## 1mexea2021003 ## Source details **Canonical URL:** [1mexea2021003](https://www.imf.org/-/media/files/publications/cr/2021/english/1mexea2021003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1mexea2021003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1mexea2021003.pdf.json) --- ### PREFACE — Mission, team, and engagements - Mission purpose and dates: - At the request of the Ministry of Finance and Public Credit (SHCP) of Mexico, an IMF FAD mission undertook a remote mission during May 3–17, 2021 on strengthening the public asset and liability management function. - A scoping mission in April 2021 set scope and focus; first day reception by Mr. Gabriel Yorio; final presentation to Mr. José De Luna Martínez. - Mission team: - Mission team lead: Sailendra Pattanayak. - Team members: Fritz Bachmair, Felipe Bardella, Fabien Gonguet (all FAD), Karla Vasquez (IMF Legal), Azzedine Lazizi and Mike Williams (FAD experts). - Key engagements: - SHCP units: Public Credit Unit, Economic Planning Unit, Federal Treasury (TESOFE), and other SHCP officials named. - Other public sector entities: Banco de México (Banxico), BANCOMEXT, Federal Electricity Commission (CFE). - Capacity building and deliverables: - Workshop on good international practices in financial assets management delivered to SHCP officials. - Findings and recommendations presented to SHCP leadership at mission end. ### Executive summary — Adoption of PSBS analytical framework - Context and progress: - SHCP has compiled the Public Sector Balance Sheet (PSBS) and expanded coverage of institutions, flows, and stocks over the last two decades. - 2006 Fiscal Responsibility Law introduced PSBR and HBPSBR; a financial net worth (PFN) indicator has also been introduced. - Since the 2018 Fiscal Transparency Evaluation (FTE), the PSBS is published quarterly and is accompanied by a statement of operations. - Remaining coverage gaps: - Exclusion of the central bank (Banxico) and subnational governments. - Partial coverage of nonorganic trust funds. - Assets and liabilities related to public private partnerships (PPPs) not reflected. - Treasury securities used by Banxico for liquidity management and corresponding restricted government account not reported on a gross basis. - Employment-related pension liabilities only partially reported (note: total pension liabilities related to public sector schemes reached 46.9 percent of GDP by 2016). - Subsoil assets not reported (PEMEX proved petroleum reserves not incorporated). - Recommended sequencing to address gaps: - Short term: incorporate all assets and liabilities of nonorganic trust funds. - Medium term: incorporate Banxico and state governments. - Long term: expand to municipalities and include PPP liabilities at subnational level. - Reconciliation and disclosure: - Full reconciliation between flows and stocks and clear disclosure of other economic flows recommended. - Introduce nominal value valuation for long-term treasury bonds in short term; move to market-basis valuation in long term. - Analytical uses and next steps: - Compute PSBS strength indicators and publish as part of quarterly fiscal reports (some indicators require additional data). - Add intertemporal component (40-year projection minimum) to assess fiscal sustainability under current policies. - Consider fiscal stress test methodology once PSBS coverage and valuation prerequisites are met. - Expanded fiscal indicators based on PSBS are useful but premature as firm policy anchors until drivers and projection capacity are well understood. ### Strengthen the cash management framework — findings and governance - Current cash forecasting: - TESOFE prepares daily cash forecast for the whole year at the start of each budget year and updates it monthly; finer detail for the following month; projections revised monthly. - Forecast inputs derive from UPI, UPCP, UCP; TESOFE lacks direct contact with spending units and limited discretion to adjust inputs. - Forecast accuracy: - Daily errors for the month ahead about 3–5 percent of each main cash flow stream (revenue, expenditure, and financing). - Average cumulative monthly error: MXN 24 billion over 2019–20. - 2020 atypical with particularly large errors at COVID onset. - Cumulative cash flow errors strongly positive in most months (persistent tendency to overcaution). - Causes of errors and operational challenges: - Forecast inputs potentially influenced by budget negotiations and “game playing.” - Delays in recording actual cash outturn data, particularly expenditures. - TESOFE discouraged from exercising discretion to adjust forecasts. - Recommended improvements to forecasting governance and procedures: - Give TESOFE more authority to decide how best to build cash flow forecasts and to use first-hand information. - Build direct links with larger spending agencies and SAT; require agencies to prepare and regularly update rolling forecasts for submission to TESOFE. - Extend forecast horizon to at least three months, updated and rolled forward at least monthly. - Specify a cash buffer target to be reviewed dynamically (quarterly initially); review more frequently as procedures strengthen. - Move to more active cash management primarily through financing transactions to smooth cash flow fluctuations. - Develop capacity to invest in reverse repo and consider institutional options for better integration of debt and cash management functions. - Cash buffer guidance and indicative sizing: - Current ad-hoc triggers: two standard deviations of mean deviation in prior two years; for 2021 two standard deviations = MXN40 billion; triggers escalate at mean plus three standard deviations (plus MXN5 billion). - Transactions buffer suggested: at least MXN40 billion. - Precautionary/safety buffer illustrative recommendation: on the order of at least MXN125 billion, possibly closer to MXN150 billion. - Suggested run-down of persistent surplus via issuance shading: MXN100–200 billion over a few months (illustrative). ### Cash management — operational instruments and coordination with Banxico - Primary tools for active intrayear smoothing: - Varying Cetes issuance (focus on short-term Cetes: 28-days and 91-days). - Financing transactions rather than delaying expenditures, as last resort. - Develop reverse repo capacity for flexible maturities and collateralized lending. - Transparency and market communication: - Any shift to using Cetes more actively should be fully explained to market to avoid misinterpretation as fiscal deterioration. - Clarify lower average cash balance as improved cash management. - Coordination with Banxico: - Establish a memorandum of understanding (MoU) or similar specifying information flows, timing, and market announcements. - Pass all cash flow forecasts to Banxico; Banxico requests forecasts to end of fiscal year. - Governance recommendations: - Move Working Group meetings to weekly to set parameters for following week’s operations; secretariat to provide policy-response advice. - Consider integration of front-, middle-, and back-office functions for cash and debt management over medium to long term (likely require primary legislation). ### Managing financial assets and introducing SALM — institutional context and assets scale - Institutional context: - Legal framework for financial asset management outside the Budgetary Central Government (BCG) is complex; parastatal sector diverse; many nonorganic trust funds manage substantial federal financial assets without overarching framework. - SHCP’s legal powers over federal financial assets vary by asset owner. - Reported composition and scale of central public sector financial assets: - Total reported financial assets: MXN5,214.7 billion (figure 14). - Central government: MXN1,356.2 billion (primarily deposits). - Nonfinancial corporations: MXN1,262.7 billion (mostly receivables). - Financial corporations (development banks): MXN2,595,9 billion in loans and investments in securities. - Federal-level trusts: 242 trusts at federal level, 66 under SHCP oversight. - Selected entity analyses and figures: - FEIP (Budgetary Revenues Stabilization Fund) year-end balances (MXN millions): - 2017 Year-End Balance 220,971.5 - 2018 Interest Earned 18,484.4; FMP Transfers 10,049.5; Other Inflows 52,271.3; Outflows −23,488.9; Foreign Currency Effect 1,483.0; Net Change 58,799.3; Year-End Balance 279,770.9 - 2019 Interest Earned 21,627.9; FMP Transfers 11,454.6; Oil Hedge Proceeds 2,399.8; Outflows −156,473.7; Foreign Currency Effect −235.5; Net Change −121,226.3; Year-End Balance 158,543.9 - 2020 Interest Earned 7,420.2; FMP Transfers 9,081.5; Oil Hedge Proceeds 47,454.7; Outflows −214,376.2; Foreign Currency Effect 1,373.8; Net Change −149,046.0; Year-End Balance 9,497.9 - FEIP composition as of end-March 2021: total FEIP balance equivalent to MXN16 billion with 50.2 percent or MXN8 billion in domestic currency and 49.8 percent in U.S. dollars or US$382 million. - FONADIN reported values as of end-2020 fiscal year: - Total reported value of financial assets MXN112.6 billion - Bank deposits MXN46.3 billion - Accounts receivable MXN66.4 billion - CFE as of end-Sep. 2020: - Cash and Cash Equivalents: 150,016.8 (Millions of MXN) - Accounts Receivable: 102,588.7 - Loans to Employees: 14,804.0 - Derivative Financial Instruments: 37,538.7 - Earlier line: CFE had MXN90,022 million in cash on hand and in banks and MXN59,986 million in short-term investments (overnight repos) as of end-Sep. 2020 (two descriptive figures appear in source). - NAFIN as of Dec. 2020 (Millions of MXN): - Cash and Cash Equivalents: 76,799 - Investment Securities: 254,564 - Repos: 180 - Derivative Financial: 9,372 - Loan Portfolio: 213,341 - Accounts Receivables: 37,392 ### SALM strategy, phasing, and institutional measures - SALM objective: - Identify and mitigate financial risks from mismatches in assets and liabilities of the central public sector; focus on currency, liquidity/refinancing, interest rate, inflation, commodity, credit/counterparty, and concentration risks. - Four stages of SALM: - Stage 1: Define scope of entities and instruments. - Stage 2: Analyze exposures and natural hedges. - Stage 3: Develop SALM strategy (mix of risk avoidance, transfer, retention). - Stage 4: Implement and evaluate SALM strategy. - Recommended institutional arrangements: - Assign SALM mandate to UCP and expand UCP middle-office analytical resources. - Constitute an SALM committee to foster negotiation among independent institutions (UCP could serve as technical secretariat). - Transactions among independent institutions must be at arm’s length. - Phased coverage and strategy components: - Phase 1 (within one year): BCG, priority trust funds, development banks, PEMEX, CFE. Continue managing BCG foreign currency exposure via increased domestic issuance and hedging; set explicit cash buffer. - Phase 2 (two to three years): Expand to remainder of central public sector (except Banxico); negotiate among institutions; consider UCP as residual risk-taker and provide advisory/capacity to lower-capacity institutions. - Phase 3 (long term): Incorporate Banxico’s foreign currency reserves into SALM considerations; consider subnational balance sheet profiles in government financing and investment decisions. - Data, valuation, and analytics prerequisites: - Collect instrument-level, position-level data on financial assets (currency composition, maturities, counterparties, sensitivities). - Ensure consistent valuation across institutions, ideally marked-to-market. - Integrate balance sheet analysis into existing debt models. ### Monitoring, oversight, and legal framework recommendations - Monitoring and oversight approach: - Focus on comprehensive monitoring framework rather than expanding SHCP direct control where infeasible. - Implement prudential principles and additional reporting requirements for entities to demonstrate compliance. - Start with monitoring liquidity guideline compliance and expand to broader financial asset monitoring. - Data collection and institutionalization: - Short term: pilot study to define data requirements, starting with SHCP-administered entities. - Medium term: expand data collection to all central government entities and operationalize processes. - Long term: expand coverage to all central public sector entities (except Banxico), automate data warehouse and analytics. - Transfer operational collection responsibility to back-office (e.g., UCP back office); middle office focuses on analysis. - Legal and regulatory considerations: - Draft Asset Management Law proposes integrated framework, Investment Committee, preauthorization, and SHCP monitoring—but concerns exist about compatibility with autonomous entities’ mandates and supervisory authorities. - Recommended multistep approach: - Step 1: Comprehensive review of legal framework for each entity category. - Step 2: Issue strengthened reporting regulations and standardize accounting. - Step 3: Explore medium-term legal reform opportunities respecting constitutional autonomy. ### Key recommendations (selected and sequenced) - PSBS and expanded indicators: - Recommendation I.1: Expand institutional coverage and improve consolidation practices. (Economic Planning Unit; short to long term) - Recommendation I.2: Improve coverage of stocks and flows and enhance stock-flow reconciliation. (Economic Planning Unit; short to long term) - Recommendation I.3: Enhance understanding and narrative on PSBS evolution and develop balance sheet strength indicators and projections. (Economic Planning Unit; short to long term) - Cash management and forecasting: - Recommendation II.1: Give TESOFE more authority over cash flow forecasts; widen sources and lengthen forecast horizon; establish capacity-building. (Working Group; by end-Q3, 2021 and beyond) - Recommendation II.2: Agree cash smoothing objective; establish cash buffer target reviewed quarterly; meet more frequently (move toward weekly). (Working Group; by end-Q3, 2021 and beyond) - Recommendation II.3: UCP to further develop Cetes as cash management instrument in coordination with TESOFE. (SHCP/UCP; by end-Q3, 2021 and beyond) - Recommendation II.4: Working Group to amend policies/guidelines and governance for Technical Committee endorsement. (Working Group; by end-Q4, 2021) - Recommendation II.5: TESOFE to develop reverse repo capacity. (TESOFE; end-Q1, 2022) - Recommendation II.6: SHCP to consider institutional integration options for debt and cash management. (SHCP; 2023) - Financial assets monitoring and SALM: - Recommendation III.1: Analyze opportunities to invest trust funds’ liquidity more actively while preserving prudence. (SHCP/UCP middle office; short term) - Recommendation III.2: Start collecting granular information on central public sector financial assets with phased coverage. (SHCP; short to medium term) - Recommendation III.3: Create/expand SHCP function for analysis and monitoring of central public sector financial assets, beginning with liquidity monitoring. (SHCP; short to long term) - Recommendation III.4: Explore issuing guidelines for prudent risk management per entity category within existing legal powers. (SHCP; short to medium term) - Recommendation III.5: Issue regulations strengthening reporting for parastatals and nonorganic trust funds; explore legal reforms medium term. (SHCP; short to medium term) - Recommendation III.6: Expand SALM coverage in phases starting with BCG, priority trust funds, development banks, CFE and PEMEX. (SHCP; short to long term) - Recommendation III.7: Establish institutional framework for phased SALM implementation, including explicit ALM mandate for UCP and SALM coordination committee. (SHCP/UCP; short to medium term) - Recommendation III.8: Assess net exposures and natural hedges at entity and aggregate levels and integrate into debt models. (UCP with Economic Planning; short to medium term) - Recommendation III.9: Develop, implement, and monitor phased SALM strategies mixing avoidance, transfer, and retention. (SHCP/UCP; short to long term) ### Appendices — Forecast performance and cash buffer analysis (selected quantitative findings) - Forecast performance (daily, month-ahead forecasts; source: Estadistica_CashM_FMI, 29-Abr-2021): - Income average daily: - 2019 Average 15.94; Error 0.53; Percent 3.30 - 2020 Average 15.98; Error 1.26; Percent 7.8 - Total 2019–20 Average 15.96; Error 0.89; Percent 5.6 - Expenditure average daily: - 2019 Average 15.60; Error 0.55; Percent 3.50 - 2020 Average 16.11; Error 0.43; Percent 2.7 - Total 2019–20 Average 15.85; Error 0.49; Percent 3.1 - Debt Servicing average daily: - 2019 Average 12.83; Error −0.15; Percent 1.20 - 2020 Average 13.90; Error 0.17; Percent 1.2 - Total 2019–20 Average 13.37; Error 0.01; Percent 0.1 - Gross Financing average daily: - 2019 Average 12.76; Error 0.50; Percent 3.90 - 2020 Average 14.17; Error 1.02; Percent 7.2 - Total 2019–20 Average 13.47; Error 0.76; Percent 5.6 - Total line exhibits large proportional variability (detailed table values preserved in source). - Appendix III — Cash buffer empirical observations and illustrative sizing: - Selected negative cumulative forecast errors episodes (24 months 2019–20): May 2019 shortfall ~MXN40 billion over five working days; October 2019 cumulative fall ~MXN40 billion over seven working days; March 2020 cumulative fall ~MXN130 billion over 12 working days. - Transactions buffer suggested: at least MXN40 billion. - Precautionary/safety illustrative addition if domestic market closed for a month and only 75 percent of normal Cetes sold: MXN80 billion additional. - Overall illustrative recommended buffer in normal circumstances: at least MXN125 billion, possibly closer to MXN150 billion. - Key policy-relevant numeric figures cited: - Average cumulative monthly forecast error: MXN 24 billion (2019–20). - Two standard deviations for 2021: MXN40 billion. - Trigger escalation includes mean plus three standard deviations (plus MXN5 billion). - Banxico pays on TSA/CUT (la tasa ponderada de fondeo bancario) 4.0 percent in mid-May 2021; SHCP marginal borrowing example on five-year bond stands at 6.0 percent. - Policy 22 maximum investment duration: 360 days. - Persistence horizon for identifying structural surplus: three to six months. - Possible issuance reduction to run off surplus: MXN100–200 billion over a few months. - Cetes maturities highlighted: 28-days and 91-days. - Quarterly issuance ranges cited: MXN5 to 20 billion. - Central public sector reported financial assets total: MXN5,214.7 billion. *Italic source: PREFACE; Executive Summary; Sections I–III; Appendices II–IV of 1mexea2021003 (IMF mission report chapter).* ### PREFACE ___________________________________________________________________________________________________ 6 ### PREFACE ### Mission purpose and dates - At the request of the Ministry of Finance and Public Credit (SHCP) of Mexico, a team from the IMF’s Fiscal Affairs Department (FAD) undertook a mission during May 3–17, 2021 on strengthening the public asset and liability management function. - The mission was conducted remotely given health and travel-related restrictions in place at the time due to the COVID-19 pandemic. - A scoping mission in April 2021 identified the scope and focus of this mission. - On the first day of the April 2021 scoping mission, the team was received by Mr. Gabriel Yorio, Undersecretary of Finance and Public Credit, SHCP. - At the end of the May 2021 mission, the team presented its findings and recommendations to Mr. José De Luna Martínez, Deputy Undersecretary for Public Credit and to SHCP staff. ### Mission team - Mission team lead: Sailendra Pattanayak. - Team members: Fritz Bachmair, Felipe Bardella, Fabien Gonguet (all FAD), Karla Vasquez (IMF’s Legal Department), Azzedine Lazizi and Mike Williams (FAD experts). - The scoping mission in April 2021 set the mission’s scope and focus. ### Engagements and meetings with SHCP and other public sector entities - SHCP engagements: - Public Credit Unit: Mr. Roberto Lazzeri Montaño, Director General of Public Debt; Ms. Elvia Angelica Sosa Vela, Director of Financial Programming; Mr. Ulises Ruiz Hernández, Director of Risk Management; Mr. José Miguel Larrieta Arteaga, Director of Debt Policy; Ms. Brenda Ciuk, Director General of Foreign Affairs; Ms. Laura Hernández Osorio, Director General of Legal Procedures of Credit; and their collaborators. - Economic Planning Unit: Mr. Felipe de Jesús Martínez Gallegos, Director General of Public Finance Statistics; Ms. Elisa Hernández Vargas; and their collaborators. - Federal Treasury (TESOFE) officials. - Other SHCP officials met: Mr. Cajeme Villarreal, Chief Economist, SHCP; Mr. Eric Avilés Herrera, Deputy General Director of Projects; Ms. Maricela Pestaña, Director of the Administration of the Integrated Information System. - Meetings with senior representatives of other public sector entities: - Banco de México (Banxico): Mr. Gerardo García, General Director of Operations; Mr. Rodrigo Cano; and Mr. Juan García. - BANCOMEXT: Mr. Miguel Siliceo, Deputy General Director, International Relations, and his collaborators. - Federal Electricity Commission (CFE): Mr. Carlos Guevara Vega, Mr. Guillermo Christy Vera, and Mr. Carlos de Jesús Viveros Medina. ### Capacity building and deliverables - The mission delivered a workshop to SHCP officials on good international practices in financial assets management. - At the end of the mission, findings and recommendations were presented to SHCP leadership. ### Acknowledgments - The mission team thanks the Mexican authorities for their cooperation and participation in constructive discussions on all topics during the mission. - The mission especially thanks Mr. Roberto Lazzeri Montaño and Mr. Ulises Ruiz Hernández for their support in organizing the mission, setting up meetings, and providing documentation. - The mission is grateful for interpretation services provided by Ms. Pilar Islas, Ms. Susan Asselin, Ms. Dorina Bonatti, Ms. Joyce Denton, Ms. Lorenia Rincon, and Ms. Hilda Tejada. *Source: PREFACE (1mexea2021003)* ### EXECUTIVE SUMMARY ### 1mexea2021003 - EXECUTIVE SUMMARY ### Adopt the Public Sector Balance Sheet (PSBS) analytical framework to inform policy making - Context and progress - The SHCP has compiled the PSBS and expanded coverage of institutions, flows, and stocks over the last two decades. - The 2006 Fiscal Responsibility Law introduced the Public Sector Borrowing Requirements (PSBR) and the Historical Balance of the Public Sector Borrowing Requirements (HBPSBR); a financial net worth (PFN) indicator has also been introduced. - Since the 2018 Fiscal Transparency Evaluation (FTE), the PSBS is published quarterly and is accompanied by a statement of operations. - The SHCP makes institutional and methodological adjustments during PSBS compilation to align with international standards. - Remaining coverage gaps (as identified) - Exclusion of the central bank (Banxico) and subnational governments. - Partial coverage of nonorganic trust funds. - Assets and liabilities related to public private partnerships (PPPs) not reflected. - Treasury securities used by Banxico for liquidity management and corresponding restricted government account not reported on a gross basis. - Employment-related pension liabilities only partially reported. - Subsoil assets not reported. - Recommended sequencing to address gaps - Short term: incorporate all assets and liabilities of nonorganic trust funds. - Medium term: incorporate Banxico and state governments. - Gradually expand to municipalities and include liabilities of PPP projects at subnational level. - Improved reconciliation and disclosures - Full reconciliation between flows and stocks and clear disclosure of other economic flows affecting assets and liabilities are needed to enable further use of the PSBS for policy analysis. - Analytical uses and next steps - Compute a few PSBS strength indicators to gauge exposure to risk (some indicators may require additional data collection). - Add the intertemporal component of the balance sheet in the short to medium term to assess fiscal sustainability under current policies. - Once prerequisites are met, consider using the fiscal stress test methodology over the medium term to assess tail-end risks on the PSBS. - Expanded fiscal indicators based on PSBS can provide useful insight beyond gross public debt but are premature as firm policy anchors until drivers and projection capacity are well understood. - Enhance transparency by further explaining currently reported indicators. ### Strengthen the cash management framework - Current cash forecasting and weaknesses - SHCP has built a comprehensive cash flow forecasting infrastructure; the forecasting process is thorough and detailed, but forecast errors have been nonnegligible. - Sharp within-month pattern of cash flows is challenging and not always captured. - A persistent tendency to overcaution is reflected in strongly positive cumulative cash flow forecast errors in most months. - Underlying challenges: - Cash forecast data from main revenue and spending agencies may be influenced by budget-related negotiations. - TESOFE lacks discretion under current policies and guidelines to make its own adjustments. - Delays in recording actual cash outturn data, particularly on the expenditure side. - Recommended measures to improve forecasting and active management - Give TESOFE more authority to decide how best to build cash flow forecasts, including making its own judgments and widening its sources of information. - Build direct links with larger spending agencies and the Tax Administration (SAT); SAT should prepare and regularly update rolling forecasts for submission to TESOFE (TESOFE should explore the use of incentives). - Extend the Working Group (Comisión de Trabajo) forecast focus from the month ahead to at least three months, with the forecast for that period updated and rolled forward at least monthly. - Specify a cash buffer target to be reviewed dynamically (quarterly initially, meeting more frequently and identifying policy responses to the forecast; later reviews could be weekly). - Move to more active cash management primarily through financing transactions to smooth cash flow fluctuations. - If using treasury certificates (Cetes) more actively, fully explain the change to the market. - Develop capacity to invest in reverse repo as a useful instrument for active cash management. - Establish a clear understanding with Banxico on SHCP operations to support monetary policy operations. - Consider institutional options for better integration of debt and cash management functions. ### Improve management of financial assets and introduce a Sovereign Assets and Liabilities Management (SALM) framework - Institutional context and current arrangements - The legal framework for financial asset management outside the budgetary central government (BCG) mirrors a complex public sector institutional landscape. - The parastatal sector encompasses diverse entities with different financial and budgetary relations with the central government. - Substantial federal financial assets are managed through nonorganic trust funds lacking an overarching framework for financial oversight. - BCG financial assets consist primarily of cash managed by TESOFE. - The SHCP’s legal power over federal financial assets varies widely depending on the asset pool owner. - The UCP has collected detailed granular information on financial assets of certain central public sector entities. - Recommended monitoring and oversight approach - Expanding SHCP’s direct control may not be legally feasible or advisable; focus instead on a comprehensive monitoring framework covering all types of central public sector financial assets (excluding Banxico) guided by general prudential principles. - Implement additional reporting requirements for entities to demonstrate compliance with prudential principles and allow SHCP to suggest corrective action where gaps are identified. - Progressively expand and automate data collection to enable multiple analytical uses; review the legal framework applicable to each category of central public sector entity for financial assets monitoring. - SALM strategy focus and institutional measures - SALM strategy should focus on managing risks from mismatches in financial characteristics of assets and liabilities of the central public sector, supplemented by oversight of fiscal risks from subnational governments; SALM framework could be extended over time to include Banxico. - Key measures: - Explicit mandate for SALM and constitution of an SALM committee to facilitate discussion and negotiation among institutions while safeguarding autonomy. - Strengthen the UCP middle office to conduct analysis, identify PSBS mismatches, and develop mitigation strategies. - Establish a process to implement and monitor the SALM strategy. - Three phases proposed for extending SALM institutional coverage with strategies mixing risk avoidance, transfer, and retention (phasing detailed in Table 1). - Specific recommendations on financial asset management - Analyze and explore opportunities to manage trust funds’ liquidity more actively (analyze variability, profitability, scope for active investment; if supported, implement legal and operational frameworks and review effectiveness periodically). - Collect data on financial assets of central public sector entities and build a data repository: - Short term: pilot study to define data requirements; start with entities administered by SHCP. - Medium term: expand collection to all central government entities, operationalize process, develop analysis and reporting capabilities. - Long term: expand coverage to all central public sector entities (except Banxico) and refine analytical capabilities. - Broaden SHCP’s function for proactive analysis and monitoring of central public sector financial assets; monitor implementation of guidelines for parastatals’ liquidity management. - Strengthen SHCP guidelines for parastatals by issuing enhanced reporting regulations and good practice guidelines per category of entity within existing legal powers. - Review and, where possible, strengthen the legal framework for financial oversight of central public sector entities outside the BCG; explore legal reform opportunities for extrabudgetary funds and SOEs. - SALM implementation steps and risk analysis - Start implementing SALM for BCG, priority trust funds, development banks, PEMEX, and CFE. - Expand SALM to remainder of central public sector (except Banxico) and cover contingent liabilities; ultimately incorporate Banxico. - Assign SALM mandate to UCP and expand UCP middle-office resources and capacity. - Constitute an SALM committee and include Banxico in the committee in the long term. - Ensure PSBS data collection includes information required for SALM analysis, focusing on priority risks and identifying net exposures at individual entity and aggregate levels. - Ensure consistent valuation of assets and liabilities across institutions and integrate a balance sheet into debt models; add foreign currency reserves into models. - SALM strategy actions: - Continue foreign currency exposure management and explore options for risk transfers among SOEs. - Negotiate potential transactions among autonomous institutions, consider UCP as residual risk-taker, provide ALM advisory to lower-capacity institutions, and manage contingent liabilities. - Consider matching foreign currency reserves and debt portfolios. ### Key timing and institutional responsibilities (high-level from Table 1) - Time horizons used in recommendations - Short Term (within one year) - Medium Term (two to three years) - Long Term - Examples of short-term actions (within one year) - Incorporate into the PSBS all assets and liabilities of nonorganic trust funds. - Introduce nominal value valuation for long-term treasury bonds and identify/disclose other economic flows. - Give TESOFE more authority over cash flow forecasts; focus forecasts at least three months ahead. - Start implementing SALM framework for BCG and priority entities; assign SALM mandate to UCP; conduct pilot data collection for financial assets. - Examples of medium-term actions (two to three years) - Add treasury securities used by Banxico for liquidity management; include Banxico and state governments in PSBS using existing subnational debt data with more breakdowns. - Move to market-basis valuation and add employment-related pension liabilities and subsoil assets. - Expand cash forecasting and active cash management programs; build reverse repo capability. - Expand SALM framework coverage to the remainder of the central public sector (except Banxico); expand SHCP monitoring and data repositories. - Long-term actions - Expand PSBS coverage to municipalities and include liabilities of PPP projects at subnational level. - Apply an annual fiscal stress test to the PSBS. - Incorporate Banxico into the SALM framework and SALM committee. - Consider matching foreign currency reserves and debt portfolios. *Source: Executive Summary, 1mexea2021003 - EXECUTIVE SUMMARY* ### 1. The Ministry of Finance and Public Credit (SHCP) has made consistent efforts over ### 1mexea2021003 - 1. The Ministry of Finance and Public Credit (SHCP) has made consistent efforts over ### Compilation progress and institutional arrangements - The SHCP has made consistent efforts over the past two decades to compile the public sector balance sheet (PSBS) and report on key PSBS indicators. - The National Council of Accounting Harmonization (Consejo Nacional de Armonización Contable, CONAC) was established in 2008 as the accounting standard setter for the public sector and issues guidelines for registering and reporting assets and liabilities. - The SHCP has expanded institutional coverage beyond the federal budget to include trust funds, development banks, state-owned enterprises (SOEs), among others. - Legal provisions introduced by the Budget and Fiscal Responsibility Law (Ley Federal de Presupuesto y Responsabilidad Hacendaria, LFPRH) in 2006 and subsequent regulations: - Article 107 of LFPRH mandates the SHCP to report amounts and composition of all public liabilities and financial obligations of the federal government, including contingent and employees-related liabilities. - An expanded financial position indicator, Historical Balance of the Public Sector Borrowing Requirements (HBPSBR) (Saldo Histórico de los Requerimientos Financieros del Sector Público, SHRFSP), was introduced consistent with the expanded public sector borrowing requirements (PSBR) (Requerimientos Financieros del Sector Público, RFSP). - A Posición Financiera Neta (PFN) type of indicator was introduced to complement HBPSBR. - The SHCP adopted IMF’s Government Finance Statistics Manual (GFSM) international standards to build these expanded indicators. ### Achievements since the 2018 Fiscal Transparency Evaluation (FTE) - The PSBS is now compiled and published on a quarterly basis, broadly covering public entities at the federal level, with breakdowns of assets and liabilities by economic classification in line with international standards. - Sectorization (central government, nonfinancial public sector, and public sector, excluding the Banco de México (Banxico) and subnationals) is broadly aligned with international standards and consolidation practices to cancel out intra-entity transactions. - A statement of operations following the GFSM 2014 framework is included in fiscal reports, integrating stocks and flows and aligning breakdowns of revenues and expenditures with international guidelines. The PSBR indicator aligns with the GFSM net lending/borrowing balancing item; additional explanations on differences between PSBR and traditional fiscal indicators are advisable. - The Fondo Mexicano de Petróleo (FMP) is now included in the PSBS; asymmetric treatment of the oil hedging program transactions of the Budgetary Revenues Stabilization Fund (Fondo de Estabilización de Ingresos Presupuestarios, FEIP) in the PSBR calculation has been addressed. - Long-term treasury bonds (Bondes “D,” Bonos de Desarrollo, and Udibonos) debt stocks in the PSBS have been adjusted to net out the difference between the discounted issue price and face value; such difference is recognized as a residual asset in accounting records. - Remaining suggested improvements include expanding institutional coverage (subnational governments, trust funds, PPPs, pension liabilities), reconciliation between flows and stocks (valuation of debt securities, disclosure of other economic flows). ### Adjustments to align the PSBS with international standards - Two-fold challenge: complex national sectorization of public entities and legal/statistical treatments differing from international methodological guidelines. - Adjustments performed by SHCP: - Institutional adjustment: coverage expanded beyond budget framework to include: - Decentralized entities (e.g., the deposit insurance fund (IPAB)), organic trust funds, and other nonfinancial SOEs—other than PEMEX and the Federal Electricity Commission (Comisión Federal de Electricidad, CFE). - Development banks (examples include Banco Nacional de Obras y Servicios Públicos, BANOBRAS; Sociedad Hipotecaria Federal; Banco Nacional de Comercio Exterior (BANCOMEXT); Nacional Financiera (NAFIN); Banco del Bienestar) and other government-owned financial institutions. - Net financial position of nonorganic trust funds (for example, Fondo Nacional de Infraestructura, FONADIN) is taken into account under the equity equivalent method. - Methodological adjustment: - Acquisition of financial assets other than cash and deposits is treated as a financial transaction, not spending. - Financing corresponding to issuance of long-term T-bonds is adjusted to reflect the discounted issue price. - Transactions related to the PIDIREGAS and debt-supported program are included. ### Areas in need of further improvements (gaps and omissions) - Major gaps and omissions (see the 2018 FTE report for in-depth analysis): - Banxico and subnational governments: Banxico, the 32 states (including the Ciudad de México), and the 2,457 municipalities are missing. There are 65 trust funds at the state level. Expanding PSBS coverage to subnational governments and Banxico is important to capture around 35 percent of public sector expenditures executed at subnational level and to report gross creditor-debtor transactions for transparency. - Nonorganic trust funds: Partially covered under the equity equivalent method; it is unclear whether only liquid assets and liabilities are included or if financing operations (for example, FONADIN financing for infrastructure projects) are reflected in the fund’s net worth used in the PSBS. - Assets and liabilities related to PPP projects: Existing portfolio under PPP arrangements is not reflected; recommendation to recognize assets and PPP-related liabilities as assets are constructed and enhance accounting to align with IPSAS 32. - Treasury securities used by Banxico for liquidity management: These should be reflected as central government debt liabilities and the corresponding restricted Banxico account as a central government asset; reporting gross basis is a good transparency practice even if consolidation cancels them at public sector level. - Employment-related pension liabilities are partially reported; liabilities under employment-related pension schemes should be fully reflected. (Note: total pension liabilities related to public sector schemes reached 46.9 percent of GDP by 2016.) - Subsoil assets: PEMEX estimates of the monetary value of proved petroleum reserves should be incorporated in the PSBS. ### Phased actions to address gaps - Short term (implementable within one year): - Incorporate all assets and liabilities of nonorganic trust funds, starting with selected funds holding significant assets and/or liabilities and then expand. - Add treasury securities used by Banxico for liquidity management. - Medium term (two to three years): - Include Banxico and state governments. SHCP already publishes online tables containing subnational debt by state that can serve as a starting point. - Add federal-level liabilities of PPP projects. - Long term (more than three years): - Expand coverage to municipalities, include liabilities of PPP projects at the subnational level, and add employment-related pension liabilities and subsoil assets. ### Reconciliation between flows and stocks (priority actions) - Ensuring consistency and full integration of transactions and other economic flows is a priority for PSBS usefulness. - Short-term issues to address: - Valuation of debt securities: Introduce nominal value as the valuation method for long-term T-bonds to ensure comparability of financing data in the statement of operations and reconciliation tables. In debt tables (gross debt, net debt, change in net debt) the stock of T-bonds is registered at face value and flows of issuance are recorded at face value. Moving to market basis valuation in the long term would allow proper identification of mismatches between assets and liabilities. - Disclosure of other economic flows: Identify and disclose other economic flows affecting each balance sheet item—changes in value resulting from changes in level and structure of prices, including exchange rate movements. - Clear disclosure of issuance and redemption of government debt, consistent valuations (ideally marked-to-market), gains on financial assets, and other economic flows will ensure horizontal consistency within the PSBS framework. ### Analytical uses of the PSBS for fiscal policy - The PSBS can serve as a powerful analytical tool to: - Identify potential mismatches and imbalances by bringing together assets and liabilities of all public sector entities. - Analyze crossholdings of assets and liabilities within the public sector and assess balance sheet resilience to shocks, including tail-end risks. - Compare current public wealth with the present value of future revenue and expenditure to assess capacity to absorb long-term structural phenomena such as aging or climate change. - The IMF’s Fiscal Affairs Department (FAD) stands ready to provide hands-on support to develop and implement analytical tools and methods for short to medium term deployment. *Source: IMF mission team* ### 12. Measuring the strength of the PSBS can indicate the fiscal resilience of the public ### 12. Measuring the strength of the PSBS can indicate the fiscal resilience of the public sector ### Role and empirical importance of PSBS strength - PSBS strength is a determinant of macroeconomic resilience and of access to cheaper financing (empirical evidence cited). - Stronger balance sheets provide more leeway for countercyclical fiscal policy in downturns and lead to shorter, shallower recessions. - Financial markets incorporate PSBS strength when pricing sovereign bonds. - “Strength” is measured through indicators focusing on size, risk exposure, mismatches, and natural hedges embedded within the PSBS. ### Practical steps for SHCP / Economic Planning Unit to measure PSBS strength - The SHCP could start computing a few PSBS strength indicators and publish them as part of quarterly fiscal reports; some indicators may require additional data collection. - International comparisons: - Use the IMF’s PSBS online database (includes the full PSBS for a sample of 38 countries) to compare size of the balance sheet or net worth (see figure 3). - Limitation: central public sector perimeter is not available in the PSBS database; comparisons limited to subsectors (e.g., federal government or public corporations) may still be useful. - Crossholdings: - Compile size and evolution of crossholdings of assets and liabilities within the federal public sector (readily available and key to consolidating the PSBS). - Currency and liquidity exposure: - To compute exposure over the full PSBS, compile (or make assumptions on) breakdown of financial assets by foreign currency denomination and by maturity; complement with sector- or institution-specific analyses under an SALM framework (Section III.C.). - Natural hedges: - Measure asset and liability valuation changes by instrument type to assess natural hedges. - Risk-adjusted balance sheet: - Weight each asset and liability by volatility of valuation changes (methodology referenced from Yousefi (2019)); figure 4 shows a risk-adjusted balance sheet for Mexico using a standard risk weighting based on a sample of European countries. ### Box 1: Balance sheet strength indicators (examples) - Size of balance sheet: - Defined as sum of assets and liabilities (excluding net worth) in percent of GDP. Larger balance sheets are normally exposed to large valuation changes. - Solvency (net financial worth): - Net worth = total assets minus total liabilities, expressed in percent of GDP. - Net financial worth = total financial assets less liabilities, expressed in percent of GDP. - Measure for net worth excluding pension-related liabilities is also introduced. - Risk-adjusted assets and liabilities: - Correct assets and liabilities for their riskiness/underlying volatility based on volatility estimates per asset/liability class. - Liquidity mismatch: - “Net liquid assets” = current assets minus current liabilities (maturing within one year), expressed in percent of GDP. - Currency mismatch: - “Net foreign exchange assets” = foreign exchange denominated assets minus foreign exchange denominated liabilities, expressed in percent of GDP. - Natural hedge: - Calculated as variance of valuation changes in net financial worth relative to variance of valuation changes in financial assets and liabilities; measures covariance between valuation changes in assets and liabilities (both as percent of GDP), normalized by movement sizes. ### Intertemporal (intergenerational) PSBS - Purpose: - Incorporates present value of future revenue and expenditure flows into the static balance sheet to analyze long-term sustainability under current policies. - Key concept: - Intertemporal budget constraint: over the infinite horizon, intertemporal net worth should be nonnegative. - Over a finite horizon (such as 40 years), a negative intertemporal net worth could be sustainable if adjustment is carried by generations beyond the horizon. - Uses and caveats: - Helps answer: Is current fiscal stance sustainable over the long term? What fiscal adjustment is required? Which policy scenarios could help? - Relies on long-term assumptions (typically 50 years or longer) and is sensitive to small assumption changes; provides direction and order of magnitude rather than an accurate number. - Feasibility for SHCP: - The Economic Planning Unit has skills to carry out the intertemporal PSBS but would need to develop long-term macrofiscal projections (at least a 40-year horizon), which are not currently produced by Mexican authorities (macrofiscal projections currently presented only for the next six fiscal years). - Minimum data requirements: 40-year projections of real GDP, nominal GDP, inflation, effective government interest rate (discount rate), and 40-year projections of total revenue and total primary expenditure to compute present values. - Understanding long-term trends such as aging and depletion of petroleum reserves is critical. ### Fiscal stress test: methodology and recommendations - Purpose: - Assess effect of tail-end risks on the PSBS by examining the impact of an extreme macroeconomic shock on fiscal flow and stock variables. - Reveals size, sources, and interactions of risks that may not appear in standard debt and deficit frameworks; provides order of magnitude of extra buffers needed to preserve fiscal sustainability in extreme events. - Requirements and components: - Understand nonlinearities in fiscal projections under severe shock (some revenues hit harder; some expenditures rigid). - May require information beyond the PSBS (e.g., contingent liabilities, financial stability assessments). - Key stages summarized in figure 5: 1. Computation of a medium-term macrofiscal baseline scenario, including a two- to three-year projection of the PSBS. 2. Design of extreme macroeconomic shock scenario, tailored to country vulnerabilities. 3. Application of shock to detailed medium-term fiscal projections (revenue and expenditure), capturing nonlinearities. 4. Identification and application of contingent liability realization to medium-term fiscal projections. 5. Application of the shock to all assets and liabilities of the PSBS, distinguishing between volume and valuation changes. - SHCP applicability: - Relevant because tail-end risks materialized twice in past 15 years (2008–09 Global Financial Crisis and 2020–21 COVID-19 pandemic). - Economic Planning Unit has skills and capacities; medium-term macrofiscal baseline and existing shock scenarios (from debt sustainability analysis or Banxico’s financial stability report) exist. - Missing prerequisites: - Identification of valuation changes by asset/liability type via a statement of other economic flows, cleaning residuals from volume changes (reclassifications, perimeter changes). - A full-fledged PSBS with complete coverage of institutions and instruments (gaps in institution and instrument coverage should ideally be addressed before a fiscal stress test). ### Expanded fiscal indicators for policy making and Mexican practice - Rationale: - Expanded fiscal indicators go beyond gross public debt by including public assets and liabilities; they complement traditional stock and flow aggregates and improve transparency and macroeconomic analysis (e.g., fiscal impulse, crowding-out, fiscal-monetary mix). - In some countries, expanded fiscal indicators are used to guide or anchor fiscal policy. - Mexican reporting: - Mexican authorities report traditional and expanded fiscal indicators alongside their expanded PSBS. - These expanded fiscal indicators are reported together with traditional ones in the quarterly fiscal reports. - Included expanded indicators: PSBR (flow), HBPSBR (SHRFSP), and PFN (net financial position with and without employment-related pension liabilities). - Traditional indicators reported: primary and overall balance (flow), net debt, and gross public debt. *Source: 1mexea2021003 - 12. Measuring the strength of the PSBS can indicate the fiscal resilience of the public sector* ### 20. To enhance transparency, further explanations and analyses on the expanded fiscal ### 1mexea2021003 - 20. To enhance transparency, further explanations and analyses on the expanded fiscal ### Transparency and presentation of expanded fiscal indicators - Quarterly reports provide methodological explanations and some bridge tables between traditional and expanded indicators, but the presentation remains "quite opaque" for nonspecialists and, arguably, for those SHCP policy makers who do not use these indicators frequently. - Recommended enhancements to transparency: - Publication of more detailed bridge tables and narrative elements on the most significant drivers behind the differences (beyond a simple reading of the bridge tables). - Provision of a short explanatory note on the economic meaning of each expanded indicator, especially relative to more traditional ones. - Presentation of historical series for these expanded indicators (at least going back to 2014) along with explanations of the drivers underlying their observed evolution to reveal trends not evident using traditional measures. - Existing bridge table coverage (as noted in the source) includes: - A bridge table between the traditional fiscal balance and the PSBR, by institution. - A bridge table between HBPSBR and PFN and of their evolution relative to the previous year, by type of instrument. - Presentation of the gross public debt, net public debt, and gross and net HBPSBR as memorandum items in the PSBS. ### Role of expanded indicators in fiscal policy and sequencing - The SHCP should focus first on enabling expanded indicators to guide fiscal decision-making rather than prematurely treating them as firm policy anchors. - Increasing public wealth is framed as a smart fiscal policy objective for the medium to longer term for higher resilience and more efficient provision of goods and services to citizens. - Only a handful of countries have fiscal frameworks and rules explicitly anchored to wider stock indicators (such as net financial worth); these frameworks typically follow many years of experience compiling a balance sheet and complement traditional objectives on debt and/or deficits. - Recommended institutional sequencing: - SHCP’s Economic Planning Unit should take the lead in gradually enhancing the reliability of the indicators and in acquiring a growing understanding of their dynamics. - Develop the ability to carry out projections of these expanded indicators (and of the PSBS) over the medium term, including under a baseline scenario, so policy effects on expanded flow and stock indicators are predictable. ### Country examples and practices - United Kingdom: long tradition of communicating reconciliations between traditional indicators (net debt, net worth) and expanded indicator disclosure in Whole of Government Accounts. - Brazil: released in April 2021 the first-ever report on reconciliation between the traditional fiscal balance and the expanded GFSM-compliant net lending/borrowing indicator. - Box 2 country practices: - Australia and New Zealand aim to strengthen their balance sheets over time and include improving net financial worth in medium-term fiscal policy objectives; no explicit numerical target is set—anchor defined as a direction (improvement) over the medium run. - Australia presents 10-years-ahead projections of the general government balance sheet as part of the annual budget documents and in the Mid-Year Economic and Fiscal Outlook report. - New Zealand presents five-years-ahead forecasts of the whole-of-government balance sheet in its biennial Investment Statement, distinguishing between social, financial, and commercial assets. - United Kingdom: policy debate on using a PSBS-based expanded fiscal indicator as a policy anchor has been facilitated by a decade of technical work to make balance sheet data comprehensive, timely, and reliable; options include targeting public sector net financial liabilities, public sector net worth, or the intergenerational balance. ### Data coverage and classification issues - Getting expanded fiscal indicators right is a prerequisite to using them meaningfully to guide decision-making. - Current limitations: - Institutional coverage of the PSBS is still incomplete. - Some types of assets and liabilities are either excluded from the PSBS or included but imperfectly classified, limiting economic relevance. - Given the size of their fiscal activities, expanding coverage to include states is highlighted as prime importance to measure the government’s actual fiscal stance. ### Summary of formal recommendations (Section D) - Recommendation I.1: Expand the institutional coverage and improve consolidation practices to allow for a more comprehensive view of public finances. (Economic Planning Unit, short to long term) - Recommendation I.2: Improve the coverage of stocks and flows and enhance stock-flow reconciliation to better understand the evolution of the PSBS. (Economic Planning Unit, short to long term) - Recommendation I.3: Enhance understanding and narrative on the PSBS and its evolution, based in particular on the gradual development of balance sheet strength indicators and balance sheet projections for medium term. (Economic Planning Unit, short to long term) ### Cash management framework and forecasting (overview) - TESOFE prepares a daily cash forecast for the whole year at the start of each budget year and updates it monthly (with daily reports circulated), focusing on finer detail for the following month; projections are revised only monthly. - Forecast sources and process: - Starts from monthly cash plans for revenue, budget expenditure, and financing prepared after budget approval and elaborated into the daily forecast. - TESOFE lacks direct contact with spending units or revenue authorities; forecasts are derived from projections supplied by other SHCP units: UPI (Revenue Sub-Secretariat, SSI), UPCP (Expenditure Sub-Secretariat, SSE), and UCP (Sub-Secretariat of Finance and Public Credit, SSHCP). - TESOFE elaborates available information into projections of available balances in the Treasury Single Account (Cuenta Única del Tesoro, CUT). - Institutional governance: - Forecasts submitted monthly to the Working Group (Comisión de Trabajo), which supports the high-level Technical Committee (Comité Tecnico) established under the Federal Treasury Law Article 31; the Technical Committee is chaired by the ministerial head of the SHCP. - The Working Group meets each month; the Technical Committee meets in the first quarter and sometimes in subsequent quarters. - The Working Group has executive authority to require actions related to investment and to ensure cash availability per Technical Committee policies and guidelines. - Cash flow building components (Box 3): - Revenue: daily projection based on Federation Revenue Law and UPI calendars; UPI prepares a daily estimate for the quarter ahead, updated monthly; for non-petroleum revenues, TESOFE estimates profiles using exponential weighting with a trend factor. - Expenditure: about 70 percent of expenditures are "programmable" with defined dates and amounts; 30 percent are "nonprogrammable" with no daily schedule; exponential smoothing of historical data is used for the latter. TESOFE uses SIAFF for daily updates of payment schedules for the next three business days and monthly schedules. - Financing: most debt flow projections come from UCP; the UCP updates projections weekly for the entire year and has a well-defined quarterly issuance calendar. - Operational flexibilities and limits: - The Working Group can adjust debt issuance (notably Cetes), impose payment ceilings on expenditure flows, and borrow from up to 50 percent of the balances of third-party funds deposited in the government’s main account at Banxico. - The government has legal authority for an overdraft with Banxico subject to a limit of 1.5 percent of annual budgeted expenditure, but it is very reluctant to draw on it. - Third-party deposits (excluding FEIP) had a balance of MXN 78 billion at end March 2021. - Investment of temporary surplus cash: - Distinction between short-term cash mismatches (maximum term for deposits of 20 days) and longer-term surpluses (maximum term of 360 days). - Longer-term surplus cash would normally be identified as a structural surplus and managed outside the cash management function; no indication this provision had been used in practice. - Seasonality and timing challenges: - Marked seasonal pattern to flows across the year driven mainly by debt redemptions concentrated in June and December and heavy year-end expenditure. - Within the month, non-oil tax inflows arrive on the 19th or 20th of each month; debt issuance inflows and salary/pension outflows also shape the monthly profile. - Charts referenced: Figure 6 (Daily Net Cash Flows, 2019–20) and Figure 7 (Cumulative Monthly Net Cash Flows, 2019–20). *Italic source: Excerpt from 1mexea2021003 - 20. To enhance transparency, further explanations and analyses on the expanded fiscal indicators currently reported by the SHCP (PDF chapter/section).* ### 31. The forecasting process is thorough and detailed, but the forecast errors have been ### 1mexea2021003 - 31. The forecasting process is thorough and detailed, but the forecast errors have been ### Forecast accuracy and observed errors - The TESOFE uses a range of inputs, including projections from others in the SHCP and past expenditure patterns. - Daily errors for the month ahead have been about 3–5 percent of each of the main cash flow streams (revenue, expenditure, and financing), with lower errors on debt servicing payments. - The average cumulative monthly error was MXN 24 billion over the period 2019–20. - 2020 is noted as an atypical year, with particularly large errors at the start of the COVID pandemic and difficulty forecasting an end-year expenditure surge. - Cumulative cash flow errors are strongly positive in most months, indicating a persistent tendency to overcaution; this was more apparent in 2020 when some anticipated COVID-related expenditures did not fully materialize. - The use of a Holt-Winters exponential smoothing model is in place; alternative approaches (e.g., auto-regressive models) have been used in other countries but face challenges from calendar effects (weekday/weekend tax dates, variable religious holiday dates). ### Causes and operational challenges behind forecast bias - Forecast inputs are mostly prepared and updated within the SHCP (UPI and UPCP), which may encourage "game playing" and overly cautious submissions. - TESOFE officials reportedly discouraged from using discretion to adjust incoming forecasts; they are required to use data flows coming from others. - Delays in recording actual outturn data—particularly on the expenditure side—reduce the timeliness and accuracy of updated forecasts. - Practices by spending units (e.g., entering forthcoming payments in the SIAFF earlier than necessary) and revenue authorities’ reluctance to deviate from budget estimates contribute to biased inputs. - The cautious bias has led to higher-than-forecast financing flows, possibly reflecting decisions to take advantage of successful debt issuance to build cash balances. ### Recommendations for forecasting governance and procedures - Give TESOFE more authority to: - Decide how best to build cash flow forecasts. - Use first-hand information from agencies. - Make adjustments to forecasts supplied by others based on TESOFE analysis of past trends, entity-level forecasting performance, and intelligence flows. - Build direct links with larger spending agencies and the SAT. - Require agencies to prepare and regularly update rolling forecasts for submission to TESOFE; these need not be accounting-quality nor involve formal processes that cause delays. - Consider early-warning requirements for payments above a threshold (potentially before lodgment in the SIAFF) as a condition of later payment release. - Explore use of incentives and penalties to improve forecasting quality (examples described: penalties deducted from future budgetary provisions and recycled to good performers; penalties only; greater virement authority to good forecasters; publication of league tables). ### Forecasting scope and frequency - Forecasting should cover at least three months ahead, with the forecast for that period updated and rolled forward at least monthly. - Extended forecasts are essential to plan the mix of maturities for investments or securities issued to smooth future cash flows. ### Cash buffer: definition, current practice, and recommendations - There is currently no formal cash buffer; policies identify trigger ranges based on forecast deviations: - Triggers are set at two standard deviations of mean deviation in the previous two years. - Additional protection mechanisms trigger when deviations reach the mean plus three standard deviations (plus MXN5 billion). - For 2021, two standard deviations are MXN40 billion. - The current approach is an early-warning technique but is not defined as a buffer and allows wide cash balance fluctuations. - Recommended definition: a buffer as the minimum level of cash balances to be sure of meeting day-to-day cash requirements at all times, taking into account other liquid resources. - Once identified and sustained, cash above the buffer should be invested with maturities reflecting future cash-flow needs; there is no need for the current Policy 22 limit of only 50 percent of deposits being available for investment. - The buffer should be: - Kept under review for changes in cash-flow drivers and seasonality. - Reviewed quarterly by the Working Group with secretariat updating calculations and testing scenarios. - Built up ahead of the end-year surge and calibrated for heavy redemptions in June and December (preferably by aligning investments to redemption dates). - Identification of the buffer is complex; TESOFE notes errors are not necessarily normally distributed and timing changes matter; Appendix III provides fuller discussion and pointers for Mexico. ### Treatment of structural surplus and investment duration - Cash managers should manage only cash required for cash management purposes. - Any structural surplus (cash above in-year management needs) should either: - Be managed separately with its own objectives, governance, and strategic asset allocation, or - Be used to reduce debt. - Indicator of persistence: if cash can be invested for more than three to six months, the surplus may be permanent. - Policy 22’s maximum investment duration of 360 days is inappropriate if persistent opportunities exist; a persistent high TSA/CUT balance suggests the balance is too high. - For Mexico, a structural surplus could best be run down through lower debt issuance; shading the issuance program to run off MXN100–200 billion over a few months is feasible (see Appendix III). ### Moving to active cash management and smoothing in practice - Current Working Group responses have been somewhat passive; some end-year payment smoothing has occurred and issuance of Cetes varies within quarterly ranges of MXN5 to 20 billion. - There has been negligible systematic investment of temporary surplus cash; occasional modest investments with development banks in the past. - No formal model or objective currently exists for cash balance smoothing; recommended objective: smooth cash flows across the TSA while ensuring cash availability for budget execution, enabling a lower average cash balance and cost savings. - Benefits of smoothing include reduced volatility in banking system liquidity and facilitating Banxico’s monetary policy operations; government balance changes at the central bank are consistently important drivers of liquidity. - Suggested primary management tools: - Financing transactions (varying Cetes issuance), focusing on short-term Cetes (especially 28-days and also 91-days) with maturity mix aligned to cash-flow profiles. - Imposing delays on expenditures only as a last resort. - Guidance on Cetes usage: - Not proposing increased reliance on Cetes to finance the annual borrowing requirement; rather, allowing the stock to fluctuate more intrayear. - When government short of cash, market may be more willing to purchase extra Cetes; variation in issuance works with market dynamics. - Transition to active management should be gradual: - Begin with tentative steps to rough-tune cash flows. - As forecast confidence and procedures improve, transact larger or more frequent operations to maintain balances closer to the buffer. - The Working Group should guide the capability-development process. ### Key numeric and policy-relevant figures (preserved from source) - Daily forecast errors: about 3–5 percent for revenue, expenditure, and financing streams. - Average cumulative monthly error: MXN 24 billion (2019–20). - Note: 2020 characterized as atypical. - Suggested increase in average cash balance approaching MXN200 billion over two years (illustrative trend noted). - Two standard deviations for 2021: MXN40 billion. - Trigger protection includes mean plus three standard deviations (plus MXN5 billion). - Cost-savings illustrative interest rates: Banxico pays on TSA/CUT (la tasa ponderada de fondeo bancario) 4.0 percent in mid-May 2021; SHCP’s marginal borrowing example on a five-year bond stands at 6.0 percent (used to calculate potential savings from balance reduction). - Maximum investment duration in current policy: 360 days (Policy 22). - Persistence indicator horizon: three to six months for distinguishing transitory versus permanent surpluses. - Possible issuance reduction to run off surplus: MXN100–200 billion over a few months. - Cetes maturities highlighted: 28-days and 91-days. - Quarterly issuance ranges cited: MXN5 to 20 billion. *Source: SHCP/IMF chapter content provided in the original PDF.* ### 55. Any shift to using Cetes more actively in this way should be fully explained to the ### 1mexea2021003 - 55. Any shift to using Cetes more actively in this way should be fully explained to the market. ### Transparency and market communication - Any shift to using Cetes more actively should be fully explained to the market to remove the risk that greater use of Cetes might be interpreted as: - a deterioration in the fiscal position; or - difficulty in selling securities further up the yield curve. - A lower average cash balance should be clarified as indicating better cash management, not a shortage of liquidity. - Transparency about the policy objective allows the SHCP an opportunity to explain to the market the benefits of the new approach. ### Coordination with Banxico and information flows - The UCP and the TESOFE should come to an understanding with the Banxico about their intentions to reduce fluctuations of balance in the TSA, which: - smooths some pressure off monetary policy operations; and - helps buttress the Banxico’s independence by clarifying separation between SHCP’s and Banxico’s operations. - A memorandum of understanding (MoU) or similar document should specify: - the flow of information between institutions (for example, the government’s target balance not only for the following day but also for a period beyond that); - the respective timing of auctions or other operations; and - the nature of market announcements. - All cash flow forecasts should be passed to the Banxico so it can take them into account in its own liquidity forecasts. - Current practice: TESOFE informs the Banxico every day of the expected flows the next day and releases forecasts extending two months ahead; Banxico would welcome forecasts to the end of the fiscal year to inform projections of the structural liquidity balance. ### Eligible investments for short-term cash surpluses (Article 17) - In national currency or UDIs, eligible investments may comprise: - Deposits in sight or on time at the Banxico, development banks, or multiple banks; in the case of the latter, such deposits may be [podrán estar] guaranteed with collateral instruments; - Government securities and credit securities issued by the federal government; - Securities issued by the Banxico; - Debt instruments issued by development banks and multiple banks; and - Other financial instruments authorized by the committee. - Notes and cautions: - Article 17’s inclusion of government securities is usually not appropriate unless they are being bought back to be canceled; if different parts of government hold securities, they may overhang the market and complicate UCP issuance or secondary market operations. - A similar list exists in foreign currency (Article 18) and additionally includes debt instruments issued by foreign governments with investment grade rating. - Practical examples and quick wins: - Within-month cash profile: build-up of cash following tax receipts on the 19th of the month is followed by a drain at month-end; smoothing could be achieved by lending excess cash for one week or until salary payment day. - Romania example: borrows every month for two weeks from a panel of commercial banks to cover time lag between paying salaries and receiving tax revenues. - Some countries auction deposits to a preapproved list of banks (Chile’s electronic platform); China initially auctioned bank deposits rather than varying T-bill issuance. ### Investment quality and limits - High-quality, low-risk investments should be prioritized. - Exclude bonds issued by SOEs or other enterprises that could circumvent budgetary procedures and create moral hazard. - Ideally collateralize investments with financial institutions; very short-term deposits with highly rated banks may be acceptable. - In practice, only modest and infrequent short-term investments have been made with development banks. ### Reverse repo as an active cash management instrument (capacity development) - Reverse repo is provided for in current policies and guidelines but the function has not been developed; TESOFE should develop capacity to invest in reverse repo. - Advantages of repo: - Flexible maturities. - In counterparty bankruptcy, repo is more secure than a collateralized deposit. - Implementation considerations: - Establishing capacity may take some time (maybe a few months). - Management of collateral (daily revaluation and remargining) is challenging; CSD (Indeval in Mexico) can sometimes offer this service. - TESOFE may contract out back-office operations to the Banxico. - Liaison with the UCP can leverage money market knowledge and functional capacity on a quasi-agency basis; Banxico may run auctions as fiscal agent. - U.S. dollar repo contracts could in principle be agreed with counterparties but would probably require additional custody arrangements and be a lower priority. Box 4 — Establishing Repo Capacity - Policy decisions to resolve: - Eligible collateral and its handling (preferred: government and Banxico securities); decide haircuts, remargining, acceptable maturities, and collateral management. - Acceptable counterparties and credit risk metrics (initially primary dealers and/or Banxico repo counterparties); repo “scores” much less than unsecured deposits. - Management of transactions: bilateral or by auction; auction process and platform. - Prior tasks: - Prepare and agree contracts with counterparties (probably based on Global Master Repo Agreement as amended locally). - Contracts or service-level agreements with agents (e.g., Banxico). - Confirm accounting and tax treatment: repos treated as collateralized loans under international accounting best practice; tax issues may arise if “sales” trigger taxable events or turnover taxes; withholding taxes add friction. - Capacity building: identify operational risks, establish procedures, data management, and training. ### Central bank reluctance and market equilibrium considerations - In some countries, central banks are reluctant to have the government invest in the market; acceptable only if the central bank is struggling to manage a liquidity buildup. - The MoU should address such circumstances; SHCP transactions should not undermine monetary policy effectiveness. - When the money market is closer to equilibrium, central bank should recognize that investment of temporary cash surpluses supports monetary policy. - If Banxico required TESOFE to maintain cash in the TSA, it should offer an interest rate reflecting maturity of agreed additional investment (possibly the interbank rate for that maturity); Colombia links rate on deposits beyond very short term to fixed-income market rates. ### Cash flow smoothing techniques and operational timing - Issuance maturity dates should avoid weeks/days of heavy cash outflow (e.g., salary payments) and target days of cash inflow (due date for tax payments to reach the TSA). - Concentration of redemption dates (e.g., June and December) can create cash management problems; SHCP moving toward March and September as preferred redemption dates. - Use more frequent liability management operations (LMOs) to mitigate problems when large bonds mature; buy bonds off market through primary dealers in last months before maturity. - Some countries spread salary payments across several days to avoid concentration. - Avoid delaying payments on goods and services beyond contracted terms to match tax receipts; alternatively align contract payment periods with tax receipt periods. ### Governance and institutional arrangements - Current split responsibilities: short-term cash investment under TESOFE and short-term debt issuance under UCP — this split is far from ideal. - International trend favors integrating cash and debt management into the same unit for policy coherence and administrative savings. - Risks if not integrated: market may perceive SHCP as failing to coordinate, affecting interest rates achieved. - Institutional options: - Forecasting for above-the-line transactions could remain with TESOFE while front-, middle-, and back-office functions are integrated to minimize coordination costs and provide a single market contact. - Most options likely require primary legislation; medium- to longer-term objective. - Immediate coordination: - Working Group should move to weekly meetings to set parameters for the following week’s operations (investment or Cetes issuance). - Forecast preparation implication: full weekly submissions and rolling forward the three-month forecast each week or at least each month. - Secretariat should give detailed advice to the Working Group on policy responses to forecast advice, including forecast sensitivities or scenarios with implications for issuance, investment, or other policy responses. - Advice should be coordinated between TESOFE secretariat and UCP counterparts before Working Group meetings. Box 5 — Governance of the Investment of Temporary Surplus Cash - Working Group (operational equivalent of an Investment Committee) should establish: - Risk tolerance (market, credit, operational), investment horizon, eligible instruments, and currencies. - Performance objectives (difficult to measure for smoothing objective; some treasuries use spread above the overnight rate or a “do nothing” counterfactual). - Delegations of authority: parameters for the week ahead within which TESOFE may transact; clearance/consultation requirements for actions outside parameters. - Reporting requirements to the Working Group, within SHCP, and externally. ### Summary of Recommendations (as listed) - Recommendation II.1 (Working Group, by the end of the third quarter, 2021 and beyond) — cash flow forecasts: a. TESOFE should be given more authority to decide how best to build the cash flow forecasts, including making its own judgments. b. TESOFE should widen its sources of information and lengthen the primary forecast horizon. c. A capacity-building program should be established accordingly. - Recommendation II.2 (Working Group, by the end of the third quarter, 2021 and beyond) — government cash management: a. Working Group should agree upon a cash smoothing objective and a program to manage cash more actively accordingly. b. Establish a cash buffer target to be reviewed every quarter. c. Meet more frequently, and in due course weekly, identifying policy responses to the forecast. - Recommendation II.3 (SHCP/UCP by the end of the third quarter, 2021 and beyond): - UCP should further develop Cetes as a cash management instrument, in coordination with the TESOFE. - Recommendation II.4 (Working Group, by the end of the fourth quarter, 2021): - Working Group should amend its policies and guidelines and associated governance arrangements for endorsement by the Technical Committee. - Recommendation II.5 (TESOFE, end of the first quarter, 2022): - TESOFE should develop its capacity to invest through reverse repo, in coordination with the UCP. - Recommendation II.6 (SHCP, 2023): - SHCP should consider institutional options for better integration of debt and cash management functions. ### Management of financial assets and SALM introduction - Authorities aim to strengthen management of financial assets of central public sector entities and harmonize legal/regulatory framework. - Current situation: - Debt management capacity is high and SHCP exerts strong control over borrowing of central public sector entities. - Management of financial assets is decentralized; SHCP’s control over investment decisions is limited. - Authorities have drafted an asset law intended to harmonize asset management across the central public sector. - SALM framework: - Authorities intend to put in place a SALM framework in a phased manner. - UCP and some public sector institutions are considering balance sheet mismatches, but no SALM framework for the wider public sector exists. - Distinctions among PSBS, financial asset management, and SALM: - PSBS compilation/analysis focuses on accounting and balance sheet information for fiscal policy. - Financial asset management ensures liquidity while maximizing long-term value at moderate risk. - SALM focuses on identifying and mitigating financial risks from asset-liability mismatches. - Different expertise required: accounting for PSBS; financial management and markets for asset management; financial risk analysis for SALM. - At SHCP, Economic Planning Unit leads PSBS compilation; no institutional responsibility yet assigned for public sector financial asset management beyond TESOFE’s cash mandate; UCP has started SALM considerations in financing strategy. *Source: IMF mission team (excerpts from the provided content unit).* ### 70. The mission’s analysis and recommendations focus on the financial assets of central ### Managing Central Public Sector Financial Assets ### Current situation and legal/regulatory framework - The mission’s analysis and recommendations focus on the financial assets of central public sector entities, the corresponding legal and regulatory framework, and an SALM approach. Section III.B. includes a discussion as to how the SHCP’s understanding and monitoring of financial assets of central public sector institutions, such as trust funds and nonfinancial and financial public corporations, can be strengthened. - The wider financial oversight regime is outside the scope of analysis and not discussed in detail beyond the legal and regulatory framework. Reforms to the SHCP’s analysis and monitoring of financial assets of central public sector institutions should be viewed as part of a broader financial oversight framework for the respective institutions. - The broader financial oversight of public corporations and extrabudgetary funds (EBFs) should extend beyond short-term budgetary considerations and include: - an explicit ownership policy, - the analysis and mitigation of fiscal risks, - reporting by the government on the sector’s performance. - In line with sound international practice, reforms to the SHCP’s oversight regime for financial assets should be considered as part of a more comprehensive framework of financial oversight to be introduced progressively. - At the budgetary central government (BCG) level: - Financial assets from the BCG are managed by the SHCP through the TESOFE. - Under the LTF, investment policies of financial assets held in the current account of the TSA are approved by a Technical Committee composed of the Secretary of Finance and Public Credit, the treasurer, and the Under Secretaries of Finance and Public Credit, of Income, and of Expenditure. - LTF regulation establishes that investment policies should include, at a minimum: authorized securities and other financial instruments, currency, portfolio ceilings per issuer, type of instrument and currency, maximum maturities, custody, risk management policies and practices, valuation rules, etc. - Outside the BCG, the legal framework mirrors a complex landscape of many central public sector institutions that: - fall under many legal statutes, - have distinct legal personality from the state in most cases, - in most cases enjoy substantial budgetary and financial autonomy, including discretion over the management of their financial assets and risk exposure. - Oversight arrangements for these entities commonly involve line ministries exercising tutelage, defining policies, coordinating planning and budgeting, controls, and performance evaluation. - Under Mexican administrative law, central public sector entities outside the BCG are categorized (as analyzed in the source) into parastatals (decentralized bodies, organic trust funds, state-owned productive companies, companies with majority state ownership) and nonorganic trust funds. Table 3 (in the source) provides a detailed legal classification and numbers for each category. ### Composition and scale of central public sector financial assets (findings) - The financial assets of the central public sector were reported at MXN5,214.7 billion (figure 14). - Of the total: - the central government held MXN1,356.2 billion primarily in deposits, - Nonfinancial corporations held MXN1,262.7 billion mostly in receivables, - Financial corporations, mainly development banks, held MXN2,595,9 billion in loans and investments in securities, for the most part. - There are 242 trusts at the federal level, 66 of which are under SHCP’s oversight. - The parastatal category and nonorganic trust funds differ materially in legal nature, governance, and financial relations with the central government; examples and characteristics are described in Box 6 of the source. ### Selected entities reviewed for analysis - For focused analysis, the mission examined a subset of entities representative of governance structures and asset size: the BCG, nonorganic trust funds FEIP and FONADIN, the commercial state-owned productive company CFE, and the development bank NAFIN. These entities were created to pursue specific long-term social and economic policy objectives. ### FEIP (Budgetary Revenues Stabilization Fund) — operations, flows, and issues - Purpose and instruments: - FEIP is a short-term budget stabilization mechanism that uses financial derivatives, primarily Asian-style options on oil price, to mitigate the budgetary impact of lower-than-projected oil revenues during the fiscal year. - It is funded primarily through annual transfers from the Fondo Mexicano de Petróleo (FMP); other inflows include returns on financial assets, hedging proceeds from derivatives, and contributions from the SHCP in instances of surplus income and according to Ley del Presupuesto y Responsibilidad Hacendaria, Article 19. - The UCP defines the parameters of the annual hedging program based on the oil price used for the federal budget and the funds available in FEIP’s accounts; UCP is also responsible for implementing the approved hedging program in international financial markets. - Recent flows and balances (Table 4, in MXN millions): - 2017: Year-End Balance 220,971.5 - 2018: Interest Earned 18,484.4; FMP Transfers 10,049.5; Other Inflows 52,271.3; Oil Hedge Proceeds 0.0; Outflows −23,488.9; Foreign Currency Effect 1,483.0; Net Change 58,799.3; Year-End Balance 279,770.9 - 2019: Interest Earned 21,627.9; FMP Transfers 11,454.6; Other Inflows 0.0; Oil Hedge Proceeds 2,399.8; Outflows −156,473.7; Foreign Currency Effect −235.5; Net Change −121,226.3; Year-End Balance 158,543.9 - 2020: Interest Earned 7,420.2; FMP Transfers 9,081.5; Other Inflows 0.0; Oil Hedge Proceeds 47,454.7; Outflows −214,376.2; Foreign Currency Effect 1,373.8; Net Change −149,046.0; Year-End Balance 9,497.9 - FEIP balance management and recommendation: - FEIP assets at any time comprise: - cash balances denominated in U.S. dollars and Mexican pesos held with Banxico, - derivative contracts whose value depends on Mexican crude oil prices. - As of the end of March 2021, the total FEIP balance amounted to the equivalent of MXN16 billi on with 50.2 percent or MXN8 billion in domestic currency, and 49.8 percent in U.S. dollars or US$382 million. - Current strategy: keep cash balances in deposit at Banxico where they earn the overnight interbank rate (very conservative). - Recommendation: given the predictable timing of quarterly budget support outflows, the SHCP should explore a more flexible strategy to actively manage FEIP cash balances; the techniques and instruments described in Section II to more actively invest the BCG’s cash could be applied by FEIP to generate additional income while meeting liquidity objectives. ### Observations on disclosure and monitoring - Nonorganic trust funds (242 trusts) manage substantial federal financial assets but lack an overarching framework for financial oversight. They: - lack separate legal personality, governance or corporate structure, - operate as EBFs, - have management of assets and liabilities that is largely undisclosed (as indicated in Section I). - Objectives of nonorganic trusts are varied (budget stabilization, public infrastructure, financial support, pensions and employment benefits, subsidies). - Management of financial assets in these trusts is defined in their constitutive legal instrument, trust contract, and operating procedures established by the grantor. ### Policy implications and recommended actions (from the source narrative) - Strengthen SHCP’s understanding and monitoring of financial assets of central public sector institutions (trust funds, nonfinancial and financial public corporations) as part of a broader financial oversight framework. - Consider reforms to SHCP’s oversight regime for financial assets as part of a comprehensive framework of financial oversight to be introduced progressively. - For BCG and FEIP cash management: - Apply the cash-investment techniques and instruments described in Section II to generate additional income when surplus cash beyond short-term buffers is predictable and consistent with liquidity needs. - If a persistent significant structural cash surplus is identified, SHCP should make a policy decision on how to utilize the surplus most economically effectively, including possible debt reduction given the government’s significant net debt position. *Source: Excerpt from IMF mission report chapter on managing central public sector financial assets (Mexico).* ### 80. The FEIP manages its financial assets conservatively to minimize exposure to ### 1mexea2021003 - 80. The FEIP manages its financial assets conservatively to minimize exposure to ### FEIP risk management and exposures - The FEIP manages its financial assets conservatively to minimize exposure to financial risks. - Cash balances held in deposits at Banxico are nominally exposed to overnight interest rate fluctuations, but this exposure is relatively low compared to potential losses from derivatives counterparty default. - Derivatives contracts are fully collateralized with a zero threshold, requiring counterparties to post collateral daily to cover changes in derivatives value. While this does not completely eliminate credit risk, it effectively mitigates FEIP’s exposure to potential losses from a counterparty default. ### Recommendations on trust funds’ cash balances - The SHCP should explore opportunities for investing more actively the trust funds’ cash balances held in the BCG’s account at Banxico. - Several central government entities, such as the FEIP, maintain deposits with TESOFE, which can draw upon them temporarily in case of a liquidity shortfall in the BCG’s account (although not the FEIP’s). - The SHCP should: - Conduct a detailed analysis of variability of those balances and patterns of liquidity expenditure by entities that hold them to assess scope for more active investments. - Consider using some of the same techniques and instruments described in Section II to more actively invest the BCG’s cash for applicable trust funds. ### FONADIN: asset profile and liquidity arrangements - FONADIN’s primary mission is to finance and facilitate infrastructure development projects; its financial assets are primarily illiquid. - Asset composition includes credit instruments, guarantees, and capital participation in infrastructure projects; it also manages cash balances for operational needs and debt service. - FONADIN maintains a line of credit with BANOBRAS for temporary liquidity shortfalls. - The illiquid and idiosyncratic nature of most of its financial assets makes it difficult to estimate market value and aggregated risk profile. - Reported values as of end of 2020 fiscal year: - MXN112.6 billion (total reported value of financial assets) - MXN46.3 billion (bank deposits) - MXN66.4 billion (accounts receivable) - The value of its other financial assets is not reported. ### CFE: assets, exposures, and hedging - CFE’s financial assets primarily consist of cash and cash equivalents and derivatives-based financial instruments. - As of the end of September 2020: - MXN90,022 million in cash on hand and in banks - MXN59,986 million in short-term investments, mainly overnight repos - CFE is exposed to interest rate and foreign currency risks and mitigates these through a hedging program using derivative financial instruments: - Foreign exchange cross-currency swaps and forwards to hedge foreign currency risk - Interest rate swaps to hedge interest rate risk - Some derivative positions appear on the asset side of the balance sheet for accounting purposes but are primarily used to hedge liabilities. - CFE uses fair value accounting for derivatives under IFRS and computes a credit valuation adjustment for counterparty credit risk. - CFE financial assets (as of Sep. 2020) — Millions of MXN: - Cash and Cash Equivalents: 150,016.8 - Accounts Receivable: 102,588.7 - Loans to Employees: 14,804.0 - Derivative Financial Instruments: 37,538.7 ### NAFIN: asset mix and risk controls - NAFIN’s financial assets are typical of banks: cash and cash equivalents, investment securities, repos, derivative instruments, and a loan portfolio. - Policies permit use of derivatives for hedging and trading to generate revenue; instruments include interest rate and currency swaps, consumer price index and interest rate futures, and foreign exchange forwards. - Risk management: activities and investments are subject to control processes overseen by the Integrated Risk Management Committee and implemented by a dedicated risk management function. - NAFIN financial assets (as of Dec. 2020) — Millions of MXN: - Cash and Cash Equivalents: 76,799 - Investment Securities: 254,564 - Repos: 180 - Derivative Financial: 9,372 - Loan Portfolio: 213,341 - Accounts Receivables: 37,392 ### SHCP monitoring, framework design, and implementation steps - Central recommendation: SHCP should strengthen monitoring of financial assets across central public sector entities rather than seek direct centralized control of all assets. - Key rationale: - Heterogeneous mandates and liability structures (e.g., social security, pension schemes, deposit insurance fund) imply entity-specific investment/risk regimes aligned with liabilities. - Expanding SHCP direct control may not be legally feasible or advisable. - Proposed incremental development and implementation of a financial assets monitoring framework: - Start with effective monitoring of compliance with existing liquidity management guidelines. - Expand scope to cover management of all types of central public sector financial assets. - Guide framework by a set of general prudential principles and guidelines to which entities must demonstrate compliance. - Anchor compliance review to existing budget review process; entities present financial plans for upcoming fiscal year. - Introduce additional reporting requirements; SHCP evaluates against prudential principles and requests corrective actions for gaps. - SHCP needs highly skilled staff with expertise in financial planning and analysis and sectoral knowledge. ### Compliance monitoring of liquidity guidelines - SHCP should establish processes to monitor compliance with official liquidity management guidelines issued in 2006 and amended in 2010 and 2020: “Acuerdo por el que se expiden los lineamientos para el manejo de disponibilidades financieras de las entidades paraestatales de la Administración Pública Federal”. - Current situation: no mechanism at SHCP to systematically monitor compliance. - Recommended actions: - Periodically collect required information to evaluate compliance. - Develop necessary software and systems infrastructure to process received data. - Automate compliance verification and reporting of noncompliance for corrective follow-up. - Review guidelines annually to keep them relevant with market developments and new financial products. ### Data collection, analytics, and institutionalization - SHCP lacks sufficiently granular instrument- and position-level information on central public sector financial assets for risk analysis. - Current data (accounting and budget) are necessary but not granular enough for risk monitoring. - Benefits of granular data: quantify aggregate exposures to foreign exchange risk, interest rate risk, inflation, and credit exposure; develop econometric models and indicators; propose proactive policy/regulatory actions. - UCP pilot initiative: - UCP middle office has requested detailed information from a subset of central public sector entities (mainly SHCP-administered nonorganic trust funds) — use this as a starting point to define data requirements. - Objective: identify contractual parameters determining future cash flows (interest rate, currency, payment schedules, early redemption clauses) and counterparty characteristics. - Build data templates to facilitate and automate data collection. - Data collection process recommendations: - Transfer responsibility to an operational unit such as UCP back office; middle office focuses on analytical modeling. - Automate collection and warehouse financial asset data in same system as liabilities to ensure consistency and reconcilability. - Collect assets and liabilities data at same frequency and point in time, ideally monthly. - Aim to build a complete and accurate data warehouse to support multiple functions. - Institutionalization: broaden SHCP mandate to include: - (i) analysis and monitoring of central public sector financial assets; and - (ii) setting guidelines on financial risk management. - UCP middle office to lead pilot phase; dedicated resources and senior management support required for institutional adoption. ### Legal and regulatory framework, draft Asset Management Law, and reservations - SHCP legal powers vary by asset pool owner: - BCG: financial assets administered by TESOFE through TSA without limitations; TESOFE determines investment policies/decisions via Technical Committee. - Parastatals: under LOAPF and LTF, SHCP can set general principles and guidelines; current guidelines regulate authorized investments, repo conditions, custody, monitoring, and sanctions. Maximum 10 percent of available cash may be deposited with commercial banks. - Nonorganic trust funds: in principle, same powers as parastatals, but in practice SHCP has not used prerogatives and exerts influence via constitutive laws, decrees, or trust contracts. - Draft “Asset Management Law” would propose an integrated framework with requirements including: - Principles for financial asset management (investments aimed at strategic/priority goods, services, and/or infrastructure). - Broad coverage (equity in commercial companies, reserves, revaluation of assets, debt securities, loans from development banks/funds, equity participation in PPPs, and certain nonfinancial assets like real estate ownership rights). - Governance: creation of an Investment Committee (Secretary of Finance and Public Debt; Treasurer; Undersecretary of Finance and Public Debt; Undersecretary of Expenditures) to approve investment policies, classification criteria, custody processes, individual acquisitions/disposals, and credit risk ratings. - Investment planning: entities’ budgets submitted to SHCP should cover all proposed financial investments for the fiscal year. - Preauthorization: covered entities would require authorization from the Investment Committee and prior consent of TESOFE or Undersecretary of Expenditure based on cost-benefit analysis. - Monitoring: compliance monitoring rests with SHCP. - Reservations and potential conflicts: - Compatibility with constitutional and statutory mandates of autonomous entities is questionable and potentially undesirable. - Concerns include loss of necessary flexibility for entities to tailor risk management to their legal mandates and policy objectives. - Potential conflicts with regulatory/supervisory powers of CNBV for development banks or other financial institutions and with CONSAR for social security entities. *Source: 1mexea2021003 (excerpt).* ### 95. Recognizing the different relations between center and autonomous public entities, ### Recognizing the different relations between center and autonomous public entities, ### Financial risk management guidelines for public entities - Some countries have established general guidelines for financial risk management per type of entity to implement a comprehensive, entity-wide approach to risk across all business lines and areas under corporate control. - Entities are expected to tailor risk management policies and practices to take into account their mandate, scope, size, and the nature of their risk exposures. - Exemptions are needed where entities are subject to specific requirements by supervisory authorities (for example, banking, insurance, pensions). - Box 7: Financial Risk Management Guidelines for SOEs adopted by the Ministry of Finance in Canada highlights key elements: - Governance Arrangements: risk management and internal control processes rest with the Board of Directors; responsibilities for senior management, risk management functions (including standalone committees), and audit are specified. - Scope: covers treasury management activities, including raising financing, managing investments, and using derivatives. - Types of Risks listed: Credit risk (including settlement risk); Liquidity risk; Market risk (including foreign currency and interest rate risk and other market value–related risks such as equity risk and commodity risk); Operational and legal risks related to risk-generating activities. - Risk-Related Reporting Requirements: timely and regular risk-related reporting to appropriate committees and the Board; public reporting providing a comprehensive, clear understanding of entity-wide financial risks; existence of financial risk management guidelines should be reported in the annual report or other public documents. - Review of the Guidelines: Every three years or as frequently as needed. - Source cited in Box 7: Department of Finance, Canada. ### Tailored and targeted approach for parastatals and trust funds - Authorities should consider a tailored and targeted approach rather than an all-encompassing framework for financial asset management across the entire central public sector. - Differentiated guidelines should be adopted for: - decentralized entities, - SOEs, - organic trust funds, and - nonorganic trust funds. - The commercial or noncommercial nature of entities should be considered when tailoring regulations; certain categories should be exempt (for example, financial SOEs, social security entities). - Nonorganic trust funds: - Issuing general guidelines may be ineffective where guidelines conflict with a trust’s patrimony regime established by its constitutive legal instrument. - Implementation may require modification of trust contracts and operational procedures. - Some trust funds may not need application of the guidelines (for example, trust funds operating only as pass-through vehicles or guarantee transactions); assessment must be case-by-case. ### Legal and institutional gaps in financial oversight - Structural issue: lack of a comprehensive framework for financial oversight of entities outside the BCG; SHCP powers for financial oversight and control are ill-defined and difficult to enforce. - Heterogeneous institutions with independent budgetary and financial authority dilute accountability and weaken fiscal control. - Consequences: - Ad hoc financial management procedures for many institutions. - Centralization of fiscal data for reporting is difficult. - Coordination of overall financial reporting of trust funds (organic and nonorganic) and SOEs is lacking. - No centralized review of entities’ strategic plans and financial performance. - Strong control over borrowing operations by SHCP is limited by lack of comprehensive data and ongoing monitoring. ### Recommended multistep approach to strengthen legal framework - Step 1: Comprehensive review of the legal framework applicable to each category of central public sector entity for financial oversight to identify gaps or weaknesses within SHCP’s current legal powers. - Step 2: Issue regulations to strengthen reporting requirements and standardize accounting standards. - Step 3: Medium-term exploration of legal reform opportunities to support financial oversight elements for public entities outside the central government (parastatals and nonorganic trust funds), respecting constitutional and statutory autonomy; reforms could cover differentiated controls on borrowing, guarantees, performance management, corporate governance, audit, and others. - Reference: Box 8 (FTE recommendations) provides specific recommendations for nonfinancial public corporations. ### Box 8 — FTE recommendations (nonfinancial public corporations) - Establish a list of nonfinancial public corporations that complies with the GFSM definition (commercial entities selling goods and services in the market and controlled by the government). - Develop a financial oversight framework including: an ownership policy; a corporate governance framework; procedures for financial reporting based on key performance targets; publication of quarterly and annual performance reports; analysis and reporting of quasi-fiscal activities. - Publish a consolidated report of nonfinancial and financial public corporations in the budget documents and SHCP’s quarterly reports. - Set up a unit in the SHCP responsible for implementing and enforcing the financial oversight regime and for developing a monitoring system that provides early warning if any corporation is underperforming or in financial difficulties. - Enact modifications to the LFPRH and operational regulations, as required, to implement the new arrangements. - Source: Section III, Recommendation III.3; Fiscal Risk Analysis and Management, Mexico, Fiscal Transparency Evaluation, October 2018. ### Sovereign Asset and Liability Management (SALM) — purpose and framework - SALM objective: identify and mitigate financial risks stemming from mismatches in the risk exposure of assets and liabilities of the public sector. - Rationale: managing individual asset and liability portfolios in isolation can lead to suboptimal results and create mismatches in public sector exposure to financial risks. - SALM is aimed at identifying and mitigating financial risks from asset and liability mismatches at the sovereign balance sheet level rather than strengthening management of individual asset and liability types separately. ### Four stages of an SALM framework (Figure 15) - Stage 1: Define the scope of public sector entities and types of assets and liabilities to be included in the analysis. - Stage 2: Analyze exposure of individual entities and the PSBS to financial risks (for example, currency risk, interest rate risk, liquidity/refinancing risk, inflation risk, commodity price risk, credit, and counterparty risk) to identify natural hedges and mismatches. - Stage 3: Develop an SALM strategy that reflects the government’s ability and willingness to bear risks and typically includes a mix of risk avoidance, risk transfer, and risk retention. - Stage 4: Implement and evaluate the SALM strategy. - Note: Usually, nonfinancial assets are not included in SALM frameworks. ### Common implementation challenges - Institutional challenges in coordinating balance sheet management of autonomous public sector institutions with distinct mandates and objectives. - Availability of sufficiently granular data. - Difficulty in valuing assets. - Typical structure of the PSBS; fully integrated SALM frameworks are rare; more common are partial or ad hoc SALM strategies for subportfolios. - In federal contexts, SALM strategies often focus on the federal/central government while considering fiscal risks from subnational governments. ### Mexico — current SALM considerations and practices - SHCP has started reflecting SALM considerations, particularly in debt management operations. - UCP has identified SALM as a tool to strengthen the resilience of the PSBS and considers the currency composition of revenues in its financing strategy, aiming to increase issuance in domestic currency and reorient the foreign currency portfolio toward U.S. dollars. - Domestic debt portfolio: issues a mix of instruments including T-bills, fixed-rate nominal bonds, and inflation-linked bonds with maturities of 3 to 30 years, as well as floating-rate bonds with maturities from 1 to 5 years. - Individual public sector entities outside the BCG (CFE, NAFIN, BANCOMEXT) analyze exposures to financial risks (including liquidity risk, currency risk, interest rate risk, and credit risk), report on them, and pursue active mitigation strategies through borrowing strategies and the use of financial derivatives. - Examples of inter-entity SALM exploration: CFE and PEMEX have discussed transferring foreign currency risk exposure between the entities using arm’s-length financial transactions. - PEMEX’s revenues are linked to U.S. dollars while about 60 percent of CFE’s liabilities are denominated in foreign currency. - CFE has hedged some U.S. dollar exposure but about 25 percent of liabilities remain unhedged. - CFE is short foreign currency and PEMEX is potentially long foreign currency; a transfer of currency risk between the two could result in more resilient balance sheets for both. ### Existing strengths to build on for SALM development - A PSBS expanding in coverage (Section I). - A well-developed debt management framework for the BCG. - High analytical capacity at the UCP. - Strong oversight over borrowing decisions by central public sector entities (EBFs, nonfinancial and financial public corporations) combined with detailed knowledge of their respective debt portfolios. - Experience in ALM at the level of individual public sector entities outside the BCG, particularly the CFE, PEMEX, and development banks. - Relatively well-developed domestic capital markets and ample experience in transacting in international capital markets. - The UCP back office maintains a detailed database of central public sector debt that allows for granular analysis of financial risk exposures. ### Gaps and capabilities needed for SALM - An explicit mandate for SALM within the SHCP. - A formal coordination mechanism to discuss and negotiate SALM strategies among independent institutions with distinct mandates, policy objectives, and governance frameworks. - Granular information on financial assets outside the BCG, including organic and nonorganic trust funds and public corporations. - Potentially sufficient resources at the middle office of the UCP to conduct additional analytical work and the necessary analytical tools functionality. - A process for developing, implementing, and monitoring an SALM strategy, including reporting mechanisms and integration with the UCP’s financing strategy. ### Phased approach to developing an SALM framework - A phased approach with three time horizons helps explore feasible SALM strategies given legal and regulatory constraints and policy conflicts, build political commitment, and adjust strategies with experience: - Short term: implementable within one year. - Medium term: two to three years. - Long term: more than three years. - Four principal elements to phase in: - (i) Coverage of public sector entities. - (ii) Institutional framework. - (iii) Identification and analysis of risk exposures. - (iv) Design, implementation, and monitoring of SALM strategies. ### Recommended coverage expansion and considerations - SALM coverage should expand from the BCG to the central public sector and could over time include Banxico, based on materiality (size and risk exposure) and practicality (likelihood of implementation given policy and legal constraints). - Initial focus could be on the BCG; organic and nonorganic trust funds holding significant assets and/or liabilities; PEMEX and the CFE; and selected development banks. - Subsequent expansion could include other central public sector institutions: other relevant trust funds, SOEs, financial public corporations, and social security funds. - Authorities should consider contingent liabilities (for example, PPPs or debt guarantees) in the second phase; identify their financial characteristics (for example, currency for guaranteed debt) and sensitivity to financial risks. - The inclusion of Banxico’s balance sheet should be considered without encumbering its autonomy; Banxico’s significant foreign currency reserves offer natural hedges to foreign currency liabilities of the BCG or SOEs. - Given Mexico’s federal structure, subnational governments may not be directly included in SALM, but potential fiscal risks stemming from them should be considered. *Source: 1mexea2021003 - Recognizing the different relations between center and autonomous public entities,* ### 109. A sound institutional framework should include an explicit SALM mandate, over ### 1mexea2021003 - 109. A sound institutional framework should include an explicit SALM mandate, over ### Institutional framework and governance for SALM - A sound institutional framework should include: - an explicit SALM mandate, - over time an SALM committee, and - appropriate analytical resources. - The UCP is identified as perhaps in the best position to take a leading and coordinating role in the introduction of an SALM framework and to advise the Minister of Finance on the implementation of SALM strategies. - The UCP may need to be assigned an explicit mandate to consider ALM aspects in its financing decisions beyond its current debt management mandate. This mandate can: - help align incentives, - set and monitor the UCP’s performance objectives, and - mitigate risks of civil or administrative liabilities. - As public sector coverage extends beyond entities directly controlled by the SHCP, an SALM committee should be instituted: - role: foster negotiations and decisions among independent institutions to mitigate potential mismatches in financial characteristics of the PSBS, not to centralize balance sheet management decision-making; - UCP may serve as the committee’s technical secretariat; - membership may include relevant units at the SHCP and public sector entities covered by the SALM framework; - establishment can be through a memorandum of understanding among participating institutions and may not require legal changes; - transactions among independent institutions must be at arm’s length; - the committee should strengthen transparency on SALM strategies implemented, including transfers of risks among entities and any role of residual risk-taker of the UCP. - The UCP middle office is best placed to conduct necessary analyses and lead SALM strategy development; this requires expanding capacity and resources (staff, models) for balance sheet risk analysis. ### Data, valuation, and granular risk assessment - Granular analysis of financial risk exposures builds on but goes beyond compilation of the PSBS. - Authorities need to define missing granularity of information for quantitative risk assessment based on currently available PSBS information. - Initial risk assessment should focus on priority risks (for example, currency risk and liquidity/refinancing risk) and expand over time to other risks, including: - interest rate risk, - inflation risk, - credit/counterparty risk, - concentration risk. - Consistent valuations—ideally marked-to-market—of assets and liabilities and across institutions facilitate understanding balance sheet vulnerabilities. - (Net) exposure to financial risks should be assessed at both entity and aggregate levels, including identification of liquidity and currency mismatches and natural hedges. - Appendix VII provides a qualitative assessment for the BCG, FEIP, FONADIN, CFE, and NAFIN; preliminary analysis suggests net exposure particularly to: - currency risk, - interest rate risk, - inflation risk. - Over time, risk assessment should be fully quantified and integrated into the UCP’s existing debt models. - Examples of missing data for SALM purposes may include: - composition of financial assets by currency, - maturity structure, - counterparties on an instrument level, - sensitivity to interest rates, - other risks (such as from any indexation to inflation). ### SALM strategy design and phasing - The SALM strategy for each phase should comprise a mix of risk avoidance, transfer, and retention. - Authorities and public sector entities already use tools to avoid and transfer risks (for example, borrowing limits, development of local currency capital markets, financial derivatives to hedge oil price, currency, and interest rate risks). - Given the BCG’s and central public sector’s net debt position and the dominance of the government’s debt portfolio in phases 1 and 2, the government’s financing program is likely the most significant lever for SALM implementation. Potential components of SALM strategies by phase: - Phase 1: - Continue managing the BCG’s exposure to foreign currency through increased issuance in domestic currency or hedging foreign currency risks through derivatives as the UCP is considering; - Within the foreign currency portfolio, shift toward exposures in U.S. dollars; - Set an explicit cash buffer to support more active liquidity management (Section II); - Consider increases in risk exposure (and expected return) in investment portfolios of trust funds to match financial risks to (debt) liability portfolio; - Explore options to transfer risks among SOEs through arm’s-length transactions. - Phase 2: - Expand phase 1 activities to other institutions of the central public sector; - Negotiate among independent institutions; - Consider residual risk-taker function of the UCP (for example, related to matching social security fund assets and liabilities or risk exposures of public sector entities that cannot manage them); - Provide advisory and capacity from the UCP to lower-capacity institutions. - Phase 3: - Take into account the size and composition of foreign currency reserves in the financing strategy of the government and other public sector borrowers; - Consider balance sheet profiles of subnational entities in the central government’s investment and borrowing decisions. ### Country examples and operational measures - Uruguay (Box 9) — SALM framework extended to central government, Central Bank, four major nonfinancial public corporations, and state insurance bank to reduce vulnerability to foreign currency shocks and redistribute exposures: - public sector short foreign currency, inflation-linked local currency, and wage-indexed local currency exposures varying across institutions; - measures implemented with consistent marked-to-market valuations included: - liability management operation between Ministry of Finance and Central Bank to reduce cost of carrying foreign currency reserves and government’s exposure to currency risk; - currency forwards between Central Bank and public corporations; - issuance of treasury notes indexed to wages to match state-owned insurers’ liabilities. - Examples of SALM strategies in selected countries (Box 10) include: - decision-making authority with one entity (Canada); - coordination mechanisms (Hungary, Switzerland, United Kingdom, Uruguay); - stress testing consolidated balance sheet (New Zealand); - maintaining minimum cash/liquidity buffers (South Africa, Turkey, Uruguay); - currency composition (and duration) management of foreign debt and foreign currency reserves (Canada, Denmark, Hungary, New Zealand, Turkey, Sweden); - managing central government debt and cash reserves on a net basis (Finland, Greece, Turkey); - debt buybacks or prepayments financed by reserves (Brazil, Mexico, Russia); - providing derivative transactions to government entities (New Zealand); - intentionally maintaining debt when assets are significant (Australia, Norway); - pooling deposits of public sector entities at Central Bank and allowing central government to borrow from the account (South Africa). ### Communication, monitoring, and evaluation - The SALM strategy should be communicated and monitored: - Initially, an SALM strategy may be communicated as part of the government’s financing strategy; - Over time, a separate SALM strategy may be published; - Implementation should be monitored and evaluated ex-post, deviations explained, and lessons drawn to inform subsequent iterations consistent with a phased and iterative approach. ### Summary of Recommendations (as listed) - Recommendation III.1: Analyze and explore opportunities to invest more actively trust funds’ liquidity currently deposited at the Banxico to enhance profitability while maintaining an appropriately prudent risk profile consistent with their policy objectives. (SHCP/UCP middle office; short term) - Recommendation III.2: Start collecting detailed granular information on central public sector financial assets to complement what exists for debt. Take a phased coverage approach starting with entities currently directly administered by the SHCP, then expand to the entire central government, and lastly to state-owned corporations (excluding the Banxico). (SHCP; short to medium term) - Recommendation III.3: Create a function in SHCP (or expand the mandate of an existing unit within the SHCP) to be responsible for the analysis and monitoring of central public sector financial assets. The function should start by implementing a monitoring program for the management of liquidity, based on existing official guidelines, and gradually expand to cover comprehensive monitoring of financial assets of the central public sector (except the Banxico). (SHCP; short to long term) - Recommendation III.4: Explore within the existing legal powers whether the SHCP could issue guidelines for prudent financial risk management policies and practices per category of legal entity, which would guide each entity’s governing body to develop their own financial risk policies. Exceptions for financial entities and other regulated institutions are advisable. (SHCP; short to medium term) - Recommendations III.5: Issue regulations for strengthening reporting requirements for parastatals and nonorganic trust funds. In the medium term, the authorities could explore legal reform opportunities to strengthen the legal power of the SHCP for the financial oversight and control of these entities in line with the constitutional and statutory autonomy of some public entities. (SHCP; short to medium term) - Recommendation III.6: Expand the coverage of central public sector institutions in an SALM framework in phases starting with the BCG, priority trust funds and development banks, and CFE and PEMEX, followed by the central public sector entities, other than the Banxico but including contingent liabilities and intertemporal effects; and, over time, the full central public sector, including the Banxico. (SHCP; short to long term) - Recommendation III.7: Establish an institutional framework for a phased implementation of an SALM approach, including an explicit ALM mandate for the UCP, an SALM coordination committee to foster negotiations among independent institutions, and adequate resources and capacity at the middle office of the UCP. (SHCP/UCP; short to medium term) - Recommendation III.8: Assess net exposures to financial risks and natural hedges for individual public sector entities and in aggregate, building on the compilation of the PSBS (but at a more granular level), ensuring the consistent valuation of assets and liabilities and eventually integrating the analysis in existing debt models. (UCP in cooperation with Economic Planning; short to medium term) - Recommendation III.9: Develop, implement, and monitor SALM strategies composed of a mix of risk avoidance, transfer, and retention for each phase. (SHCP/UCP; short to long term) *Source: 1mexea2021003 - IMF PDF chapter.* ### Appendix II. Forecast Performance: Some Observations ### Appendix II. Forecast Performance: Some Observations ### Characteristics of TESOFE’s cash flow forecasts and performance - The analysis is based on the file Estadistica_CashM_FMI, 29-Abr-2021, containing full breakdowns for cash flow outturns and forecasts in 2019–20. Forecasts are those made at the beginning of each month for the month ahead. ### Key findings on forecast errors (daily) - Errors are non-negligible and larger in COVID-affected 2020. - Debt servicing (interest plus principal payments) shows the lowest error. - Debt financing shows a significant positive error, suggesting forecasts may have been cautiously understated. - Net cash flow errors are proportionately very large when the average is small. ### Table II.1: Mexico: Average Daily Cash Flow and Forecast Error, 2019–20 (Daily Data, MXN bn or %) - Income - 2019: Average 15.94; Error 0.53; Percent 3.30 - 2020: Average 15.98; Error 1.26; Percent 7.8 - Total 2019–20: Average 15.96; Error 0.89; Percent 5.6 - Expenditure - 2019: Average 15.60; Error 0.55; Percent 3.50 - 2020: Average 16.11; Error 0.43; Percent 2.7 - Total 2019–20: Average 15.85; Error 0.49; Percent 3.1 - Debt Servicing - 2019: Average 12.83; Error −0.15; Percent 1.20 - 2020: Average 13.90; Error 0.17; Percent 1.2 - Total 2019–20: Average 13.37; Error 0.01; Percent 0.1 - Gross Financing - 2019: Average 12.76; Error 0.50; Percent 3.90 - 2020: Average 14.17; Error 1.02; Percent 7.2 - Total 2019–20: Average 13.47; Error 0.76; Percent 5.6 - Total - 2019: Average 00.27; Error 0.31; Percent 114.80 - 2020: Average 0.14; Error 2.01; Percent 1435.7 - Total 2019–20: Average 0.21; Error 1.16; Percent 552.4 ### Cumulative monthly forecast errors - Figures II.1 and II.2 show cumulative monthly forecast errors for 2019 and 2020: - Except for debt servicing in 2019, cumulative errors are uniformly positive for the main flow categories. - Errors reversed when predicting expenditure in December. - Large underestimation of revenue flows (primarily non-oil tax revenue) following COVID, likely reflecting caution from UPI. ### Variability and standard deviations (Table II.2) - Standard deviations indicate substantial variability and timing changes; even debt servicing errors are surprisingly large. - Standard deviations (Daily Data, MXN bn): - Income: 2019 Average Error 0.53; Standard Deviation 12.72 | 2020 Average Error 1.26; Standard Deviation 11.59 | Total Average Error 0.89; Standard Deviation 12.17 - Expenditure: 2019 Average Error 0.55; Standard Deviation 10.20 | 2020 Average Error 0.43; Standard Deviation 9.67 | Total Average Error 0.49; Standard Deviation 9.94 - Debt Servicing: 2019 Average Error −0.15; Standard Deviation 4.27 | 2020 Average Error 0.17; Standard Deviation 8.85 | Total Average Error 0.01; Standard Deviation 6.95 - Gross Financing: 2019 Average Error 0.50; Standard Deviation 5.97 | 2020 Average Error 1.02; Standard Deviation 12.51 | Total Average Error 0.76; Standard Deviation 9.81 - Total: 2019 Average Error 0.31; Standard Deviation 16.64 | 2020 Average Error 2.01; Standard Deviation 20.52 | Total Average Error 1.16; Standard Deviation 18.71 - Standard Deviation of Total If Components Independent: 17.88 (2019) ... 21.51 (2020) ... 19.78 (Total 2019–20) ### Interpretation of correlations and offsets - Calculated standard deviations of the total assuming independence are close to (slightly less than) the observed standard deviation of the total, suggesting: - Very little attempt to gear expenditure to actual revenue flows (characteristic of cash-rationing countries). - Little use of the financing program to offset errors in other cash flows; financing flows have only a very slight tendency to offset forecast errors. ### Table II.3: Gross Financing and Other Flows: Forecast Errors and Standard Deviations (Daily Data, MXN bn) - Gross Financing - 2019: Average Error 0.50; Standard Deviation 5.97 - 2020: Average Error 1.02; Standard Deviation 12.51 - Total 2019–20: Average Error 0.76; Standard Deviation 9.81 - Other Flows - 2019: Average Error 0.19; Standard Deviation 15.91 - 2020: Average Error 0.98; Standard Deviation 17.00 - Total 2019–20: Average Error 0.40; Standard Deviation 16.48 - Total - 2019: Average Error 0.31; Standard Deviation 16.64 - 2020: Average Error 2.01; Standard Deviation 20.52 - Total 2019–20: Average Error 1.16; Standard Deviation 18.71 - Standard Deviation of Total if Components Independent: 16.99 ... 21.11 ... 19.17 ### Serial correlation and timing effects - If daily cash flow errors were independent over a 25-working-day month, cumulative standard deviation would be MXN80 billion; observed average monthly cumulative error is MXN24 billion. - This difference is evidence of serial correlation: errors are not independent and likely reflect timing changes when expected flows materialize on different days. *Source: IMF mission team based on SHCP data.* ### Appendix III. The Cash Buffer ### Determinants and conceptual framing - No single arithmetical technique determines the right cash buffer size; optimal level depends on financial maturity, economic flexibility, market access, exposure to natural disasters, and government risk tolerance. - Distinction between two components: - Transactions buffer: sufficient, considering emergency credit or borrowing facilities, to meet daily treasury payments and transfers under most circumstances; otherwise kept low to save costs. - Safety (precautionary) buffer: to tide over financial stress or crisis (market sudden stop, cybercrime, global financial crisis, another pandemic). ### Alternative analytical approaches - Some frameworks separate a cash-management buffer (covering cash flow volatility, extended outflows, and forecast errors) from a debt-management buffer (focused on upcoming debt servicing and market disruption risk). - Transactions/safety distinction offers integrated approach to debt and cash management. ### Building blocks to determine buffer size (Box III.1) - Volatility of daily cash flows: greater volatility increases buffer needs. - Reliability of available cash forecasts: more reliable forecasts reduce reliance on buffer. - Scope for smoothing forecast profile via market transactions (liquidity): greater access lowers buffer reliance. - Ability to manage unanticipated fluctuations and the timescale: quicker response reduces buffer needs. - Risk of market disruption affecting ability to raise finance: include appropriate allowance in buffer. - Existence of safety nets (emergency credit facilities, contingent credit, short-term assets): can reduce buffer size accordingly. - Cost of carrying an unnecessarily high buffer: interest earned on cash is usually much less than financing cost; trade-off between cost and risk. ### Practical considerations - Perfect forecasts, limitless market liquidity, and instant access to instruments would eliminate need for buffer; these conditions do not exist in practice. - Many countries, including Mexico, exhibit marked within-month cash profiles (timing mismatches) and seasonal patterns increasing buffer requirements. - COVID supply-demand shocks make past cash flow data a poor guide; many countries are prudently increasing buffers. ### Approaches used in practice - Some adopt rules of thumb linking buffer size to debt servicing or anticipated expenditure over the next month/quarter. - With macro stability, improved forecasting, and smoothing scope, countries can refine buffer design. ### The cash buffer in Mexico: assessment and recommendations - Forecast errors, rather than volatility of actual flows, are the critical determinant for target/optimal balance. - Summary statistics can mislead due to serial correlation; conventional confidence limits are of limited use without mechanisms to handle the extreme 1 percent or 5 percent fluctuations. - A practical approach: examine maximum unanticipated falls over periods when intervention is impractical. In Mexico, the response timescale is likely between one and two weeks. - Cetes auctions: held weekly but announced a week in advance. - Possibilities to improve short-term liquidity: override provisions for additional T-bill auctions, compressed timetable for 28-day Cetes, or deposits on a call basis. ### Empirical observations (24 months 2019–20) - Selected episodes of cumulative negative forecast errors: - April 2019: expected non-oil tax revenue much less than expected, following an unanticipated extra inflow the previous day. - May 2019: shortfall totaled about MXN40 billion over five working days (following unexpected increase). - October 2019: cumulative fall of MXN40 billion over seven working days (including delayed oil revenue by a day). - March 2020: massive cumulative fall of about MXN130 billion over 12 working days, likely related to COVID (lower-than-expected financing receipts, falls in non-oil revenue, unanticipated expenditure increases). ### Transactions buffer estimate - Data limitations: 24-month sample, rebalanced monthly forecasts, and potential end-of-month effects require further investigation. - Suggested transactions balance: at least MXN40 billion should be required, plus allowance for imperfect smoothing even with perfect forecasts. - TESOFE has access to a range of safety nets (described in main text). ### Precautionary/safety buffer and illustrative scenario - Typical monthly issuance: - Monthly bond issuance: in the order of MXN50 billion. - Monthly Cetes issuance: in the order of MXN150 billion. - Domestic market disruption is less likely than external market closure; Mexico is no longer reliant on external issuance. - Auction performance over the last five to six years: bid-to-cover ratios averaging three times for Cetes and nearly that for other securities. - Illustrative cautious scenario: if domestic bond market closed for a month and only three-quarters of normal Cetes volume could be sold, an additional reserve of MXN80 billion would be needed (in addition to the transactions buffer). - Historical note: even at the peak of the global financial crisis, Mexican bond and Cetes markets remained open though funding mix shifted; at start of COVID, authorities issued extra Cetes when bond market was distorted. ### Overall illustrative recommendation - Suggested cash buffer in normal circumstances: on the order of at least MXN125 billion, possibly closer to MXN150 billion. - TESOFE should further develop the analysis. *Source: IMF mission team based on SHCP data.* ### Appendix IV. Example of Public Sector Financial Assets Analysis: Peru ### Context and purpose - Excerpt from Peru’s “Strategy for Asset and Liability Management 2019 – 2022” illustrating types of analysis feasible with sufficient data. ### Position of the Nonfinancial Public Sector (NFPS) Financial Assets (as of July 2018) - Total NFPS financial assets: S/ 115,746 million (16% of GDP), an increase of 1.6% against December 2017. ### Ownership breakdown and main figures (selected) - By ownership and source (Dec.-17 Balance PCT.(%) vs Jul.-18 Balance PCT.(%)): - Public Treasury Own Resources - Ordinary Resources (RO) and Resources by Credit Operations (ROOC) are resources from tax collection and debt operations aimed at covering budgeted expenditures, paying debt service, and covering investment project expenses. - Dec.-17 balances (selected lines shown in source): 27,419 ; 13,426 ; 13,993 with PCT.(%) 24.1 ; 11.8 ; 12.3 - Jul.-18 balances: 24,393 ; 14,403 ; 9,989 with PCT.(%) 21.1 ; 12.4 ; 8.6 - Funds, Allocated and Committed Resources - Dec.-17: 27,501 PCT. 24.1 - Jul.-18: 26,760 PCT. 23.1 - Components: - Fiscal Stabilization Fund (FSF): Dec.-17 20,718 PCT. 18.2 ; Jul.-18 20,896 PCT. 18.1 - Secondary Liquidity Reserve (RSL): Dec.-17 0 PCT. 0.0 ; Jul.-18 0 ,1 PCT. 0.0 - Other funds: Dec.-17 3,578 PCT. 3.1 ; Jul.-18 3,338 PCT. 2.9 - Allocated and Committed Resources: Dec.-17 3,205 PCT. 2.8 ; Jul.-18 2,525 PCT. 2.2 - Resources in Public Entities in the Public Treasury - Dec.-17: 20,295 PCT. 17.8 - Jul.-18: 25,948 PCT. 22.4 - Components: - Specified Resources (RD): Dec.-17 9,632 PCT. 8.5 ; Jul.-18 12,797 PCT. 11.1 - Directly Collected Resources (RDR): Dec.-17 4,310 PCT. 3.8 ; Jul.-18 4,935 PCT. 4.3 - Donations and Transfers (DyT): Dec.-17 3,862 PCT. 3.4 ; Jul.-18 4,502 PCT. 3.9 - Other Resources: Dec.-17 2,491 PCT. 2.2 ; Jul.-18 3,714 PCT. 3.2 *Source: Excerpt from “Strategy for Asset and Liability Management 2019 – 2022,” Peru’s Ministry of Economy and Finance.* ### 4. Resources in Public Entities in the P rivate ### 4. Resources in Public Entities in the Private Financial System ### Composition and headline totals - TOTAL NFPS financial assets: 113,937 100.0 (Dec.-17) and 115,746 100.0 (Jul.-18); change 1,809 1.6. - Of the total financial assets in the NFPS, Funds, Allocated and Committed Resources represent 51.1 percent. - The chapter highlights rigidities from Resources in Public Entities in the Financial System that hinder a true global management of the treasury. ### Resources in public entities — itemized (Dec.-17 and Jul.-18) - 4.1. Consolidated Reserve Fund (FCR): 16,350 14.3 and 17,108 14.8. - 4.2. Companies - FONAFE: 5,097 4.5 and 5,070 4.4. - 4.3. EsSalud: 4,200 3.7 and 4,511 3.9. - 4.4. General Government: 6,487 5.7 and 5,723 4.9. - Accounts Receivable (Public Treasury): 6,589 5.8 and 6,233 5.4. - Note: Resources mainly come from intangible assets (examples: FCR obligations related to pension schemes managed by ONP; EsSalud revenues to cover expenditures on health benefits). ### Financial assets portfolio analysis — instrument-based structure (Public Treasury and Public Entities) - Total assets managed by the Public Treasury: 78,400 68.8 (Dec.-17) and 79,838 69.0 (Jul.-18); change 1,438 1.8. - 1.1. Current Account: 12,637 11.1 and 10,279 8.9; change -2,358 -18.7. - 1.2. Term Deposits: 58,770 51.6 and 62,917 54.4; change 4,147 7.1. - 1.3. Investments in Securities: 404 0.4 and 409 0.4; change 5 1.1. - 1.4. Account Receivables: 6,589 5.8 and 6,233 5.4; change -356 -5.4. - Total assets managed by Public Entities: 35,537 31.2 (Dec.-17) and 35,908 31.0 (Jul.-18); change 370 1.0. - 2.1. Current and Savings Account: 10,485 9.2 and 11,575 10.0; change 1,090 10.4. - 2.2. Term Deposits and Others: 9,329 8.2 and 8,166 7.1; change -1,163 -12.5. - 2.3. Investment in Securities: 15,723 13.8 and 16,167 14.0; change 444 2.8. - Key findings: - For the Public Treasury (S/79,838.0 million), term deposits are the main instrument for capitalization (54.4 percent), mainly at the Central Reserve Bank of Peru (BCRP). - For assets managed by public entities in the private financial system (S/35,908.0 million), investment in securities is the main instrument (14.0 percent). - Intangible assets from the Consolidated Reserve Fund (CRF) and EsSalud, managed under their policies and investment regulations, are highlighted. - Public entities keep balances in current accounts and term deposits under existing legal regulation (Directoral Resolution N º 016-2012-EF/52.03 and the EGIAP). ### Financial assets portfolio analysis — currency-based structure - Total (Dec.-17 and Jul.-18): 113,937 100.0 and 115,746 100.0; change 1,809 1.6. - Resources Managed by the Public Treasury (Dec.-17 / Jul.-18 / change): - 1.1. Soles: 44,420 39.0 and 48,750 42.1; change 4,330 9.7. - 1.2. Dollars: 32,945 28.9 and 30,286 26.2; change -2,659 -8.1. - 1.3. Euros: 205,76 0.2 and 157,56 0.1; change -48,2 -23.4. - 1.4. Yen: 829 0.7 and 643,99 0.6; change -185 -22.3. - Resources Managed by Public Entities (Dec.-17 / Jul.-18 / change): - 2.1. Soles: 24,424 21.4 and 24,099 20.8; change -325 -1.3. - 2.2. Dollars: 11,106 9.7 and 11,804 10.2; change 698 6.3. - 2.3. Euros: 7 0.0 and 5 0.0; change -2,3 -33.7. - Key findings: - Local currency (Soles) is the prominent currency for resources managed by the Treasury and by public entities. - U.S. dollar is the second most important currency for both groups; dollar resources mainly come from FSF for the Treasury and from CRF for public entities. - Both groups keep an important part of assets in dollars; exposure to foreign exchange risk is explained by the requirement that reserves be denominated in a convertible foreign currency. ### Governance, legal and regulatory framework guidance (Appendix V and VI) - Appendix V: Key elements for a sound legal and regulatory framework for EBF financial oversight — elements to consider: - Consistency of EBFs' legal nature with GFSM 2014 classification and sectorization guidelines. - Legal underpinnings for sound internal governance arrangements subject to strong accountability mechanisms, including to the legislature. - Requirements to include information on EBFs in budget documentation. - Robust legal basis for financial controls and approvals (borrowing, government guarantees' authorizations/limits; comparability of expenditure/revenue classification and accounting standards; sound budget execution controls). - Timely and transparent financial reporting requirements. - Rigorous procedures for internal controls and auditing. - Definition of a centralized function for analysis and mitigation of fiscal risks stemming from EBFs. - Appendix VI (selected practices across countries): - Budget formulation and approval, reporting in budget documentation, comparability of accounting standards (IPSAS), borrowing approvals, budget execution controls, and auditing arrangements are highlighted across South Africa, United Kingdom, France, and Bulgaria as good practices for robust oversight of EBFs and decentralized entities. ### Preliminary assessment of financial risks (Appendix VII — stylized balance sheet examples) - Illustrative exposures by selected public sector entities (examples and risks identified): - TESOFE (Central Government): cash and overnight at Banxico; commercial paper issued by development banks; risks: interest rate risk (low), credit risk; contingent liabilities: none (preliminary). - UCP: treasury bills, fixed-rate bonds, inflation-linked bonds, floating-rate bonds, Eurobonds in U.S. dollars/euros/Japanese yen, foreign loans, government-guaranteed debt, PPP debt; risks: foreign currency risk, interest rate risk, inflation risk, refinancing risk, credit risk for contingent liabilities. - FONADIN: cash, infrastructure-backed debt, loans, equity; risks: interest rate risk, credit risk; contingent liabilities: long maturity, inflation-linked bullet bonds; contingent credit line with BANOBRAS; inflation risk; refinancing risk. - FEIP: cash and overnight at Banxico, derivatives (for hedging oil price); risks: interest rate risk (low), counterparty risk; contingent liabilities: none (preliminary). - CFE (Nonfinancial Public Corporation): cash, short-term investments, derivatives for hedging interest rates and foreign currency; risks: interest rate risk, foreign currency risk, credit risk, counterparty risk; liabilities: mostly long-term foreign currency loans and bonds, inflation-linked bonds, accounts payable, leases, defined benefit pension liabilities; contingent risks: foreign currency risk, interest rate risk, inflation risk, refinancing risk. - NAFIN (Financial Public Corporation): deposits, bonds and notes, derivatives, repos, loans; risks: interest rates (domestic and foreign), foreign currency risk, credit risk, counterparty; liabilities: deposits, interbank loans (domestic and foreign), repurchase agreements, other payables; contingent risks: interest rate risk, foreign currency risk, refinancing risk, credit risk. - Note: The analysis of contingent liabilities is highly preliminary and focuses on key contingent liabilities the BCG is exposed to; a more thorough analysis should be performed. *Source: MEF – DGETP.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1mexea2021003.pdf_