-up growth over the next year due to vaccination, economic policies, and U.S. growth. - The central bank projects inflation to converge to the 3 percent target by mid-2023 and considers the balance of risks for inflation to be biased to the upside. ### Policy discussions: priorities and recommendations - Agreed priorities: safeguard the recovery, preserve economic stability, and promote inclusive growth—first and foremost by vaccinating the population swiftly and ensuring sufficient vaccine access. - Fiscal stance and recommendations: - Mexico would benefit from higher, front-loaded fiscal spending, combined with a credible tax reform that would raise revenues once the recovery is well established. - Stronger and well-targeted social assistance in the coming year would reduce burdens on the vulnerable and mitigate poverty, including the effects on the poor from higher inflation. - A structural increase in education, health, and public investment spending would help secure a durable and inclusive recovery and mitigate hysteresis effects; this needs to be combined with policies that raise government revenues. - Measures should be implemented to reform Pemex, improve the business climate and governance, tackle informality, and combat climate change. - Simulation illustrative scenario: - Spending increases: 1½ percent of GDP in 2022 and a further ¾ percent of GDP each in 2023–24 (for a total, permanent increase of 3 percent of GDP relative to the baseline). - Spending composition: strengthen social assistance, education and health, and public investment (each of these categories increases by about 1 percent of GDP above the baseline). - Financing: an increase in revenues relative to the baseline by 3 percent of GDP phased in gradually over the medium term (2023–25). - Simulated outcome: real GDP would be higher than the baseline by 2½ percent through the medium term and rise further thereafter; public debt would increase marginally at first but decline gradually thereafter below the baseline. - Fiscal policy actions and rationale: - The authorities pursued a conservative fiscal policy through the pandemic: - Direct budgetary support in 2020 amounted to 0.7 percent of GDP (health 0.4 percent of GDP; SMEs and workers 0.2 percent of GDP) compared with an average of 4.1 percent of GDP in EMs. - Guarantees and loans to SMEs by development banks were 1.2 percent of GDP compared to 2.6 percent of GDP in EMs. - Public debt rose by around 8 percent of GDP in 2020, owing mainly to the drop in GDP. - The 2021 budget pursued a similar restrained stance with the overall deficit expected to decline from 4.5 to 4.2 percent of GDP. - The draft 2022 budget is neutral in structural terms with an overall deficit target improving to 3.5 percent of GDP. - Based on staff’s macroeconomic forecasts, there is a fiscal gap of ¼ percent of GDP in 2022, which gradually increases to around 1 percent of GDP by 2026. - Recommendations for targeted near-term spending: - A permanent increase in spending of about 1½ percent of GDP in 2022 could offset hysteresis and poverty impacts: - About ¾ percent of GDP for education and health. - About ½ percent of GDP to strengthen poverty reduction efforts (including childcare benefits and maternity support). - A further ¼ percent of GDP for incremental public investment in green infrastructure. - A further increase of about 1½ percent of GDP over the medium term would raise total permanent spending by about 3 percent of GDP relative to the baseline. - Specific policy measures to improve effectiveness: - Social assistance: - Lower leakage to high-income groups; reduce overlaps and coverage gaps via a single registry of beneficiaries; improve targeting (e.g., community-based methods); adopt new instruments (e.g., mobile money); increase use of evidence-based analysis. - Education and health: - Pre-pandemic needs: increase spending by around 1–1½ percent of GDP each on education and health to make satisfactory progress toward the SDGs. - Rebalance education spending toward equipment and facilities; audit payrolls to identify ghost workers; curb absenteeism; improve early-childhood education; target health investment toward impoverished areas; decrease administrative and insurance costs; reduce beneficiary duplication. - Public investment: - Non-Pemex public investment is low; efficiency gains from better coordination across government levels, effective national and sector strategies, better multi-year budgeting, and rigorous transparent cost-benefit analysis with external review. - Containment of rising pension costs and Pemex reforms: - Pensions: - Consider reforms to the design of the minimum pension to avoid incentivizing early retirement; align special regimes with broader system; complete transition from pre-1997 pension scheme; increase age at which public sector workers become eligible for full pension; maintain current level of social (noncontributory) pensions adjusted for inflation in coming years. - Pemex: - Past corruption scandals underline the importance of strengthening governance and procurement. - Support to Pemex should be limited and contingent on changes to Pemex’s business plan to prioritize financial objectives and improve governance, including focusing production on profitable fields, selling non-core assets, postponing new refinery plans, reforming its costly special pension scheme, and partnering with private firms. - Medium-term tax reform to finance higher spending: - Goal: raise 3–4 percent of GDP over the medium term, designed and legislated over the next year and phased in gradually as the economy strengthens; continue to strengthen tax administration. - VAT: - VAT collection has a compliance gap of around 2½ percent of GDP. - Scope to eliminate zero-rating (except for a few key foodstuffs), rationalize VAT exemptions, eliminate reduced border rates, and apply the uniform statutory rate to all imports. - Personal income tax: - Personal income tax collections are 5 percent of GDP below OECD peers. - Broadening the base by eliminating exclusions and tax expenditures and broadening the top bracket by lowering its threshold could yield up to ¾ percent of GDP. - Corporate income tax: - High tax rate with a typical base; improvements in taxpayer compliance have generated greater-than-expected revenues. - A global agreement on a corporate minimum tax may help support revenues over the medium term. - Subnational taxes: - Increased property taxes could gradually yield at least ¾ percent of GDP over the medium term. - Simplifying and better enforcing the local vehicle tax would help generate revenues for states and municipalities. - Natural resource taxes: - A moderate increase in royalty rate and refinement of the additional rent tax could allow Mexico to share upside from mining projects with minimal competitiveness effects. - Gasoline excise: - The formula since late 2018 guarantees cumulative retail fuel price growth below CPI inflation and disproportionately benefits richer households; moving toward a more market-based system of excises would increase revenues. - Carbon tax and climate measures: - Mexico’s carbon tax on fossil fuels is USD 1.5–3 per metric ton of CO2 equivalent. - Gradually strengthening carbon pricing (e.g., raising the carbon tax to USD 75 per ton by 2030), comprehensively pricing emissions, and implementing reinforcing sectoral measures would avert 11,600 deaths from local air pollution, raise 1.8 percent of GDP in annual revenues, achieve Mexico’s unconditional NDC target, and contribute significantly toward achieving the ambitious net zero emissions goal for mid-century. - Consideration could be given to a border carbon adjustment to help preserve competitiveness. *IMF staff summary (Chapter 12).* ### 30. Authorities’ views. The authorities noted that their budget seeks to protect the poor, ### 30. Authorities’ views. ### Fiscal and social policy - Budget objectives: protect the poor, support the recovery, safeguard fiscal sustainability, and promote regional GDP per capita convergence. - Health and social measures: vaccinating the eligible population and increasing health and social spending, which would support household consumption. - Labor and pension policies: measures such as labor and pension reforms and continued minimum wage increases. - Social programs: authorities argued that their social programs have prevented more people from falling into poverty. - Tax stance: considering the strains of the pandemic and to support the economy, they do not see scope for raising tax rates or imposing new taxes. - Revenue mobilization: seeking to tackle tax evasion where large compliance gaps provide opportunities to raise revenues; anticipate that new simplified tax regimes will facilitate compliance and reduce burdens, encouraging formalization. - Debt stance: as an EM, mindful of market volatility and rising rates in Mexico could add to market costs and lead to a steeper debt path; therefore, they do not want to increase the public debt/GDP ratio, an approach they believe has contributed to preserving macroeconomic stability. - Constitutional constraint: constitutional constraints limit debt issuance except for public investment. - Regional investment: investing in poorer regions to support development and facilitate closing social and income gaps. - Pemex and energy: expect that tax and debt relief for Pemex, alongside measures to enhance efficiency, will yield important returns to the economy, including fostering energy security. - Climate policy consideration: appreciating the need to catalyze behavioral change for reducing carbon emissions and reflecting on elements of a feasible strategy, including a broad set of mitigation actions as well as redistribution to assist the poor, given potentially sizable distributional and price consequences of carbon tax increases. ### Monetary and exchange rate policies - Pandemic response: the central bank lowered the policy rate to 4 percent. - Real ex ante rate: despite these cuts, the real ex ante rate remained positive and one of the highest among large EMs. - Exchange rate adjustment: depreciation in the peso helped facilitate the adjustment to the shock, with only limited foreign exchange intervention in the non-deliverable forward market during mid-2020 amid severe market stress. - Recent policy tightening: with inflation well above the target, the central bank has raised the policy rate by 75 basis points since June 2021. - Policy rate assessment: this puts the policy rate at the lower end of the authorities’ estimated range for the nominal neutral rate (although the ex ante real rate is below the authorities’ range for the real neutral rate). - Communication enhancements: following the hike in June 2021, the central bank further enhanced transparency by presenting an updated inflation forecast with each decision and publicizing the vote of each board member. - Trade-offs in tightening: - Rationale for tightening: inflation has significantly exceeded its target for several months, raising concerns about entrenchment and second-round effects; tightening could provide insurance and help anchor inflation expectations. - Costs of tightening: would create costs in the form of foregone output and employment, though these may be relatively modest compared to costs of re-anchoring inflation expectations later. - Rationale for looking through: strong central bank credibility and expectation that current price pressures are largely transitory given commodity prices, manufacturing input bottlenecks, and a surprise surge in services demand; sizable slack should create a disinflationary force. - Risks of rapid hiking: could constrain room for policy maneuver at the time of U.S. liftoff; looking through could promote recovery and reduce scarring. - Recommended approach: a gradual path of policy normalization to balance recovery and anchoring medium-term inflation expectations. - Exchange rate policy: maintain exchange rate flexibility and limit foreign exchange intervention to instances of disorderly market conditions. - Transparency recommendations: publish more details about macroeconomic forecasts, eventually an internally consistent macroeconomic forecast that includes the policy rate path underpinning the forecasts; publish scenarios and fan charts while reiterating they are projections and not commitments. - Monetary framework review: conduct a strategic review to assess performance and possible changes to the toolkit or communications strategy; consider implications of the Federal Reserve’s shift to flexible average inflation targeting; consider roles of financial stability, inclusion, employment, and greening of the financial system. - Authorities’ view on inflation and communication: considered current price pressures predominantly exogenous and expected to be temporary, but given breadth and magnitude and extended horizon above target, they deemed it necessary to start removing accommodation to keep expectations anchored and guard against second-round effects; emphasize data dependence and caution about publishing the path of interest rates in the baseline forecast given risks to communication strategy and potential perception as a policy goal. - Timing of framework reviews: authorities noted reviews are best conducted on a pre-determined regular frequency and could be considered once the COVID-19 shock is over and longer-lasting effects on potential output and neutral interest rates are better understood. ### Financial sector policies - Banking resilience and vulnerabilities: banking sector appears resilient to shocks, but some smaller institutions remain vulnerable. - Stress tests: authorities conducted stress tests in June 2021 based on various scenarios (historical episodes, tighter financial conditions with higher U.S. rates and inflation, a weak domestic recovery, and higher risk premia with a sovereign credit rating downgrade); tests revealed most banks would remain above regulatory minimum capital ratios even under severe stress, but some institutions representing a small percentage of system assets could fall below regulatory minimums. - Concentration risk: banking system is concentrated in a small number of banks and lending is subject to concentration risk, with most banks lending to a handful of large corporates. - Regulatory priorities: continue to uphold regulatory and supervisory standards; progress against outstanding recommendations of the 2016 FSAP would help boost resilience, including increasing operational independence, budget autonomy, and legal protection of the banking and securities supervisor, and ensuring adequate access to funding for deposit insurance, with consideration given to transferring legacy debt to the government to free up resources. - Specific regulatory improvements: enhance definition of “common risk” and “related parties” for bank exposures and strengthen the resolution regime for financial holding companies; examine these in the forthcoming FSAP. - Flexibility: flexibility within the framework should continue to be used to cope with challenges. - Fintech developments: rapid technological change in finance with Fintech firms growing rapidly from a low level; following the implementation of the 2018 Fintech law, 57 firms, primarily in the e-payments sector, have now received a license, after only one had been approved as of a year ago. - Regulatory agility: need regulatory agility to harness benefits while ensuring financial, operational and market integrity, consumer and investor protection, and financial stability are not impaired. - Financial depth and inclusion: Mexico performs poorly relative to peers in measures of financial depth; concentrated banking typically charges higher fees and interest margins, discouraging participation and expansion. - Competition and inclusion: increasing competition could lower fees and margins, especially for the unbanked and other higher risk segments; further analysis warranted on collateral recovery challenges and other impediments to credit provision; efforts to increase financial education and boost connectivity could help. - Authorities’ perspective: attributed banking strength to sound regulation and supervision and pandemic support; implementation of new TLAC requirements, delayed by the pandemic, is now progressing; recognize benefits of greater financial inclusion and seeking to foster Fintech, increased access to financial products, transparency on products and prices, and enhanced competition; note importance of increased formalization, greater financial literacy, improved connectivity, and increased digitization of payments; consider international cooperation key to monitor and manage risks from cross-border provision of digital products and services. ### Supply-side policies and growth - Growth challenge: Mexico has struggled to achieve strong growth for the past few decades and has struggled to outgrow advanced economies and close the income gap with its USMCA peers. - Binding impediments: widespread informality, lack of financial inclusion, insufficient competition in energy and other key sectors, crime, and corruption. - Required strategy: turning around growth requires sustained implementation of a reform program that tackles these areas; staff remains concerned that authorities’ policies fall short of such a program. - Government growth strategy elements: implement the USMCA trade deal, increase public investment for regional development and partner with private sector on infrastructure projects, enhance financial inclusion, and promote better governance. - Infrastructure: government has announced about 2.3 percent of GDP of infrastructure projects in partnership with the private sector, which are expected to be implemented over the medium term; further projects are planned. - Energy policy recommendations: - Electricity prices for corporations remain notably above those in the U.S. and other key manufacturing EMs, and reliability issues are a rising concern. - Leverage Mexico’s large and diverse renewable energy resource base to foster a cheaper, more reliable, sustainable, and competitive energy sector and promote efficiency and investment. - Reform Pemex’s business plan to prioritize financial and governance objectives and partner with private firms to leverage expertise and manage costs. - Encourage private sector participation in electricity generation and hydrocarbon distribution. - Strengthen the electricity grid to support reliability and facilitate contributions from variable renewable sources. - Climate mitigation targets and policy mix: - Mexico has pledged to unconditionally reduce greenhouse gas emissions 22 percent below baseline levels in 2030 or by 36 percent conditional on external support. - A more ambitious intermediate mitigation pledge would be needed to adopt a net zero emissions target by mid-century. - Policies to achieve targets could include robust carbon taxation (¶29), investment in green or low-carbon technologies (to transition to cleaner energy systems for ½ percent of GDP), and providing a coherent regulatory framework (e.g., avoiding subsidizing fossil fuels and providing incentives to increase the share of energy from renewable sources). - Formalization and gender gaps: - Labor market measures: authorities limiting the ability of companies to outsource part of their labor requirements (about 5 million workers are subject to the reform) and raising minimum wages for formal workers. - Policy trade-offs: higher employer social security contributions, along with higher minimum wages (Box 3), which were above the median informal income and much of the formal income distribution in 2021, could deter formalization. - Recommendations: a comprehensive approach including lowering firing restrictions as the labor market strengthens, reducing regulatory costs of formalizing a business, lowering the tax wedge of low-income workers, and calibrating minimum wage increases in line with labor productivity growth. - Gender issues: low female labor force participation, large gender pay gaps, and high levels of violence against women need urgent attention; improving access to and the quality of childcare would increase female labor force participation and could more than pay for itself over time. *MEXICO INTERNATIONAL MONETARY FUND* ### 48. Addressing concerns of deterioration in institutional quality would support growth ### Addressing concerns of deterioration in institutional quality would support growth ### Institutional quality, staffing, and service delivery - Key government agencies have seen significant turnover of staff in recent years, owing in part to reductions in public sector wages and strong restrictions on moving to the private sector. - As experienced staff have left, risks have risen regarding the quality of service. - Legislative efforts have raised concerns regarding the independence of some bodies, e.g., in the energy sector. - Reinforcing institutions, consistent with their duties and core competencies, would further support the investment climate. ### Labor market structure and minimum wage dynamics (Box 3) - Informality is consistently around 55–60 percent of total employment. - The minimum wage has grown significantly in recent years: - Nominal increases in the last three years of 16, 20, and 15 percent, respectively. - These changes amount to a cumulative rise of about 40 percent in real U.S. dollar terms by 2021. - The authorities have indicated the nominal minimum wage may grow by a further 50 percent over the next three years. - Consequences and risks identified: - The minimum wage is high compared to formal income levels and has overtaken the median informal monthly income in Mexico. - The sharp rise in the minimum wage may strain formalization efforts and could disproportionately affect women who are over-represented in the informal sector. - Informal jobs are more precarious, disincentivize human capital investment, and add to scarring risks. - The informal labor rate is high relative to Mexico’s per capita income and recently exceeded its pre-pandemic level. ### Governance, transparency, AML/CFT, and anti-corruption (findings and recommendations) - Anti-corruption: - Despite steps to strengthen the national anti-corruption framework, enforcement against corruption cases has remained limited. - Further steps recommended: - Adopting implementing regulations. - Filing positions and adequately resourcing relevant bodies and agencies. - Enhancing the powers of institutions in charge of investigations, prosecution, and oversight of public spending. - Facilitating reporting and detection of corruption cases, including by enacting whistleblowing protection. - Improving the efficiency of the courts. - Enhancing the verification mechanism related to public asset declarations by high-level public officials. - AML/CFT: - Mexico has made progress addressing some technical deficiencies identified in its 2018 AML/CFT assessment by enhancing the legal and regulatory framework. - Important steps taken regarding implementation of a risk-based approach to AML/CFT supervision in the financial sector and in financial intelligence. - Areas for further work: - Amending and enacting legislation to ensure accurate and up-to-date basic and beneficial ownership information is available. - Expanding obligations applicable to designated non-financial businesses and professions. - Enhancing money laundering enforcement commensurate with Mexico’s risk profile. - Introducing comprehensive criminal liability for legal persons. - Note: A third enhanced follow-up report and technical compliance re-rating was approved by the Financial Action Task Force in June 2021. ### Authorities’ stated priorities - Seeking to promote trade, develop poorer regions through infrastructure projects and integrate them into the national economy, and increase formalization and financial depth. - Increased interest in investment in near-shore value chains. - Preference for strengthening energy state-owned enterprises and placing them on a solid financial footing. - Reiterated commitment to emissions reduction targets and view these as a starting point for greater ambition. - Agreed on the need to continue advancing the governance agenda and ensure swift and timely adoption of pending legal reforms. ### Staff appraisal: macroeconomic outlook and core challenges - Macroeconomic assessment: - The economy is rebounding and "is set to grow by 6.2 percent in 2021 and 4 percent in 2022." - The external position in 2020 is assessed as stronger than the level implied by medium-term fundamentals and desirable policies. - Humanitarian and social costs: - There have been over half a million excess deaths, sizable under-employment, increases in poverty, and learning losses for the young. - Core structural problems: - Low productivity growth and high poverty remain Mexico’s key problems. - New challenges from technological shifts and the effects of climate change. ### Policy priorities and recommended reforms - Safeguard the recovery, preserve economic stability, and promote inclusive and sustainable growth: - Swiftly vaccinate the eligible population. - Adopt a more supportive fiscal stance targeted to well-designed social assistance, education, health, and public investment to alleviate burdens on the vulnerable, mitigate scarring, and promote growth. - Combine supportive spending with a fiscal reform phased in over the medium term as the economy strengthens, alongside supply-side reforms to raise productivity and tackle informality. - Social spending and public investment: - Strengthen social assistance by improving targeting, reducing overlaps and coverage gaps, and enhancing administrative capacity. - Invest in education equipment and facilities, early-childhood education and childcare, curb absenteeism, and target health sector investments toward impoverished areas. - Increase high-quality public investment (non-Pemex) based on rigorous and transparent cost-benefit analyses, including external review. - Pensions and Pemex: - Contain rising pension costs and consider: - Improving the design of the minimum pension. - Aligning special regimes with the broader system. - Swiftly completing transition from the pre-1997 scheme. - Increasing the age for full public-sector pensions. - Keep social noncontributory pensions constant, adjusted for inflation, in the coming years. - Pemex: address losses, strengthen governance and procurement, and link support to a strategy prioritizing financial objectives (focus on profitable fields, sell non-core assets, postpone new refinery plans, partner with private firms). - Fiscal reform to set debt/GDP on a downward path: - A credible medium-term tax reform is needed, designed and legislated over the next year or so and phased in gradually, with a goal of raising 3–4 percent of GDP. - Continue strengthening tax administration. - Potential measures include: - Improving VAT collections by eliminating zero-rating except for a few key food items, rationalizing exemptions, implementing a comprehensive compliance risk management strategy, and eliminating reduced rates at the border. - Broadening the personal income tax base by eliminating exclusions and tax expenditures and broadening the top income tax bracket. - Increasing property tax collections by updating the cadaster, improving coordination across levels of government, and simplifying and better enforcing the vehicle tax. - Adopting a more market-based system for gasoline prices as the current excise formula disproportionately benefits the rich. - Reforming the mining taxation regime to collect more revenues when profits rise. - Monetary policy and exchange rate: - Recommend a gradual path of monetary policy normalization to balance support for the economy with anchoring medium-term inflation expectations. - Central bank should remain highly attuned to inflation expectations and may need a somewhat faster pace of tightening if medium-term inflation expectations rise. - Provide more details about central bank forecasts, including eventually publishing the policy rate path that underpins forecasts. - Maintain exchange rate flexibility; limit foreign exchange intervention to instances of disorderly market conditions. - Energy and climate policy: - Change course on energy policy to improve competitiveness and investment: leverage renewable resources, encourage private sector participation in electricity generation and hydrocarbon distribution, strengthen the electricity grid, and reform Pemex’s business strategy. - Climate measures: comprehensively price emissions, gradually strengthen carbon pricing, implement reinforcing sectoral measures such as feebates, and consider a border carbon adjustment to preserve competitiveness. - Labor market formality, gender gaps, financial depth, and rule of law: - Calibrate minimum wage increases in line with labor productivity growth and take a comprehensive approach including reducing regulatory costs of formalizing a business. - Improve access to and quality of childcare to increase female labor force participation. - Boost competition for financial services and tackle impediments such as timely legal enforcement of contracts. - Adequately resource anti-corruption agencies, enhance investigative and oversight powers, and enhance money laundering enforcement commensurate with Mexico’s risk profile. ### Key statistics and numeric highlights - Informality: 55–60 percent of total employment. - Minimum wage nominal increases over three years: 16, 20, and 15 percent. - Cumulative rise in the minimum wage: about 40 percent in real U.S. dollar terms by 2021. - Proposed further nominal minimum wage growth indicated by authorities: 50 percent over the next three years. - Economic growth projections: 6.2 percent in 2021 and 4 percent in 2022. - Excess deaths: over half a million. - Fiscal reform goal: raise 3–4 percent of GDP. - IMF/technical note: A third enhanced follow-up report and technical compliance re-rating was approved by the Financial Action Task Force in June 2021. *Source: IMF staff report excerpt — "Addressing concerns of deterioration in institutional quality would support growth".* ### 61. It is proposed that the next Article IV consultation with Mexico take place on the ### It is proposed that the next Article IV consultation with Mexico take place on the standard 12-month cycle. ### COVID-19 and High-Frequency Indicators - Confirmed Covid-19 cases: "fell through the Spring but set a new peak in August, now rapidly abating." - Individual mobility: "has recovered, with slowdowns or reversals during the Covid waves." - Card transaction volumes (14day MA, Index, Jan-Feb Avg. = 100): total and sectoral volumes show recovery with contact‑intensive sectors declining during waves and health care rising during the third wave. - Private sector 2021 GDP forecasts: "have risen and are now converging." ### Real Sector, Employment, and Activity - GDP annual growth (real): 2017 = 2.1; 2018 = 2.2; 2019 = -0.2; 2020 = -8.3; 2021 = 6.2; 2022 = 4.0 (Table 1). - Sectoral notes: - "Manufacturing led the contraction and the early recovery, but services have taken a lead role this year." - "Gross fixed capital formation fell sharply and has seen a slower rebound than other GDP components." - "Private consumption cooled during the second and third waves but is broadly recovering." - "Exports contracted dramatically but now exceed pre-pandemic levels." - Employment: - "Deep job losses have largely recovered (though slack remains)." - Formal employment measured by IMSS shows partial recovery but remains below pre-pandemic levels. ### Prices, Inflation, and Monetary Policy - Headline consumer prices (end-of-period): 2018 = 4.8; 2019 = 2.8; 2020 = 3.2; 2021 = 5.9; 2022 (proj.) = 3.1 (Table 1 / Figure 4). - Core consumer prices (end-of-period): 2018 = 4.9; 2019 = 3.7; 2020 = 3.6; 2021 = 3.8; 2022 (proj.) = 4.7 (Table 1 / Figure 4). - Inflation dynamics: - "Headline inflation has risen to 2017 levels in 2021H1." - "Core inflation also rising, initially on merchandise inflation but also from services between Covid waves." - Policy rate: - "The policy rate eased considerably but remained above comparator countries, and has recently begun increasing." - Real wages and productivity: - "Real wage growth reflects minimum wage hikes and composition effects of recent layoffs." ### External Sector and Reserves - Gross international reserves (in billions of U.S. dollars): 2017 = 175.4; 2018 = 176.4; 2019 = 183.0; 2020 = 199.1; 2021 = 211.8; 2022 (proj.) = 221.5 (Table 1 / Table 4a). - Balance of payments highlights (Table 4a, in billions of U.S. dollars): - Current account: 2018 = -25.1; 2019 = -3.9; 2020 = 26.1; 2021 = 0.4; 2022 (proj.) = -3.5. - Exports, f.o.b.: 2018 = 450.7; 2019 = 460.6; 2020 = 417.0; 2021 = 482.4. - Imports, f.o.b.: 2018 = 464.3; 2019 = 455.2; 2020 = 383.0; 2021 = 481.6. - External vulnerability indicators (Table 6): - Exchange rate (period average, Aug-21): 20.1 (MXN/USD). - Months of imports of goods and services (projected): 4.9. - Gross total external debt (percent of GDP, Jun-21): 36.5. ### Fiscal Sector and Public Debt - Fiscal outcomes and projections: - "The fiscal deficit is projected to narrow to 4.2 percent in 2021 as the economy recovers." - Overall fiscal balance (General government, percent of GDP): 2018 = -1.1; 2019 = -2.2; 2020 = -2.3; 2021 = -4.5; 2022 (proj.) = -4.2; 2023 (proj.) = -3.5 (Table 1 / Table 7). - Gross public sector debt (percent of GDP): 2018 = 54.0; 2019 = 53.6; 2020 = 53.3; 2021 = 61.0; 2022 (proj.) = 59.8; 2023 (proj.) = 60.1 (Table 1 / Table 3). - Fiscal structure (authorities' presentation, Table 2): - Budgetary revenue (percent of GDP, 2020) = 23.1; budgetary expenditure (2020) = 26.0. - Oil revenue (percent of GDP, 2020) = 2.6; non-oil tax revenue (2020) = 14.5. - Public sector notes: - "Public debt is forecast to decline slightly in 2021 owing to the recovery and stronger peso." - "The increase in deficit was lower in Mexico than peers due to the limited pandemic support." - "The authorities continue to utilize resources from various trust funds." ### Financial Markets, Banking, and Financial Stability - Market and sovereign indicators (Table 6): - EMBIG Mexico spread (period average, Oct-21) = 353.5 basis points. - Sovereign 10-year local currency bond yield (period average, Oct-21) = 6.7 percent. - Bank of Mexico net international reserves (US$ billion, proj.) = 174.8 (2018), 180.9 (2019), 195.7 (2020), 198.4 (proj. 2021). - Banking system soundness (Figure 9 / Table 5): - Nonperforming loans to total gross loans: 2018 = 2.1; 2019 = 2.1; 2020 = 2.4; Jul-21 = 2.4. - Regulatory capital to risk-weighted assets: 2018 = 15.9; 2019 = 16.0; 2020 = 17.7; May (latest) = 18.4. - Return on assets (May latest) = 1.8; Return on equity (May latest) = 16.1. - Liquidity: Liquid assets to short-term liabilities (May latest) = 47.6 percent. - Credit trends: - "Credit contraction is decelerating for companies and is set to resume growth for consumption." - Financial system credit to non-financial private sector (nominal y/y growth, Table 7 / Table 8): 2018 = 8.9; 2019 = 3.0; 2020 = 1.5; 2021 (proj.) = 3.3. ### Nonfinancial Corporate Sector - Leverage and liquidity (Figure 10): - "Nonfinancial corporate leverage has seen a reprieve in 2021." - Interest coverage and EBITDA growth: "Debt servicing capacity has reversed recent declines... as has profitability." - Hard currency issuance and bond market access: "bond issuance and market access has been strong for most firms." - Maturity profile: "The maturity structure of borrowing is weighted toward longer maturities." - Composition of issuance (Figure 10): - Reported maturity buckets and currency composition indicate a majority in peso and long-dated maturities. ### Social Indicators and Inclusion - Selected indicators (Table 1 / Figure 11): - GDP per capita (U.S. dollars, 2020) = 8,403.6. - Population (millions, 2020) = 127.8. - Poverty headcount ratio (% of population, 2020) = 43.9. - Infant mortality rate (per thousand, 2019) = 12.2. - "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. Income inequality is slightly above the regional average." ### Baseline Medium-Term Projections (selected) - GDP (real growth, Table 7): 2021 = 6.2; 2022 = 4.0; 2023 = 2.2; 2024 = 2.0; 2025 = 2.0; 2026 = 2.0. - Consumer prices (end of period, Table 7): 2021 = 5.9; 2022 = 3.1; 2023 = 3.0; 2024 = 3.0; 2025 = 3.0; 2026 = 3.0. - Current account balance (percent of GDP, Table 7): 2021 = 0.4; 2022 = -0.3; 2023 = -0.4; 2024 = -0.6; 2025 = -0.9; 2026 = -1.0. - Public sector overall balance (percent of GDP, Table 7): 2021 = -4.2; 2022 = -3.5; 2023 = -3.2; 2024 = -2.9; 2025 = -2.8; 2026 = -2.8. - Crude oil export price, Mexican mix (US$/bbl, Table 7): 2018 = 61.75; 2019 = 56.13; 2020 = 35.86; 2021 = 60.95; 2022 (proj.) = 59.75; 2023 (proj.) = 56.75; 2024 (proj.) = 54.65; 2025 (proj.) = 54.65; 2026 (proj.) = 54.6. *Source: 1mexea2021001 - 61.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall Assessment - The external position in 2020 was stronger than the level implied by medium-term fundamentals and desirable policies. - Strengthening in 2020 owed to the impact of large fiscal expansions in other major economies relative to Mexico’s muted fiscal response to the pandemic and continued weakening of the domestic investment climate. - Assessment is subject to considerable uncertainty around the temporary nature of COVID-19 and its implications for imports and fiscal policies. ### Potential Policy Responses - Further domestic fiscal support is needed in the near term to ease pandemic strains, mitigate scarring, and secure the recovery. - Steadfast implementation of structural reforms to deliver stronger investment would help lower the saving-investment balance and bring the external position closer to the level implied by medium-term fundamentals and desirable policies. - Policy package should be comprehensive and focused on strong, durable, and inclusive growth, including credible medium-term tax reform. - The floating exchange rate should remain the main shock absorber; FX interventions should be used only to prevent disorderly market conditions. - The IMF’s Flexible Credit Line provides an added buffer against global tail risks. ### Foreign Asset and Liability Position and Trajectory Background and composition: - NIIP projected to improve from about −55 percent of GDP in 2020 to −40 percent of GDP over the medium term, driven mainly by the decline in foreign liabilities. - Foreign assets: direct investment (21 percent of GDP) and reserves (18 percent of GDP). - Foreign liabilities: FDI (60 percent of GDP) and portfolio investment (49 percent of GDP). - Gross public external debt: 29 percent of GDP, of which about one-third was holdings of local currency government bonds. Assessment: - NIIP is sustainable. - Large share of local currency denomination of foreign-held public liabilities reduces FX risks. - Large gross foreign portfolio liabilities could be a source of vulnerability in case of global financial volatility. - Exchange rate vulnerabilities are moderate as most Mexican firms with FX debt have natural hedges and actively manage FX exposures. Key 2020 figures (% GDP): - NIIP: −54.9 - Gross Assets: 62.6 - Res. Assets: 18.5 - Gross Liab.: 117.5 - Debt Liab.: 45.6 ### Current Account Background: - CA balance improved sharply to 2.4 percent of GDP in 2020 from −0.3 percent in 2019. - Drivers: dramatic contraction in imports amid lower capital inflows (17 percent), smaller export contraction due to relatively larger fiscal expansion in major partners, global household consumption composition shift, trade diversion related to the US–China trade dispute (12 percent), and soaring worker remittances (11 percent in US dollar terms). - Saving and investment decomposition: increase in saving contributed one-third of the CA improvement; decline in investment contributed two-thirds. - Private sector saving-investment balance rose by 5 percent of GDP, more than offsetting public sector dissaving of 2.2 percent of GDP. - 2021 CA balance projected at 0 percent of GDP and is subject to considerable uncertainty. - Over the medium term, CA balance projected to deteriorate toward −1 percent of GDP as temporary COVID-19 impacts dissipate. Assessment and model results: - EBA model cyclically adjusted CA norm in 2020: −1.9 percent of GDP. - Implied EBA CA gap: 3.6 percent of GDP (range 2.6 to 4.6 percent of GDP). - Relative policy gap contribution: 2.6 percent of GDP, mainly led by COVID-19–driven accommodation of fiscal policy in the rest of the world. - IMF staff adjustments for transitory pandemic impacts: - Travel services (including tourism): adjustment of 0.4 percent of GDP - Global household consumption shift: adjustment of −0.6 percent of GDP - Remittances: adjustment of −0.3 percent of GDP - Trade diversion related to US-China dispute: adjustment of about −0.3 percent of GDP - Including adjustments, IMF staff CA gap: 2.8 percent of GDP (range 1.8 to 3.8 percent of GDP). Key 2020 figures (% GDP): - CA: 2.4 - Cycl. Adj. CA: 1.7 - EBA Norm: −1.9 - EBA Gap: 3.6 - COVID-19 Adj.: −0.5 - Other Adj.: −0.3 - Staff Gap: 2.8 ### Real Exchange Rate Background: - In 2020, the peso fluctuated in a range of 18–25 percent vis-à-vis the US dollar. - Average REER in 2020 was about 7.6 percent lower than the 2019 average, mostly driven by a nominal depreciation. - As of end-July 2021, the REER had appreciated by 7.0 percent compared to the 2020 average. Assessment and model estimates: - IMF staff CA gap implies an REER gap of −21.8 percent (applying an elasticity of 0.13). - EBA REER level and index models estimate undervaluation of 10.0 and 20.9 percent, respectively, in 2020. - IMF staff’s overall REER gap range: −29.8 to −13.8 percent, midpoint −21.8 percent. ### Capital and Financial Accounts: Flows and Policy Measures Background: - In 2020, net portfolio and other investment flows were negative, driven by residents’ increased acquisition of overseas assets and nonresidents’ lower acquisition of Mexican assets. - Net FDI inflows remained relatively strong despite the pandemic. Assessment: - Long maturity of sovereign debt and high share of local-currency-denominated debt reduce exposure of government finances to depreciation risks. - High foreign ownership of sovereign bonds could contribute to vulnerabilities. - Banking sector is broadly resilient. - Nonfinancial corporate debt is low; FX risks are generally covered by natural and financial hedges. - Strong presence of foreign investors leaves Mexico exposed to capital flow reversals and risk premium increases. ### FX Intervention and Reserves Level Background: - Central bank committed to free-floating exchange rate; discretionary intervention used solely to prevent disorderly market conditions. - End-2020 gross international reserves: US$199 billion (18.5 percent of GDP), up from US$183 billion at end-2019, mostly owing to federal government debt management operations and valuation changes. - In 2020, two non-deliverable forward auctions conducted, alongside further US dollar liquidity provision measures. Assessment: - End-2020 reserves at 128 percent of the ARA metric and 281 percent of short-term debt (at remaining maturity) — assessed as adequate. - IMF staff recommends authorities continue to maintain reserves at an adequate level over the medium term. - Flexible Credit Line arrangement continues to provide an additional buffer. *Annex I. External Sector Assessment (Updated as of September 30, 2021).* ### 7. The baseline projections: gross external debt is expected to return to its pre-pandemic ### 7. The baseline projections: gross external debt is expected to return to its pre-pandemic share of GDP at about 37 percent in 2021, mainly driven by the expansion in nominal GDP. Over the medium term, it is expected to decline to around 35 percent of GDP. ### Baseline projections and debt trajectory - Gross external debt is expected to return to its pre-pandemic share of GDP at about 37 percent in 2021. - Over the medium term, gross external debt is expected to decline to around 35 percent of GDP. - The 2021 return to the pre-pandemic share is mainly driven by the expansion in nominal GDP. ### Risks and mitigating factors for external debt - Major downside risks: - Underperformance of growth owing to protracted pandemic-related stress or policy slippages. - Changes in risk sentiment that increase risk premia, weaken the peso, and contribute to volatile capital flows. - Currency depreciation example: - A 30 percent depreciation could raise external debt about 50 percent of GDP. - Mitigating factors: - Public sector rollover risks are mitigated by a favorable maturity structure: nearly 90 percent of public external debt has maturity above one year. - Currency composition: around 20 percent of public external 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. - Data coverage note: - The coverage of debt statistics in Mexico is limited to two of the required six debt instruments, namely, debt securities and loans. ### Public sector debt sustainability and stress-test highlights (selected indicators and assumptions) - Public sector definition used: Central government, state-owned enterprises, public sector development banks, and social security funds. Excludes local governments. - Selected historical and projection highlights (in percent of GDP unless otherwise indicated): - Nominal gross public debt: 48.8 (2019), 53.3 (2020), 61.0 (2021), 59.8 (2022), 60.1 (2023), 60.5 (2024), 60.9 (2025), 61.2 (2026), 61.5 (2026 reference). - Public gross financing needs: 10.9 (2019), 10.5 (2020), 13.2 (2021), 13.0 (2022), 11.3 (2023), 12.2 (2024), 12.0 (2025), 11.8 (2026), 11.7 (2026 reference). - Real GDP growth: 3.0 (2019), -0.2 (2020), -8.3 (2021), 6.2 (2022), 4.0 (2023), 2.2 (2024), 2.0 (2025), 2.0 (2026). - Inflation (GDP deflator): 4.5 (2019), 4.1 (2020), 2.9 (2021), 5.6 (2022), 2.8 (2023), 3.5 (2024), 3.3 (2025), 3.2 (2026), 3.3 (2026 reference). - Nominal GDP growth: 7.6 (2019), 4.0 (2020), -5.6 (2021), 12.1 (2022), 7.0 (2023), 5.8 (2024), 5.4 (2025), 5.3 (2026). - Effective interest rate (interest payments divided by debt stock): 7.4 (2019), 8.1 (2020), 7.9 (2021), 7.5 (2022), 6.8 (2023), 6.6 (2024), 6.6 (2025), 6.7 (2026), 6.9 (2026 reference). - Identified debt-creating flows and contributions (selected): - Change in gross public sector debt (cumulative): 1.1 (2019), -0.3 (2020), 7.7 (2021), -1.3 (2022), 0.3 (2023), 0.5 (2024), 0.3 (2025), 0.3 (2026), 0.4 (2026 reference). - Primary deficit: 0.2 (2019), -1.4 (2020), 0.5 (2021), 0.6 (2022), 0.1 (2023), -0.2 (2024), -0.6 (2025), -0.7 (2026), -0.9 (2026 reference), -1.7 (longer-term balance reference). - Primary (noninterest) revenue and grants: 23.7 (2019), 23.2 (2020), 24.0 (2021), 23.6 (2022), 22.8 (2023), 22.6 (2024), 22.6 (2025), 22.7 (2026), 22.8 (cumulative), 22.8 (137.2 cumulative figure listed). - Primary (noninterest) expenditure: 24.0 (2019), 21.8 (2020), 24.6 (2021), 24.2 (2022), 22.9 (2023), 22.4 (2024), 22.1 (2025), 22.0 (2026), 21.9 (cumulative), 135.6 (cumulative figure listed). - Automatic debt dynamics (derived): 0.5 (2019), 1.4 (2020), 8.7 (2021), -2.5 (2022), -0.1 (2023), 0.4 (2024), 0.7 (2025), 0.8 (2026), 0.9 (reference). - Interest rate/growth differential: -0.1 (2019), 2.2 (2020), 7.6 (2021), -2.5 (2022), -0.1 (2023), 0.4 (2024), 0.7 (2025), 0.8 (2026), 0.9 (reference). - Exchange rate depreciation contribution: 0.6 (2019), -0.7 (2020), 1.1 (2021). - Other identified debt-creating flows: 0.6 (2019), 0.4 (2020), -0.7 (2021), 0.9 (2022), 0.6 (2023), 0.5 (2024), 0.4 (2025), 0.4 (2026), 0.4 (cumulative), 0.43, 3.3 (other cumulative figures). - Residual, including asset changes: -0.3 (2019), -0.7 (2020), -0.8 (2021), -0.2 (2022), -0.3 (2023), -0.3 (2024), -0.2 (2025), -0.2 (2026), -0.2 (reference), -1.5 (cumulative). - Stress test scenarios and alternative assumptions (selected): - Baseline underlying assumptions (examples): Real GDP growth 6.2 (2021), 4.0 (2022), 2.2 (2023), 2.0 (2024), 2.0 (2025), 2.0 (2026); Inflation 5.6 (2021), 2.8 (2022), 3.5 (2023), 3.3 (2024), 3.2 (2025), 3.3 (2026); Primary Balance -0.6 (2021), -0.1 (2022), 0.2 (2023), 0.6 (2024), 0.7 (2025), 0.9 (2026); Effective interest rate 7.5 (2021), 6.8 (2022), 6.6 (2023), 6.6 (2024), 6.7 (2025), 6.9 (2026). - Alternative scenarios shown include Historical Scenario and Constant Primary Balance Scenario (Primary Balance held at -0.6 across projection years). - Stress tests performed: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock. - Example stress test parameterizations (selected): - Real interest rate shock shows effective interest rate rising to 7.1, 7.5, 7.9, 8.4 in stress years. - Real exchange rate shock includes inflation 9.7 in one year under the shock. - Outcome visuals referenced: Gross Nominal Public Debt (in percent of GDP) and Public Gross Financing Needs (in percent of GDP) time series under baseline and stress scenarios. ### External debt sustainability (overview) - Annex includes "External Debt Sustainability: Bound Tests" and "External Debt Sustainability Framework" tables and figures (external debt in percent of GDP), indicating detailed stress-test analysis and benchmarks for external debt vulnerabilities. ### Social needs, priorities, and reforms (Annex IV) — socioeconomic impacts and policy implications - Pre-pandemic socioeconomic context and disparities: - About 42 percent of the population was in poverty prior to the pandemic, with notable heterogeneity across states. - The three poorest states (in the South) had poverty rates over 65 percent compared to below 23 percent among the three least poor states. - Poverty is generally higher among women; domestic and gender violence are high. - Elderly experience higher poverty rates and greater intensity of poverty (based on OECD data). - Incidence of obesity, hypertension, diabetes is high. - About 40 percent of households with children/adolescents and a head of working age did not have social protection (ECLAC-UNICEF, 2020). - Education and health shortfalls: - Spending per student was well below the OECD average and somewhat below the EM average. - Teacher-to-student ratio and PISA score were below comparator averages. - Substantial variation across states; strong correlation between income per capita and literacy rates. - Public health spending was well below the OECD and somewhat below the EM average, with substantial variation in access across states. - Frontier analysis (DEA) suggests room to improve quality and efficiency in education and health. - Pandemic effects and scarring risks: - Pandemic exacerbated disparities; CONEVAL (2021) estimates number of people in poverty increased from 51.9 to 55.7 million. - Some states saw poverty increase by over 8 percentage points; old-age and rural poverty declined in contrast. - Domestic and gender violence worsened. - Learning losses from school closures and dropouts are sizable; gaps larger for marginalized groups. - Mexico has among the largest gaps in internet coverage for children across income groups in the region, which could exacerbate education losses and dropouts. - Social program changes and spending: - Since 2019, government social programs focused on universal coverage and social (non-contributory) pensions, emphasizing indigenous groups, the elderly, and people with special needs. - Overall spending on social assistance increased from 1.8 percent of GDP in 2018 to 2.1 percent of GDP in 2019. - Pensión para el Bienestar de las Personas Adultas Mayores: - Increased over three-fold from MXN 36 billion in 2018 to MXN 129 billion in 2020. - Share of this program among social programs increased from 8 percent in 2018 to around 20 percent in 2019-20. - Monthly payments increased from MXN 580 per month in 2018 to MXN 1275 per month in 2019, and as of July 2021 were at MXN 1550 per month. - Authorities plan to increase monthly payments to MXN 3000 by 2024 and eligibility age has been lowered from 68 to 65 years. - Shift away from prior targeted/conditional transfers: - Prospera and Seguro Popular were discontinued and replaced. - Prospera had positive impacts on enrollment, education, health, and nutrition, but had concerns about targeting, exclusion errors, and corruption. - Seguro Popular was replaced by INSABI, aiming to establish fully funded, integrated public health networks with free, universal services. - Evidence on fiscal stimulus and mitigating COVID-19 impacts: - Cross-sectional regressions using state-level data suggest increased social program spending in 2020 mitigated the pandemic’s negative effects on employment, retail sales, and poverty. - Quantitative example: a state that increased spending by 0.27 percentage points of GDP (75th percentile) increased employment by 5.4 percent, while a state that increased spending by 0.15 percentage points of GDP (25th percentile) increased employment by 3.1 percent. - Effects are higher for male than female employment; labor poverty outcomes improved with greater policy support. - Policy recommendation on spending and financing: - Higher spending is needed for social programs, education, and health to mitigate COVID-19 effects and reduce socioeconomic gaps. - Such higher spending would need to be calibrated to potential tax collections. - Example financing scenario: a medium-term tax reform that targets 3 percent of GDP could finance spending of around 2 percent of GDP over the medium term for social programs, education, and health. - While more resources are likely needed to make satisfactory progress toward the SDG goals, such spending would constitute a meaningful and pragmatic start. *Source: IMF staff (as presented in the provided content).* ### 9. Greater efficiencies should also be sought, drawing on lessons learned. Higher spending ### 1mexea2021001 - 9. Greater efficiencies should also be sought, drawing on lessons learned. Higher spending ### Social spending, targeting, and program design - Higher spending should be part of a comprehensive approach that: - assesses the needs of all vulnerable groups; - is part of a coherent policy package addressing gaps, overlaps, and fragmentation across social programs and high labor market informality. - Targeting should be improved to seal leakage of benefits to high-income groups and could be made more progressive. - Due attention should be paid to evidence-based programming, sound operational design, and coordination across agencies; according to CONEVAL, these appear to be lacking. - Empirical specification note: The 2020 change in economic activity (employment, retail sales) and poverty (labor poverty) were regressed on the change in social program spending in 2020 (actual 2020 minus actual 2019, divided by 2019 GDP), controlling for state-level income per capita, tourism and export exposures, population density, mobility, cases per capita, and a lagged dependent variable. Social programs include social assistance and labor market. *Prepared by Kevin Wiseman (WHD).* ### Labor Market Dynamics and Scarring Risks - Pandemic impact and slack - In 2020Q2, more than 10 million jobs were lost. - The share of the working age population inactive but available to work typically about 6½ percent with a standard deviation of one half, jumped above 20 percent. - The share of the underemployed, typically 4½ percent with similarly small variation, jumped above 13 percent. - The share of unemployed, underemployed, and inactive but available people of working age spiked above 35 percent—17 standard deviations from the pre-pandemic mean. - Recovery trajectory - Employment recovered in absolute numbers by late spring 2021 and as a share of the working age population by late summer 2021. - The number of formal jobs exceeded its early 2020 level by August 2021. - Nearly 1½ years into the pandemic, the share of the underemployed remains above 12 percent. - The share of workers who are inactive but available for work has subsided but remains 3 standard deviations above its historical average. - Scarring risks - Protracted labor market slack raises the specter of permanent economic damage (economic scarring defined as a permanent reduction in output following a recession). - Large pandemics appear to induce meaningful long run reductions in output, especially when fiscal support is limited (IMF WP 21/181). - Cost of unemployment during the pandemic - Separation income loss: Workers who became unemployed at the peak of the pandemic saw their income decline nearly 8 percent on average as compared to about 4 percent during the peak quarters of the global financial crisis (GFC) and on average. - Job quality: Fully employed formal workers experiencing a bout of unemployment returned to jobs that were more frequently informal and more frequently underemployed than in a typical unemployment spell or during the GFC. - Distributional effects: women and low-skilled workers - Female employment fell 23 percent in 2020Q2, and inactivity spiked. - Enduring underemployment, especially informal underemployment, has been concentrated among women. - Low-skilled women (defined as those with an education up to a secondary education in the Mexican system, through age 15) saw the worst consequences, with inactivity and under-employment even now above the peak rates witnessed during the GFC. - Mexico has a large, positive tele-workability gap among female workers (IMF 2020), suggesting high-skilled female workers would be relatively insulated. - Underemployment among low-skilled women is concentrated in the informal sector, further eroding employment quality. - Policy recommendations to reduce scarring - Further fiscal support and well-calibrated reforms to reduce the duration of underemployment and low-productivity jobs. - Consideration should be given to adjusting minimum wages in line with labor productivity, as recent sharp hikes risk dis-incentivizing formal work. - To facilitate female labor force participation: improvements to childcare provision; measures to tackle relatively high teenage pregnancy and gender violence to improve well-being and growth (World Bank 2019 and 2021). *Prepared by Kevin Wiseman (WHD).* ### The Role of Semiconductors in Mexico’s Trade - Trade partner trends - The export share to the U.S. declined from 88 percent in 2003 to 79 percent in 2020; the import share declined from 62 percent in 2003 to 44 percent in 2020 (UN Comtrade). - Export share to China increased from 0.6 percent in 2003 to 1.9 percent in 2020; import share from China increased from 5.5 percent in 2003 to 19.2 percent in 2020. - Sector composition - Motor vehicle and motor vehicle parts comprised 32 percent of exports in 2018. - Computers and semiconductors comprised 12 percent of exports in 2018. - Semiconductors and other electrical component manufacturing was the largest importing industry in 2018, accounting for about 9 percent of total imports. - Rising reliance on imported inputs - Imported input share in motor vehicle production increased from 39 percent in 2003 to 55 percent in 2018. - Imported input share of motor vehicle parts increased from 50 percent in 2003 to 68 percent in 2018. - Imported input share of motor vehicle body and trailers increased from 43 percent in 2003 to 54 percent in 2018. - Imported input value share in semiconductor production rose from 77 percent in 2003 to 92 percent in 2018. - The U.S. supplied above half of semiconductors to Mexico before 2007; China has been the largest supplier since 2010. - China’s share of input sourcing for semiconductor production increased from 3.5 percent in 2003 to about 20 percent in 2014. - Semiconductors in motor vehicle production - In 2018, semiconductors used in the motor vehicle parts sector were valued at 75 billion pesos and accounted for 6.2 percent of inputs. Above 95 percent were imported. - Semiconductors used in the motor vehicle sector were valued at 8.0 billion pesos and accounted for 0.6 percent of total inputs in 2018. Semiconductors for motor vehicle body and trailers were worth 0.2 billion pesos and accounted for 0.3 percent of total inputs. - As of 2014 (WIOD data), the U.S. was the largest importing country of semiconductors used in motor vehicle parts, its share decreased from 48 percent in 2003 to 34 percent in 2014; Mexico’s domestic supply of semiconductors decreased from 20 percent in 2003 to 8 percent in 2014. - Implications of semiconductor shortages - Continued strong U.S. growth is an important tailwind for Mexico, but semiconductor supply chain shortages are a headwind. - Attinasi et al. (2021) find the motor vehicle sector is the most affected industry by the chip shortage, with an 11.3 percent decline in global production of passenger vehicles from 2020Q4 to 2021Q1; for Mexico this decline is about 19 percent. - The Mexican central bank’s 2021Q2 Quarterly Report estimates a loss in GDP growth rate of 0.71-0.99 p.p. in 2021 owing to the impact of semiconductor supply on automotive production. *Prepared by Mengqi Wang and Swarnali Ahmed Hannan (WHD). Mengqi Wang was a summer intern at WHD.* ### Trade Diversion Effects for Mexico from Global Trade Tensions - Context and mechanism - Heightened trade and technology tensions between the U.S. and China could imply positive spillovers to Mexico via trade diversion. - Taking fuller advantage of North American trade integration requires structural reforms to unlock productivity (tackling informality, facilitating financial deepening, further liberalizing product markets). - Measurement and data - Analysis combines INEGI input-output tables for Mexico covering 2003–18, WIOD cross-country input-output tables covering 2003–14, and UN Comtrade product-level trade flow data covering 2003–20, producing a panel at NAICS 4-digit level comprising 258 industries. - U.S.-China tariff episode (first three rounds) - List 1 (July 6, 2018): 25 percent duties, covered US$34 billion of imported products. - List 2 (August 23, 2018): 25 percent duties, covered $16 billion of imports. - List 3 (September 24, 2018): 10 percent tariffs on $200 billion of imports. - Effects estimated - After the three rounds, output and input tariffs increased four-fold, affecting almost all industries in Mexico through input-output linkages. - Difference-in-differences results: Compared with industries not affected by the trade tensions, U.S. imports from affected industries in Mexico increased on average by 16.1 percent owing to the trade tensions. - If one industry’s total tariff change during the period increased by one standard deviation (10.3 percent), then its U.S. imports grew 7.2 percent higher owing to the trade tensions. - Using a flexible monthly specification, the difference in U.S. import levels between more-affected and less-affected industries starts to appear in early 2018, confirming trade diversion. - Over 75 percent of industries expanded their exports to the U.S. after the U.S.-China trade tensions, with a mean increase in exports of (text cut off in source). *Prepared by Mengqi Wang and Swarnali Ahmed Hannan (WHD). Mengqi Wang was a summer intern at WHD.* *Source: 1mexea2021001 - 9. Greater efficiencies should also be sought, drawing on lessons learned. Higher spending (PDF chapter/section).* ### 7.8 percent. These industry-specific trade diversion effects are found to be positively correlated with ### 1mexea2021001 - 7.8 percent. These industry-specific trade diversion effects are found to be positively correlated with ### Trade diversion findings and correlations - Estimated industry-specific trade diversion effect: 7.8 percent. - Positive correlation between trade diversion effect and change in tariff exposures on: - Extensive margin: industries exposed to U.S.-China trade tensions experienced a larger increase in U.S. import values compared with those unexposed (measured via a dummy variable). - Intensive margin: industries with a larger increase in tariff of U.S. on China experienced a greater increase in U.S. import values after the U.S.-China trade tensions, compared to those with lower increase in tariff (correlation with the size of tariff change). - Empirical sample referenced: 35 countries and 13 manufacturing sectors. - Outcomes in the sample: - Positive and significant effect on value added and employment. - No significant effect on labor productivity and total factor productivity. ### Caveats, global effects, and policy implication - Higher tariffs would leave the global economy worse off, even if some countries may benefit from trade diversion (as discussed in IMF WEO (April 2019, Ch. 4)). - Negative confidence effects and tighter financial conditions triggered by trade tensions would affect all countries negatively. - Finding that trade diversion did not significantly raise labor productivity or total factor productivity reinforces the need for structural reforms to harness the benefits of trade agreements to enhance growth. - Policy recommendation highlighted: implement structural reforms to translate trade diversion gains into productivity and sustained growth. ### Fund relations—key financial figures and arrangements - Quota: 8,912.70 SDR Million, Percent of Quota: 100.00 - Fund holdings of currency: 6,533.22, 73.30 - Reserve position in Fund: 2,379.51, 26.70 - New Arrangement to Borrow: 72.59 - SDR Department: - Net cumulative allocation: 11,393.62, 100.00 - Holdings: 11,694.98, 102.65 - Outstanding Purchases and Loans: None - Latest Financial Arrangements (selected FCL lines): - Type: FCL; Arrangement Date: Nov. 22, 2019; Expiration Date: Nov. 21, 2021; Amount Approved (SDR Million): 44,563.50; Amount Drawn (SDR Million): 0.00 - Type: FCL; Arrangement Date: Nov. 29, 2017; Expiration Date: Nov. 21, 2019; Amount Approved (SDR Million): 53,476.20; Amount Drawn (SDR Million): 0.00 - Type: FCL; Arrangement Date: May 27, 2016; Expiration Date: Nov. 28, 2017; Amount Approved (SDR Million): 62,388.90; Amount Drawn (SDR Million): 0.00 - Type: FCL; Arrangement Date: Nov 26, 2014; Expiration Date: May 26, 2016; Amount Approved (SDR Million): 47,292.00; Amount Drawn (SDR Million): 0.00 - Type: FCL; Arrangement Date: Nov. 30, 2012; Expiration Date: Nov. 25, 2014; Amount Approved (SDR Million): 47,292.00; Amount Drawn (SDR Million): 0.00 - Type: FCL; Arrangement Date: Jan. 10, 2011; Expiration Date: Nov. 29, 2012; Amount Approved (SDR Million): 47,292.00; Amount Drawn (SDR Million): 0.00 - Type: FCL; Arrangement Date: Mar. 25, 2010; Expiration Date: Jan. 09, 2011; Amount Approved (SDR Million): 31,528.00; Amount Drawn (SDR Million): 0.00 - Type: FCL; Arrangement Date: Apr 17, 2009; Expiration Date: Mar. 24, 2010; Amount Approved (SDR Million): 31,528.00; Amount Drawn (SDR Million): 0.00 - Note: Access was reduced from 62,388.90 to 53,476.20 SDR million on November 26, 2018. - Projected Payments to the Fund (SDR million) — Forthcoming: - 2021 Principal: 0.00; Charges / Interest: 0.00; Total: 0.00 - 2022 Principal: 0.19; Charges / Interest: 0.19; Total: 0.19 - 2023 Principal: 0.19; Charges / Interest: 0.19; Total: 0.19 - 2024 Principal: 0.19; Charges / Interest: 0.19; Total: 0.19 - 2025 Principal: 0.19; Charges / Interest: 0.19; Total: 0.19 ### Statistical issues and data adequacy for surveillance - General assessment: Data provision is adequate for surveillance. - National accounts: - Follow System of National Accounts, 2008 (2008 SNA). - Data sources: economic censuses every five years, monthly and annual surveys, administrative data, business register. - INEGI publishes annual and quarterly GDP statistics, sectoral accounts, and balance sheets. - 2021 data ROSC update: national accounts are of a high quality. - Areas for improvement: implementing chained GDP volume indices with previous period annual weights; treatment of goods for processing abroad; coverage of illegal activities; some government transactions recorded on cash rather than accrual basis; need for greater consistency and reconciliation between Bank of Mexico and Ministry of Finance (SHCP). - Prices: - CPI reference period: second half of July 2018. - CPI basket based on National Survey of Household Expenditure 2012 and 2013 and 1999 COICOP classification. - PPI reference period: July 2019. - PPI covers agricultural, manufacturing, construction, and services sectors accounting for 79.2 percent of Mexican production; excludes trade and some services. - Government finance statistics: - Comprehensive and timely except for the subnational sector. - Authorities compile fiscal statistics following national concepts and GFSM2014 for reporting to IMF’s annual GFS database. - 2021 Data ROSC recommended publishing a table of all institutional units in the public sector to reconcile national and international presentations and adopting uniform accounting standards at sub-national level. - Pension liabilities partially reported; government securities reported at face value; official debt statistics exclude stock of T-bonds issued to Bank of Mexico; accounting practices differ between federal government and Banxico. - Monetary and financial statistics: - Methodological foundations generally sound. - Data on other financial intermediaries support construction of financial corporation’s survey published monthly in International Financial Statistics. - Mexico reports some Financial Access Survey (FAS) indicators including gender-disaggregated basic financial services and two UN indicators for Target 8.10. - Financial sector surveillance: - Mexico regularly reports quarterly Financial Soundness Indicators (FSIs); currently reports 11 core and 23 encouraged indicators. - FSIs on the non-financial corporations sector are not reported. - External sector statistics (ESS): - 2021 data ROSC update: ESS are of a high quality. - Banxico migrated BOP and IIP statistics to BPM6 in 2017 (BOP 2006-present; IIP annual 2002-present, quarterly 2009-present). - Remaining issues: full implementation of EDS Guide 2013; include intercompany external debt and SDR allocations in external debt statistics disseminated by Banxico; extend market valuation of liabilities to all financial institutions (some external debt presented at face value); record interest on public sector external debt on an accrual basis. - Consistency could be improved between IIP and external debt; differences noted between balance of payments and national accounts in financial account transactions and positions. - Authorities report coordinated direct investment survey, coordinated portfolio investment survey, data template on international reserves and foreign currency liquidity (reserve template), and quarterly external debt statistics. - Data Standards and Quality: - Mexico subscribes to the Special Data Dissemination Standards (SDDS) since August 1996; metadata posted on the Dissemination Standards Bulletin Board. - A data ROSC update was undertaken during June 7 -21, 2021. *Prepared by the Western Hemisphere Department (in consultation with other departments), MEXICO STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1mexea2021001.pdf_