## Near-Term Impact of Tariffs and Trade Policy Uncertainty on Mexico

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### Recent developments and key findings
- Economic activity has been soft since mid-2024 due to binding capacity constraints, restrictive monetary policy, unwinding of the 2024 fiscal expansion, and rising trade uncertainty.
- Sectoral developments:
  - Completion of large public investment projects and deterioration in business sentiment compressed investment.
  - Faltering confidence and moderating real wage growth slowed consumption.
  - Weaker oil and mining activity led to a contraction in industrial output and slowed services growth.
  - Agriculture rebounded as the effects of the 2024 drought dissipated.
  - Employment growth fell but lower labor force participation kept unemployment broadly unchanged.
- Trade exposure and tariff facts:
  - Trade with the U.S. represents 80 percent of total exports and 27 percent of GDP.
  - Introduction of U.S. tariffs would have raised the average tariff rate from 0.2 to about 13 percent under certain assumptions.
  - As of July, the applied effective tariff rate stood closer to 5 percent, reflecting increased use of USMCA preferences and potential implementation delays.
  - Lower-than-expected effective tariffs allowed exports to continue growing and eased some downside to broader economic activity.
- Macroeconomic resilience:
  - Long-standing strong macroeconomic fundamentals, institutional policy frameworks, and policy implementation underpinned resilience.
  - Reversal of the 2024 fiscal expansion helped keep sovereign spreads relatively low.
  - Central bank prioritization of lower inflation resulted in an appreciation of the currency.
  - Effective financial oversight contained financial system vulnerabilities.

### GIMF model simulations and estimated impacts
- Baseline assumptions:
  - U.S. tariffs on imports from other countries, as of end-August, are made permanent.
  - Increased use of USMCA preferences by Mexican exporters partially offsets the impact of new tariffs.
  - The effective average tariff on Mexican exports to the U.S. is assumed to reach around 9 percent going forward.
  - Monetary policy responds endogenously to inflation and the output gap; exchange rates adjust flexibly (except RMB).
- Estimated near-term direct effect of tariffs:
  - The near-term direct effect of the tariff is to reduce GDP by about 0.6 percent in the first three years.
- Trade policy uncertainty (TPU) effects:
  - A vector autoregressive model linking Mexico’s activity (IGAE) with U.S. TPU suggests an additional drag on output reducing GDP by 0.4 percent over three years.
- Combined estimated cumulative impact:
  - The combined effect points to a cumulative output loss of about 1 percent.
- GIMF: Estimated Impact on Output for Mexico (Percent level deviations from baseline):
  - Year 1: Tariffs impact -0.2; Trade uncertainty -0.2; Total impact -0.4
  - Year 2: Tariffs impact -0.6; Trade uncertainty -0.3; Total impact -0.9
  - Year 3: Tariffs impact -0.6; Trade uncertainty -0.4; Total impact -1.0

### Inflation, monetary policy, and communications
- Recent inflation dynamics:
  - Core inflation has remained elevated; dissipating drought effects contributed to a decline in headline inflation.
  - Gradual easing of core services prices was more than offset by rising core goods inflation, boosted by lagged effects of the 2024 exchange rate weakening and spillovers of food price shocks to core food items.
  - Core inflation has remained above the tolerance range.
- Central bank response:
  - The central bank has been steadily lowering the policy rate as inflationary pressures wane.
  - The policy rate has been cut by 375 bps since early-2024.
  - This brought the ex-ante real rate to 3.6 percent, the upper bound of the estimated range for the neutral rate.
  - Inflation expectations have fallen but end-2025 inflation expectations remain modestly above the central bank’s tolerance range; longer-term expectations are about 60 bps above target.
- Outlook for inflation and policy:
  - Inflation is expected to converge to the central bank’s target in the second half of 2026.
  - Monetary easing is expected to continue with the policy rate returning to the middle of the estimated range for neutral during 2026.
- Communication guidance:
  - Staff recommends publishing baseline and alternative scenarios with key macro variables and associated policy rate paths to clarify policy reaction function, and providing more information on assumptions and expected timeframes for returning to neutral.

### Fiscal position, Plan Mexico, and state-owned enterprises
- 2024–2026 fiscal dynamics:
  - In 2024, the government relied on an escape clause and increased the deficit to 5.7 percent of GDP (from 4.3 percent in 2023).
  - This allowed for a 1½ percent of GDP increase in spending on infrastructure projects, subsidies and transfers.
  - Gross public debt rose to around 58 percent of GDP at end-2024.
  - The new administration targeted a deficit of 3.9 percent of GDP for 2025 and achieved significant consolidation as of July by compressing capital spending and strengthening revenue administration.
  - The draft 2026 budget projects the 2025 deficit will reach 4.3 percent of GDP, reflecting a shortfall in oil revenues.
  - Sovereign financing costs have generally fallen since 2024; the government issued new benchmark (5–30 year) bonds in early- and mid-2025.
- Plan México (overview of reforms to 2030):
  - Objectives: facilitate private investment; address infrastructure gaps; support strategic sectors.
  - Facilitating private investment:
    - National digital platform to streamline public services and business creation.
    - Faster expensing for certain fixed capital investments in high-tech sectors and for R&D.
    - Firms may deduct 25 percent of incremental workforce training costs undertaken with academic and research institutions.
    - Increase SMEs access to credit by 30 percent by 2030 via greater competition and public provision/guarantees.
  - Addressing infrastructure gaps:
    - Completion of four new airports and upgrades to eleven ports; interoceanic rail corridor on the Isthmus of Tehuantepec.
    - Increase domestic production of gasoline, diesel, and jet fuel by 30 percent and add 22GW in electricity generation capacity by 2030.
    - Over 1 percent of GDP to be spent on new power plants, transmission upgrades, and distribution; almost 6 percent of GDP earmarked for investment in PEMEX.
  - Supporting strategic sectors:
    - Increase domestic content in textiles, footwear, furniture, clothing, toys, steel, and aluminum.
    - Tariffs introduced on low-value shipments from countries without trade agreements.
    - Draft bill considers raising tariffs on car imports to 50 percent for countries without a trade agreement.
    - Pharmaceuticals firms required to operate a domestic plant to qualify for public procurement; public procurement contracts to require at least 65 percent domestic content.
- Fiscal consolidation targets and staff preference:
  - Authorities’ consolidation plan targets PSBR of 4 .1  percent of GDP for 2026, 3.5 percent of GDP for 2027, and 3 percent of GDP thereafter.
  - Staff note: this plan would lead to a steady rise of debt over time, reaching 61.5 percent of GDP by 2030.
  - Staff preferred consolidation: target a PSBR of 2.5 percent of GDP by 2027 and thereafter; permanent measures of about 1½ percent of GDP would be needed to reach staff’s preferred path.
  - Staff cautions against relying heavily on reduction in interest cost and keeping capital investments low.
- PEMEX and CFE:
  - Pemex: declining production and inefficient refineries resulted in losses and accumulation of debt with suppliers; large debt amortizations are due in 2026.
  - Authorities changed Pemex’s legal status, simplified its tax regime, consolidated subsidiaries, and launched a business plan aimed at self-sufficiency by 2027.
  - Key measures for Pemex: ramp up hydrocarbon and petrochemical output (including private partnerships), enhance refining efficiency, lower personnel and current expenditures, improve procurement, and reduce financial costs and short-term financing pressures.
  - Support included issuance of pre-capitalized notes by a nonresident SPV to allow Pemex to retire more expensive debt.
  - CFE reclassified as a public state-owned company; new secondary legislation mandates that CFE generates at least 54 percent of all electricity provided to the grid.

### Financial conditions, inclusion, and FSAP recommendations
- Credit and financial sector:
  - Despite restrictive monetary conditions, consumer and corporate credit have been expanding since 2023.
  - Credit growth supported by fintechs and rebalancing from external to domestic borrowing by corporates.
  - Access to financial services remains limited and Mexico’s financial sector is small compared to peers.
  - Financial supervision and regulation remain robust.
- Banking system soundness (selected exact figures, June/latest values):
  - Commercial banks: 44 percent of assets (share of intermediation).
  - Regulatory capital to risk-weighted assets: 20.0 (June).
  - Regulatory Tier 1 capital to risk-weighted assets: 17.9 (June).
  - Nonperforming loans to total gross loans: 2.1 (June).
  - Return on assets: 2.7 (June).
  - Return on equity: 17.7 (June).
  - Liquid assets to short-term liabilities: 114.8 (June).
- FSAP key recommendations (high-level):
  - Enhance autonomy and legal protection of supervisors; assess agency resourcing.
  - Develop and publish a macroprudential policy strategy; consider expanding toolkit (LTV, DSTI).
  - Strengthen consolidated supervision, refine risk-based supervision, and bolster crisis-management tools (P&A, bridge banks, bail-in powers).
  - Continue developing cybersecurity strategy and conduct cyber crisis simulations; draft cybersecurity framework expected in Q1 2026.
  - Issue supervisory climate-related guidance and disclosure requirements; CNBV amended regulations in January 2025 to require sustainability-related disclosures aligned with ISSB S1 and S2.
  - Broaden scope of regulated fintech activities and finalize open finance implementation; draft minimum capital rule for fintechs expected by end-2025.

### Outlook, external sector, and risks
- Growth projections:
  - Growth is projected to slow to 1 percent in 2025 due to domestic policy restraint, shifting U.S. trade policies, and weakening U.S. demand.
  - Activity is expected to accelerate somewhat in 2026 as domestic policies provide less of a headwind, offset in part by tariffs and lingering trade uncertainty.
  - The economy is expected to return to its long-term average growth by 2027.
  - A medium-term output loss of about 1 percent (in level terms) from higher U.S. tariffs and trade uncertainty is embedded into staff projections.
- External sector and reserves:
  - Current account balance expected to weaken over the medium term; near-term strengthening from weak domestic demand is expected to unwind.
  - Reserve buffers rose to about US$ 232 billion (or 135 percent of ARA metric) by end-2024 and are expected to remain adequate in the medium term.
- Risks (selected):
  - Downside risks: more pronounced U.S. slowdown; larger-than-expected U.S. tariffs or tighter USMCA conditions; drastic migration shifts reducing remittances; rising global risk aversion; insufficient fiscal consolidation.
  - Upside risks: stronger U.S. growth or agreement to lower tariffs; greater firm adaptability under USMCA; Plan Mexico yielding larger private investment.
  - Inflation risks: services prices unresponsive to demand slowdown; reversal of disinflation from food prices; downward pressure on the peso increasing goods prices; inability of inflation expectations to return to 3 percent.
- Downside scenario (aligned with October 2025 WEO Scenario A):
  - Four-layer shock: (i) higher U.S. tariffs and supply chain disruptions; (ii) higher inflation expectations in the U.S. and in emerging markets (excluding China); (iii) tighter global financial conditions and higher sovereign yields; and (iv) decline in global demand for U.S. assets.
  - Policy guidance under this scenario: allow automatic stabilizers to operate; support with limited and temporary fiscal loosening accompanied by a credible medium-term consolidation plan; carefully weigh policy rate reductions against risks to inflation expectations.

### Annex I — External Sector Assessment (key figures)
- NIIP and reserves:
  - NIIP: -32 percent of GDP in 2024 (improved from -42 percent in 2023).
  - Foreign assets in 2024: mostly direct investment (14 percent of GDP) and international reserves (12½ percent).
  - Gross liabilities in 2024: direct investment (42 percent of GDP) and portfolio investment (25¼ percent).
  - Staff projects NIIP to about -30 percent of GDP over the medium term.
  - Gross international reserves at end-2024: $232 billion (12½ percent of GDP); reserves adequacy: 135 percent of the ARA metric and 309½ percent of short-term debt (at remaining maturity).
- Current account:
  - CA deficit widened to 0.9 percent of GDP in 2024.
  - EBA model estimates cyclically-adjusted CA balance of -0.5 percent of GDP and EBA norm of -1.3 percent of GDP.
  - Staff 2024 CA gap midpoint: 0.8 percent of GDP (range 0.4 to 1.2 percent of GDP).
- Real exchange rate:
  - Peso average depreciation in 2024: 3 percent vs. 2023; end-of-period change nearly 20 percent due to sharper depreciation in H2 2024.
  - As of July 2025, REER stood about 1½ percent lower than its 2024 average.
  - Staff CA gap implies REER undervaluation of 2.3 percent in 2024; overall assessment: REER undervaluation in range 1.1 to 3.5 percent, midpoint 2.3 percent.

### Annex IV — Debt and DSA baseline (selected exact series)
- Public debt (percent of GDP):
  - Actual 2024: 58.3
  - 2025: 58.9
  - 2026: 59.9
  - 2027: 60.7
  - 2028: 61.0
  - 2029: 61.2
  - 2030: 61.5
- Change in public debt:
  - 2024: 5.7
  - 2025: 0.5
  - 2026: 1.1
  - 2027: 0.8
  - 2028: 0.3
  - 2029: 0.3
  - 2030: 0.2
- Primary deficit (percent of GDP):
  - 2024: -0.2
  - 2025: -1.5
  - 2026: -1.6
  - 2027: -1.8
  - 2028–2034: -1.8 (each year)
- Gross financing needs (percent of GDP):
  - 2024: 14.5
  - 2025: 13.6
  - 2026: 14.5
  - 2027: 14.4
  - 2028: 15.1
  - 2029: 16.4
  - 2030: 15.6
- Memo: Real GDP growth (percent):
  - 2024: 1.4
  - 2025: 1.0
  - 2026: 1.5
  - 2027: 2.0
  - 2028–2034: 2.1 (each year)
- Memo: Inflation (GDP deflator; percent):
  - 2024: 4.9
  - 2025: 5.2
  - 2026: 4.5
  - 2027–2034: 3.4 (each year)

### Annex VI — Tariff scenarios and sectoral impacts (selected exact outcomes)
- Model and scenarios:
  - Static general equilibrium trade model (CFRT, 2023) over 60 countries and 19 sectors with heterogeneous firms and IO linkages.
- Effective tariff outcomes by scenario (exact figures):
  - Universal tariffs: about 13 percent effective tariff for Mexico (assuming no change in USMCA preference utilization).
  - Tightening ROO (10 percentage point increase): effective tariff ~14 percent.
  - U.S. content restriction: effective tariff ~16.6 percent.
  - USMCA content restriction (tariffs on non-USMCA content only): effective tariff ~5.8 percent.
  - Increased USMCA utilization to 85 percent: effective tariff ~4.3 percent.
- Aggregate impacts:
  - Scenario 1 (Universal tariffs; Mexico effective tariff ~13 percent): exports decline by 6 percent.
  - Scenario 2 (Tighter ROO): export and output losses about 2 times Scenario 1.
  - Scenario 3 (U.S. content restriction): output losses nearly 3 times Scenario 1.
  - Scenario 5 (Higher U.S. tariffs on non-USMCA partners, e.g., doubling): can more than fully offset the negative direct impact on Mexico.
  - Illustrative tariff profile: a U.S. tariff regime of 45 percent on China and 15 percent on other countries would roughly offset adverse impact of current tariffs on Mexico.
- Sector heterogeneity:
  - Automotive: high USMCA content, less exposed.
  - Electronics: relies more on non-regional content, significantly exposed to tighter ROO and content restrictions.

### Annex VII — Migration and remittances (selected observations)
- Geographic concentration:
  - Most Mexican migration flows concentrated in California, Texas, and Florida; largest remittance flows originate from California, Texas, and Arizona.
- Remittances and state dependence:
  - States with highest migration rates also exhibit high poverty rates (e.g., Veracruz, Oaxaca, Chiapas) and some rely increasingly on remittances.
  - Remittances have outpaced growth in average state income in Oaxaca and Chiapas (indices 2005=100, 2005–2022 series reported).

### Minimum wage analysis and labor market modeling (Annex XI and model results)
- Minimum wage changes and context:
  - Minimum wage increased by 125 percent in real terms since 2018; nominal increase since 2018: 215 percent.
  - Minimum-to-median wage ratio rose from around 0.42 in 2018 to above 0.68 by 2023.
  - October 2024 constitutional reform: annual minimum wage increases at least as high as prevailing inflation.
  - Administration plan: increase nominal minimum wage by close to 12 percent per year until 2030 to reach 2.5 times the basic consumption basket (about 10,000 pesos or US$500 per month).
  - Projected labor share at or below minimum wage: increase from 19 percent of the workforce in 2024 to about 35 percent by 2030.
- Empirical findings and models:
  - Microdata: ENOE, 2016Q1–2024Q4, 26 non-border states; identification via 2016–17 “bite”.
  - Rising minimum wages up to 2024 did not have material adverse effects on participation, employment, hours, or formalization across most- versus least-exposed state groups.
  - Two calibrated quantitative labor market models confirm current minimum wage levels may have limited impact given small number of formal workers affected.
  - Projected increases along authorities’ plan, without equivalent productivity gains, likely to have material side effects on output, employment, informality, and inequality.
- Policy recommendation:
  - Carefully monitor labor market developments before implementing future minimum wage hikes; investigate whether reported low formal wages at the bottom reflect mismeasurement or weak enforcement.

*International Monetary Fund — 1mexea2025001-source-pdf: "Near-Term Impact of Tariffs and Trade Policy Uncertainty on Mexico"*

### 1. Near-Term Impact of Tariffs and Trade Policy Uncertainty on Mexico __________________________ 5

### 1. Near-Term Impact of Tariffs and Trade Policy Uncertainty on Mexico

### Recent developments and key findings
- Economic activity has been soft since mid-2024 due to binding capacity constraints, restrictive monetary policy, unwinding of the 2024 fiscal expansion, and rising trade uncertainty.
- Specific sectoral developments:
  - Completion of large public investment projects and deterioration in business sentiment compressed investment.
  - Faltering confidence and moderating real wage growth slowed consumption.
  - Weaker oil and mining activity led to a contraction in industrial output and slowed services growth.
  - Agriculture rebounded as the effects of the 2024 drought dissipated.
  - Employment growth fell but lower labor force participation kept unemployment broadly unchanged.
- Trade exposure and tariff effects:
  - Trade with the U.S. represents 80 percent of total exports and 27 percent of GDP.
  - The introduction of U.S. tariffs would have raised the average tariff rate from 0.2 to about 13 percent under certain assumptions.
  - As of July, the applied effective tariff rate stood closer to 5 percent, reflecting increased use of USMCA preferences and potential implementation delays.
  - Lower-than-expected effective tariffs allowed exports to continue growing and eased some downside to broader economic activity.
- Macroeconomic resilience:
  - Long-standing strong macroeconomic fundamentals, institutional policy frameworks, and policy implementation underpinned resilience.
  - Reversal of the 2024 fiscal expansion helped keep sovereign spreads relatively low.
  - Central bank prioritization of lower inflation resulted in an appreciation of the currency.
  - Effective financial oversight contained financial system vulnerabilities.

### GIMF model simulations and estimated impacts
- Baseline assumptions:
  - U.S. tariffs on imports from other countries, as of end-August, are made permanent.
  - Increased use of USMCA preferences by Mexican exporters partially offsets the impact of new tariffs.
  - The effective average tariff on Mexican exports to the U.S. is assumed to reach around 9 percent going forward.
  - Monetary policy responds endogenously to inflation and the output gap; exchange rates adjust flexibly (except RMB).
- Estimated near-term direct effect of tariffs:
  - The near-term direct effect of the tariff is to reduce GDP by about 0.6 percent in the first three years.
- Trade policy uncertainty (TPU) effects:
  - A vector autoregressive model linking Mexico’s activity (IGAE) with U.S. TPU suggests an additional drag on output reducing GDP by 0.4 percent over three years.
- Combined estimated cumulative impact:
  - The combined effect points to a cumulative output loss of about 1 percent.
- GIMF: Estimated Impact on Output for Mexico (Percent level deviations from baseline):
  - Year 1: Tariffs impact -0.2; Trade uncertainty -0.2; Total impact -0.4
  - Year 2: Tariffs impact -0.6; Trade uncertainty -0.3; Total impact -0.9
  - Year 3: Tariffs impact -0.6; Trade uncertainty -0.4; Total impact -1.0

### Inflation and monetary policy
- Recent inflation dynamics:
  - Core inflation has remained elevated; dissipating drought effects contributed to a decline in headline inflation.
  - Gradual easing of core services prices was more than offset by rising core goods inflation, boosted by lagged effects of the 2024 exchange rate weakening and spillovers of food price shocks to core food items.
  - Core inflation has remained above the tolerance range.
- Central bank response:
  - The central bank has been steadily lowering the policy rate as inflationary pressures wane.
  - The policy rate has been cut by 375 bps since early-2024.
  - This brought the ex-ante real rate to 3.6 percent, the upper bound of the estimated range for the neutral rate.
  - Inflation expectations have fallen but end-2025 inflation expectations remain modestly above the central bank’s tolerance range; longer-term expectations are about 60 bps above target.
- Outlook for inflation and policy:
  - Inflation is expected to converge to the central bank’s target in the second half of 2026.
  - Monetary easing is expected to continue with the policy rate returning to the middle of the estimated range for neutral during 2026.

### Fiscal position and state-owned enterprises
- Fiscal developments and indicators:
  - In 2024, the government relied on an escape clause to their fiscal rule and increased the deficit to 5.7 percent of GDP (from 4.3 percent in 2023).
  - This allowed for a 1½ percent of GDP increase in spending, particularly for infrastructure projects, subsidies and transfers.
  - Non-oil revenues were boosted by increases in formal employment and wages; hydrocarbon revenues declined sharply due to lower oil production and falling natural gas prices.
  - Gross public debt rose to around 58 percent of GDP at end-2024.
  - The new administration targeted a deficit of 3.9 percent of GDP for 2025 and achieved significant consolidation as of July by compressing capital spending and strengthening revenue administration.
  - The draft 2026 budget projects the 2025 deficit will reach 4.3 percent of GDP, reflecting a shortfall in oil revenues.
  - Sovereign financing costs have generally fallen since 2024; the government issued new benchmark (5–30 year) bonds in early- and mid-2025 which helped meet the bulk of annual foreign-currency financing needs.
- State-owned enterprise finances:
  - Pemex’s declining production and inefficient refineries resulted in losses and a significant accumulation of debt with suppliers, part of which is in arrears; large debt amortizations are due in 2026.
  - Authorities changed Pemex’s legal status, simplified its tax regime, consolidated subsidiaries, and launched a business plan aimed at turning Pemex self-sufficient by 2027.
  - Key Pemex measures include ramping up hydrocarbon and petrochemical output (including through private sector partnerships), enhancing refining efficiency, lowering personnel and current expenditures, improving procurement processes, and reducing financial costs and short-term financing pressures.
  - Support was granted through issuance of pre-capitalized notes by a nonresident special purpose vehicle to allow Pemex to retire more expensive debt.
  - The state-owned electricity company (CFE) was similarly reclassified as a public state-owned company; new secondary legislation mandates that CFE generates at least 54 percent of all electricity provided to the grid.

### Financial conditions and access to finance
- Credit and financial sector:
  - Despite restrictive monetary conditions, consumer and corporate credit have been expanding at a healthy pace since 2023.
  - Credit growth was supported by structural broadening of financial services to previously underbanked populations, including via fintechs, and some rebalancing from external to domestic borrowing by corporates.
  - Access to financial services remains limited and Mexico’s financial sector is small compared to peers.
  - Financial supervision and regulation remain robust.

### Outlook and risks
- Growth projections:
  - Growth is projected to slow to 1 percent this year due to domestic policy restraint, shifting U.S. trade policies, and weakening U.S. demand.
  - Activity is expected to accelerate somewhat in 2026 as domestic policies provide less of a headwind, offset in part by tariffs and lingering trade uncertainty.
  - The economy is expected to return to its long-term average growth by 2027.
  - A medium-term output loss of about 1 percent (in level terms) from higher U.S. tariffs and trade uncertainty is embedded into staff projections.
- External sector and reserves:
  - Mexico’s current account balance is expected to weaken over the medium term.
  - A near-term strengthening of the current account—due to weak domestic demand—is expected to unwind, accompanied by a mild deterioration of the trade balance and a gradual decline in remittances owing to changes in migration policies in the U.S.
  - The current account will remain slightly above its assessed norm due to lower-than-desirable investment.
  - Reserve buffers rose to about US$ 232 billion (or 135 percent of ARA metric) by end-2024 and are expected to remain adequate in the medium term.
- Risks (Annex II):
  - Downside risks to activity:
    - A more pronounced slowdown in the U.S.
    - A larger-than-expected impact of U.S. tariffs (including further increases or tighter conditions for trading under the USMCA).
    - Drastic changes in migration flows reducing remittances.
    - Rising global risk aversion triggering capital outflows and higher financing costs.
    - Insufficient fiscal consolidation raising financing costs and deterring investment.
  - Upside risks to activity:
    - Stronger growth in the U.S. or an agreement to lower tariffs (via a favorable USMCA review).
    - Greater-than-expected adaptability of firms to operate under USMCA and enter new markets.
    - Plan Mexico having a larger-than-expected effect on private investment and infrastructure gaps.
  - Inflation risks:
    - Service prices proving unresponsive to the demand slowdown.
    - Reversal of disinflationary effects from food prices.
    - Global uncertainties putting downward pressure on the peso, boosting goods prices.
    - Inability of inflation expectations to return to 3 percent.
- Downside scenario (in line with October 2025 WEO Scenario A):
  - Four-layer shock: (i) higher U.S. tariffs and supply chain disruptions; (ii) higher inflation expectations in the U.S. and in emerging markets (excluding China); (iii) tighter global financial conditions and higher sovereign yields; and (iv) a decline in global demand for U.S. assets.
  - Consequences: weaker external demand, reduced investor risk appetite, contraction in Mexico’s net exports, more constrained financing conditions, higher public debt, and a wider current account deficit.
  - Policy guidance in such a scenario: allow automatic stabilizers to operate, support with limited and temporary fiscal loosening accompanied by a credible medium-term consolidation plan; carefully weigh any policy rate reduction against risks of de-anchoring inflation expectations and undermining price stability.

### Authorities’ views
- Authorities agreed that activity is expected to remain subdued in the second half of 2025, followed by a recovery in 2026.
- They noted the economic impact of U.S. tariffs has been milder than initially anticipated and emphasized the current slowdown is being driven by temporary uncertainty, particularly around trade policy.
- Authorities anticipate a gradual rebound in household consumption and private investment as uncertainty fades, and expect the labor market—despite softening—to help sustain consumption.
- They underscored the economy’s resilience underpinned by strong buffers and a robust policy framework.

*International Monetary Fund — 1mexea2025001-source-pdf: "Near-Term Impact of Tariffs and Trade Policy Uncertainty on Mexico"*

### Box 2. Plan Mexico

### Box 2. Plan Mexico

### Overview
- Plan México is the current administration’s blueprint for reforms until 2030. The reforms aim at boosting growth through: facilitating private investment; addressing infrastructure gaps; and supporting strategic sectors.

### 1. Facilitating private investment
- Reducing regulatory burdens:
  - A national digital platform will allow users to access public services and streamline administrative procedures for business creation and tax registration leading to reduced documentation and faster review.  
- Faster expensing and training incentives:
  - Faster expensing for certain fixed capital investments in high-tech sectors and for R&D.
  - Firms may deduct 25 percent of incremental workforce training costs that are undertaken in partnership with academic and research institutions.
- Credit and supply chains:
  - Increasing SMEs access to credit by 30 percent by 2030 including through greater competition and direct provision or guarantees by development banks.
  - Improving domestic supply chains through training and marketing programs.

### 2. Addressing infrastructure gaps
- Transport:
  - Increased road infrastructure and better maintenance of existing roads, including through public-private partnerships, completion of four new airports and upgrades to eleven ports, and completion of several commuter lines and the interoceanic rail corridor on the Isthmus of Tehuantepec.
- Energy and water:
  - Increasing the domestic production of gasoline, diesel, and jet fuel by 30 percent and adding 22GW in electricity generation capacity by 2030.
  - Over 1 percent of GDP is to be spent on investment in new power plants, transmission upgrades, and distribution systems and almost 6 percent of GDP is earmarked for investment in PEMEX.
  - Sanitation and water projects are to be accelerated, especially in water-stressed areas.
- Digital infrastructure:
  - Investments in data centers, high-speed internet coverage, and digitalization of bureaucracy through Mexico’s new digital transformation agency.

### 3. Supporting strategic sectors
- Domestic content and trade measures:
  - Increasing the domestic content of textiles, footwear, furniture, clothing, toys, steel, and aluminum.
  - Tariffs have been introduced on low-value shipments of related products that are imported from countries without trade agreements with Mexico.
- Automotive and tariffs:
  - Increasing vehicle production and auto domestic value added by 10 and 15 percent, respectively.
  - A draft bill under consideration includes raising tariffs on a wide range of products across multiple sectors, including on car imports to 50 percent, for countries without a trade agreement with Mexico.
- Pharmaceuticals and procurement:
  - Pharmaceuticals firms will be required to operate a domestic plant to qualify for public procurement.
  - Public procurement contracts will require at least 65 percent of domestic content.

### Fiscal stance and consolidation needs
- Authorities’ consolidation plan targets:
  - PSBR of 4 .1  percent of GDP for 2026, 3.5 percent of GDP for 2027, and 3 percent of GDP thereafter.
  - Staff note: this plan would lead to a steady rise of debt over time, reaching 61.5 percent of GDP by 2030.
- Staff preferred consolidation:
  - A more ambitious and front-loaded consolidation—targeting a PSBR of 2.5 percent of GDP by 2027 and thereafter—would put debt on a declining path and create additional fiscal space.
- Required measures:
  - Permanent measures of about 1½ percent of GDP would be needed to reach staff’s preferred deficit path.
  - The authorities’ plan relies heavily on a reduction in interest cost and keeping capital investments low, which staff cautions against given Mexico’s need for growth-enhancing investment.

### Revenue mobilization and tax policy options
- Revenue administration priorities:
  - Focus on reducing high levels of informality and leakages from the VAT. Current focus on customs administration and improving inter-agency coordination.
  - Need for a clearer framework for addressing compliance shortfalls based on a detailed analysis of tax gaps, with concrete objectives for improving compliance through time.
- Tax policy options and potential yields (percent of GDP):
  - PIT: Lowering threshold of top bracket(s) and/or raising highest marginal rate — 0.1-0.5
  - Tightening limits for deductions — up to 0.13
  - Carbon tax: Gradually increasing floor to US$50 per ton by 2030; Include natural gas — around 1.5
  - Mining royalty: Expand to all minerals/raise rates — 0.2
  - Eliminate fiscal incentives at the borders — 0.4
  - Property tax — 0.75-1.2
  - Vehicle tax — 0.3
- Tax expenditures summary (Percent of GDP):
  - CIT 0.45 0.40 0.40
  - PIT 0.88 0.93 0.94
  - VAT 1.87 1.82 1.82
  - Fiscal Incentives 1.44 1.00 0.92
  - Total4.66 4.18 4.11
- Subnational tax reforms:
  - Increase property tax collections by updating the cadaster, strengthening coordination among municipality, state and national levels, and setting a minimum tax rate.
  - Establish a minimum rate for local vehicle taxes to free up federal fiscal space.

### PEMEX and contingent liabilities
- Strengthening PEMEX finances to reduce government support:
  - Plans to partner with private investors—particularly in deep-water production and exploration—to bring capital and technology.
  - Steps to reduce operational costs and smooth debt maturity profile.
  - Emphasized need for transparent and judicious implementation; selling non-core assets and scaling back investments in unprofitable activities.
  - Strengthening transparency and accountability through clear reporting of government support and aligning corporate governance with international best practice.

### Institutional fiscal framework reforms
- Shortcomings and proposed changes:
  - Current framework has flexibility in setting fiscal targets and frequent invocation of escape clauses, allowing an upward drift in public debt.
  - Propose refocusing the framework to target a medium-term level of debt, combined with an operational limit (a path for the PSBR).
  - Require a transparent description of the framework, corrective mechanisms to offset deviations, and more narrowly defined escape clauses.
  - Expand the existing spending rule to provide more comprehensive coverage of general government spending; reconsider the need for the balanced budget rule in conjunction with tightening other aspects of the framework.
  - Proposed exclusion of spending in human capital from the balanced budget calculation requires cautious implementation to avoid blurring current spending and investment.
  - Creating an independent fiscal council to provide independent public assessment of macro-fiscal forecasts, rules methodology, and ex-post compliance.
  - Plans to move government accounting to an accrual basis are welcome.

### Authorities’ views
- Commitments and emphasis:
  - Reaffirmed commitment to fiscal consolidation, meeting revised deficit targets for 2025 and 2026 and maintaining public debt at stable levels over the medium term.
  - Revisions reflect a temporary and prudent adjustment to accommodate external shocks and support domestic demand while protecting investment and social priorities.
  - Emphasized scaling up investment by mobilizing private sector participation and encouraging subnational investment.
  - Noted recent gains in revenue administration and spending efficiency; broader tax reform remains a medium-term option.
  - Pemex’s new strategic plan focused on efficiency, operational stability, and greater private participation to place the company on a sustainable path toward self-sufficiency.
  - Proposed amendments to fiscal framework include accrual recognition of committed expenditures (particularly in SOEs) and extending the golden rule to encompass investment in human capital with specific budget lines defined in secondary legislation.

### Monetary policy guidance
- Current stance and recommended approach:
  - After 375bps in rate reductions, monetary policy remains moderately contractionary.
  - Further monetary easing should be conditioned on clearer evidence that inflation is heading back to the central bank’s target.
  - Staff’s baseline projection envisions an additional 150 basis points of rate cuts by the second half of 2026, which would ensure that policy is broadly neutral at the point when inflation reaches the 3 percent target.
- Communication and transparency enhancements for Banxico:
  - Publish baseline and alternative scenarios with key macro variables and associated policy rate paths to clarify policy reaction function.
  - Provide more information on assumptions underpinning baseline projections, specify expected timeframe when policy rate will return to neutral, state the central bank’s assessment of the terminal policy rate, and clarify how inflation expectations are incorporated.
  - Tailor messages to different audiences and expand household surveys to gauge broader population’s understanding of monetary policy and inflation.
- Exchange rate guidance:
  - The exchange rate should continue to be a shock absorber.
  - FX interventions should be used sparingly—only when there are disruptions in market liquidity or clear problems in the functioning of the FX market—guided by the Integrated Policy Framework.

*Source: IMF staff summary of Box 2. Plan Mexico (from the provided PDF content).*

### 25.      Authorities’ views. The authorities see inflation on a downward path—supported by

### 1mexea2025001-source-pdf - 25.      Authorities’ views. The authorities see inflation on a downward path—supported by

### Monetary policy and inflation outlook
- Authorities see inflation on a downward path—supported by softening economic activity, declining services inflation, the expected fading of price pressures on core goods, and subdued pressures on non-core inflation—although the balance of risks remains tilted to the upside.
- Authorities recognized that inflation expectations remain above the target, but stressed that they are stable and reaffirmed their commitment to policy rate decisions that are consistent with achieving the inflation target during the forecast period.
- Authorities emphasized continuing to develop their communication strategy, while cautioning that publishing alternative scenarios or more explicit guidance on the policy rate path could be detrimental to flexibility and credibility of monetary policy when responding to shocks.
- Authorities reiterated that the flexible exchange rate continues to serve as a key shock absorber.

*Key policy stance*
- Policy decisions will be consistent with achieving the inflation target during the forecast period.
- Communication strategy to be developed further; caution against publishing alternative scenarios or explicit policy-rate paths.

### Banking system soundness and financial stability
- The banking system remains sound amidst low leverage.
- Recent assessments support the conclusions of the 2022 FSAP that systemic risks are contained and there are sizable margins to absorb shocks.
- Banks maintain high levels of capital and liquidity (well above regulatory thresholds), delinquencies are low, provisioning and profitability are high, and stress tests show that financial institutions are resilient to a pronounced economic slowdown.
- Both corporate and household leverage are low and there are no signs of stretched asset price valuations (including for housing).
- Bank exposure to the export sector appears low on average, although a small number of institutions faces higher concentration (which the regulator is closely monitoring), and indirect exposures, in particular in border regions, could represent pockets of vulnerabilities.
- Banks’ exposure to the public sector accounts for about one quarter of system assets.
- Corporate balance sheets are characterized by relatively low levels of debt and limited FX mismatches although a sustained decline in the receipts of exporters would represent a material credit risk.

*Intermediation structure (exact figures)*
- Commercial banks remain the most significant intermediary (44 percent of assets), followed by pension funds (20 percent), investment funds (13 percent), and insurance companies (8 percent).
- Banks' exposure to non-bank financial institutions remains low relative to their regulatory capital.

*Stress test findings*
- Banxico’s stress tests show that all banks would maintain capital adequacy ratios above the regulatory minima.
- Scenarios include (i) lower domestic consumption and investment; (ii) a slowdown in global economic activity; and (iii) an adjustment in sovereign and Pemex credit ratings.

### Public development institutions and credit policies
- Public development institutions should remain focused on addressing market failures.
- Authorities aim to increase credit to SMEs and mortgage loans by expanding the role of public financial institutions in the provision of loans and guarantees.
- INFONAVIT has been tasked with building 400,000 social housing units.
- To ensure appropriate risk taking and avoid crowding out of the private sector, public banks’ focus should be on providing partial guarantees and ‘second floor’ lending to commercial banks.
- Operations should be limited to market segments and products currently underserved by commercial banks.
- Lending conditions for private banks could be improved, including by enhancing the insolvency law, and strengthening creditor rights.
- Capital risk weights should continue to be calibrated to ensure financial stability while preserving room for credit expansion.
- INFONAVIT’s plans for real estate development projects would be better served by public tenders to private construction companies.
- The new, joint supervision of INFONAVIT (by the Ministry of Finance and the financial regulator) should ensure that lending standards are not diluted and the institution’s balance sheet remains healthy.

*INFONAVIT specifics*
- INFONAVIT’s liquidity position is strong thanks to the strong labor markets in recent years, and operating margins are positive, although NPL ratios have remained elevated after the pandemic.

### Financial inclusion, fintech, and digital payments
- Recent efforts have helped expand access to financial services but a significant share of the population remains unbanked and underinsured.
- Efforts to support fintech and promote the entry of new institutions have shown some early results.
- Mexico’s regulatory and financial inclusion policies have supported digital payment development, aided by interoperable systems such as SPEI and Cobro Digital (CoDi). However, widespread adoption remains limited because of underdeveloped technological infrastructure and low competition.
- Regulatory frameworks for fintechs and digital payments companies could be further strengthened.
- Initiatives to foster competition and equal access to financial information—like open banking—could help drive faster and more cohesive progress.
- Clear guidance on, and unified oversight of, the management of cyber risks would strengthen confidence in digital payments providers.
- Promoting financial literacy and access to financial services could help advance insurance penetration.

### Macroprudential and supervisory reforms (pending 2022 FSAP recommendations)
- The Countercyclical Capital Buffer (CCyB) has remained at 0 percent supported by a persistently negative credit gap in recent years. An enhanced framework could include establishing guiding principles for activating the CCyB.
- Setting limits on and monitoring household debt-service-to-income and loan-to-value ratios—which would not be binding at the current juncture—would allow for the timely identification of credit risks over time and promote credit extension by guiding financial institutions.
- Refining legal definitions and supervisory powers, enhancing inter-agency coordination, and updating disclosure requirements to support effective consolidated supervision of financial conglomerates.
- Ensuring adequate staffing and funding for regulators and improving legal protections for supervisors.
- Advancing risk-based and consolidated supervision, bolstering recovery and resolution planning, and refining the emergency liquidity assistance framework to better address evolving risks like cyber threats and climate-related vulnerabilities.
- Improving the bank resolution framework by:
  - (i) removing legal and operational barriers to the use of purchase and assumption (P&A) and bridge bank tools;
  - (ii) broadening the resolution regime to explicitly include financial holding companies to ensure comprehensive oversight and effective crisis management across financial groups;
  - (iii) granting the institutional framework for macroprudential policy full operational independence through improved resourcing of regulatory agencies and legal protection of supervisors.

### Authorities’ views on financial sector reform
- Authorities shared staff’s assessment of Mexico’s financial system's resilience and its limited exposure to the export sector.
- Authorities reaffirmed their commitment to strengthening financial oversight in line with FSAP 2022 recommendations, noting progress on managing cyber risks and implementing enhanced sustainability disclosure requirements, and highlighted continued efforts to strengthen the supervision of financial conglomerates.
- Given strong capital buffers and low leverage, as well as market practices with large down payments, the authorities do not see setting guidelines for the countercyclical capital buffer or thresholds for DSTI and LTV ratios as a near-term priority.
- Authorities concurred with the importance of promoting financial deepening and emphasized progress on simplifying capital market issuance procedures and advancing financial literacy.
- Authorities outlined plans to promote open banking and facilitate credit expansion—particularly for SMEs and mortgage borrowers—with support from public development banks.
- The authorities are committed to continue calibrating macro-prudential policies to ensure financial stability while promoting credit extension.

### Trade openness and growth strategy
- Increasing trade openness and ensuring a stable and predictable trade environment remains critical to sustaining growth.
- Trade has served as an important engine of growth for Mexico, with export-oriented sectors registering significantly stronger productivity gains.
- A broad strategy to deepen the impact of trade on the broader economy should include:
  - Addressing trade tensions. Mexico should continue to resolve trade tensions with the U.S., which should help stabilize investor confidence and maintain supply chain continuity.
  - Strengthening trade integration. Mexico should approach the upcoming USMCA review as an opportunity to deepen integration with the United States, aiming to enhance the benefits of regional trade while limiting potential negative spillovers.
  - Avoiding trade-distorting policies—like recently introduced and planned product-specific import duties—that are likely to be detrimental to the domestic economy. These can weaken productivity, distort resource allocation, and create negative spillovers to trading partners.
  - Advancing the diversification of trading partners including by capitalizing on the updated EU-Mexico trade agreement and exploring expanding trade with regional partners (e.g., Brazil).

### Structural reforms to boost potential growth
- Key priorities to boost potential growth include:
  - Improve the environment for private investment: enhancing governance, streamlining regulations, and addressing critical infrastructure gaps (especially in transport, water, energy, and digitalization). Some investments under Plan México would address these gaps while helping to tackle regional disparities. Policies to support strategic sectors should be focused on addressing market failures, be temporary, cost-effective, transparent and should not discriminate against trading partners.
  - Boost energy supply: Mexico’s energy reform includes steps to enhance grid reliability and expand renewable generation through greater private sector participation, but other elements raise concerns (see Box 4).
  - Close skills gaps and reduce labor market informality: greater investments in education, a lower administrative burden for those in the formal economy, increased enforcement of tax and labor laws, and greater access to affordable childcare (to boost female labor force participation).
  - Plans to further large increases of the minimum wage (12 percent annually until 2030) should be reconsidered due to potential adverse effects on employment and informality.
  - Tackle crime and insecurity: crime significantly raises business operating costs and hinders growth, with about a ¼ of firms and nearly 1/3 of households reporting being affected. Organized crime—particularly related to international drug trade—is prominently linked to rising violence and challenges to the rule of law. Efforts should be intensified through stronger international cooperation, enhanced intelligence sharing, and more effective efforts to combat drug trafficking.

### Anticorruption, AML/CFT, and judicial reforms
- Recent steps taken by anticorruption institutions need to be deepened.
- Transformation of the Secretariat of Public Administration into the Secretariat of Anticorruption and Good Governance (SESNA) is yet to show impact; verification of asset declarations is hampered by data protection provisions affecting risk-based audits.
- Access to information has been affected by fragmentation of institutions authorized to interpret relevant provisions and by the elimination of the National Institute for Transparency, Access to Information and Personal Data Protection (INAI) and the absorption of part of its powers by SESNA and the Secretariat of Digital Transformation.
- There is significant scope to move forward legal reforms, including adopting the whistleblower protection law which remains stalled in Congress, increasing funding and capacity for enforcement, and establishing robust guarantees of institutional independence.
- Mexico continues to face money laundering threats associated with organized crime:
  - Following the U.S. designation of three financial institutions as being of primary concern for money laundering, Mexico’s financial regulator promptly assumed control of these entities to preserve market confidence, and facilitate investigations and a controlled winding down of their assets.
  - Need to further strengthen domestic and international interagency coordination, operationalize the new beneficial ownership framework, enhance supervisory effectiveness across all sectors and ensure consistent parallel financial investigations.
  - Key vulnerabilities include the relatively low number of suspicious transaction reports, limited supervisory resources to address the expanding Fintech sector, weaknesses in sanctioning mechanisms for the banking sector, and insufficient resources for risk-based supervision.
  - Emerging typologies highlight infiltration of proceeds generated by organized crime in the non-financial sector, underscoring the need for dissemination of targeted operational and strategic intelligence and prompt supervisory and investigative responses.

- Mexico’s ongoing judicial reform should prioritize promotion of professionalism, independence, and accountability of the judiciary.
  - The June 2025 elections for federal and local judges marked a significant institutional shift intended to broaden democratic participation in the judicial system, but the process raised questions about voter turnout, ballot validity, and transparency of candidate selections.
  - Transition from a career-based appointment system to popular elections has introduced significant uncertainty about judicial independence and professional capabilities of newly elected judges.
  - Important to strengthen transparency in judicial decisions, reinforce integrity safeguards, and uphold core principles of judicial professionalism and accountability to ensure investor protection and contract enforcement.

### Authorities’ views on trade, AML/CFT, and institutional reforms
- Authorities emphasized the importance of maintaining a stable and rules-based trade environment and reiterated efforts to ease tensions and reduce uncertainty.
- Authorities viewed the recent product-specific import duties as a targeted measure aimed at addressing distortions, fostering domestic production of intermediate goods, and increasing domestic value added in exports.
- Authorities highlighted actions to improve the business climate, expand infrastructure, and strengthen public safety as central to enhancing long-term growth prospects.
- Authorities reiterated their commitment to reinforcing the AML/CFT framework, including through closer cross-border cooperation and improved enforcement—particularly in light of the upcoming FATF mutual evaluation.

### Energy reform institutional changes and targets (Box 4)
- The 2024 Energy Reform prioritizes energy security, sovereign control over the energy system, public ownership, and social responsibility.
- Reform creates a new National Energy Commission under the Ministry of Energy to replace the existing model of independent regulators.
- National Strategy for the Electricity Sector:
  - Investment plan to add close to 30 GW of generation capacity by 2030 (about 8 percent increase).
  - 22GW provided by the state-owned electricity company (CFE) and 8 GW by private investments in renewable energy.
  - CFE will also invest US$ 8.2bn in building transmission lines and substations across the country.
  - New regulations establish stricter reliability and backup requirements for private providers; changes to rules for self-generation offer greater flexibility for private projects.
- National Strategy for the Hydrocarbons Sector:
  - Reclassification of Pemex from a “productive” to a “public” state-owned enterprise.
  - Plans envisage vertical and horizontal integration of Pemex’s subsidiaries.
  - Target of 1.8 million barrels per day of oil by 2027 (compared to 1.7 million barrels per day in 2024).
  - Refining target of 1.3 million barrels per day.
  - Pemex expected to raise gas production to 5 billion cubic feet per day by 2028 (compared to 3.7 billion cubic feet per day in 2024).
  - Pemex is also expected to pursue projects in cogeneration, green hydrogen, alternative fuels and renewables.

*Staff appraisal and forward-looking emphasis*
- Continue calibrating macro-prudential policies to ensure financial stability while promoting credit extension, particularly for SMEs and mortgage borrowers, with measured involvement by public development banks.
- Implement pending FSAP recommendations to enhance resilience, supervisory capacity, and crisis-management tools.
- Prioritize structural reforms to raise potential growth, including addressing infrastructure gaps, energy sector transparency and accountability, skills and labor market reforms, and stronger rule-of-law and anticorruption frameworks.

*Italicized source attribution*
*Source: 1mexea2025001-source-pdf - 25. Authorities’ views. The authorities see inflation on a downward path—supported by (PDF).*

### 37.      Growth is expected to accelerate somewhat in 2026 as restraint  from fiscal and

### Growth is expected to accelerate somewhat in 2026 as restraint from fiscal and

### Growth outlook and external position
- Activity slowed in 2025 amid restrictive domestic policies and trade tensions.
- The economy has weathered trade uncertainty well, supported by continued preferential access to the U.S. market and a sustained track record of very strong macroeconomic fundamentals, institutional policy frameworks, and policy implementation.
- With a commitment to maintaining prudent policies going forward:
  - external buffers are expected to remain solid,
  - public debt is sustainable with a high probability,
  - the external position is in line with the level implied by medium-term fundamentals and desirable policies.

### Fiscal stance and public debt
- Authorities’ fiscal plans imply a gradual increase in the debt-to-GDP ratio—reaching 61.5 percent of GDP by 2030.
- The plans carry the risk of further increases in debt if the fiscal position is hit by slippages and adverse shocks.
- A more front-loaded and ambitious consolidation path is needed to:
  - enhance the credibility of fiscal plans,
  - prevent a further upward drift in public debt,
  - create valuable fiscal space for a counter-cyclical response if external risks are realized.
- Concrete measures of around 1½ percent of GDP are needed to underpin this consolidation.
- Given the need to protect social spending and growth-enhancing public investment, consolidation efforts will require mobilization of tax revenues through both further improvements in tax administration and tax policy changes.

### State-owned enterprises and Pemex
- Strengthening the financial health and profitability of state-owned enterprises is essential to lowering the public debt-to -GDP ratio.
- Plans to put Pemex on a stronger footing—through private partnerships, cost reductions, and stronger debt management—are welcome.
- Transparent and judicious implementation, including by showing a firm commitment to commercial objectives and scaling back unprofitable activities, will be key.

### Medium-term fiscal framework
- The design of the medium-term fiscal framework should be strengthened by:
  - adopting a binding medium-term debt anchor and corrective mechanisms in the event of deviations from the targeted debt path,
  - tightening escape clauses,
  - creating an independent fiscal council.
- These changes would improve credibility, anchor expectations regarding debt and deficit trajectories, and reduce financing costs.
- Proposed reforms to specific aspects of the fiscal framework, such as the exclusion of spending in human capital from the calculation of the balance budget rule, should be approached carefully to ensure fiscal discipline and a strong link between the fiscal framework and debt sustainability are preserved.

### Monetary policy stance
- Further monetary easing should be conditioned on clearer evidence that inflation is decisively moving toward the 3 percent target.
- With inflationary pressures declining, weakening economic activity and the strengthening of the peso, the monetary easing of recent months has been appropriate.
- However, with core inflation still elevated and expectations above target, further interest rate cuts should be deferred until there is clear evidence that core inflation and inflation expectations are on a sustained downward path to the 3 percent inflation target.

### Monetary policy communications
- There is scope for improving monetary policy communications.
- The current framework has helped manage post-pandemic inflation and incorporates elements of forward guidance.
- Providing greater clarity on Banxico's policy reaction function—by publishing scenarios and associated policy rate paths—would help strengthen policy transmission and better anchor inflation expectations.
- Tailoring messages to different audiences would enrich Banxico’s communication toolkit and help guide the formation of expectations.

### Exchange rate policy
- The exchange rate should continue to be a shock absorber.
- The peso is supported by healthy external buffers and an external position that is broadly in line with fundamentals.
- With a deep and liquid FX market, limited balance sheet currency mismatches, sound macroprudential policies, and low exchange rate passthrough, continued exchange rate flexibility remains key to facilitate external adjustment especially in the context of heightened risks.

### Banking system, financial inclusion, and lending
- The banking system remains sound amidst low leverage.
- Efforts to foster financial inclusion and expand lending should focus on addressing market failures and promoting competition.
- Initiatives to promote competition, including through the entry of new private institutions, are welcome and should focus on establishing a level playing field between new and traditional financial institutions.
- Strengthening credit rights and reducing informality will be key to foster financial inclusion.
- Plans to boost SME and mortgage lending via increased loans and guarantees from public financial institutions should be transparent, mindful of the fiscal implications of such lending, and ensure space for private sector participation.

### Financial sector supervision
- Enhancements in financial sector supervision should continue.
- Continued implementation of the 2022 FSAP recommendations would further strengthen the macroprudential and supervisory frameworks.
- There is scope to strengthen interagency coordination and risk-based supervision, especially to ensure the effective investigation and prosecution of financial crimes and associated money laundering.

### Trade openness
- Preserving trade openness is key for sustaining growth.
- Addressing trade tensions with the U.S.—including through a favorable review of the USMCA—would support investor confidence and supply chain continuity.
- Trade-distorting measures, such as recent product-specific import duties, are likely to be detrimental to the domestic economy and impose negative spillovers on trading partners, and should be avoided.
- Expanding and diversifying trade partnerships would further strengthen Mexico's position in global supply chains.

### Supply-side constraints and growth
- Unlocking stronger growth requires addressing long-standing supply-side constraints.
- Priority should be given to closing infrastructure gaps—especially in energy, transport, telecommunications and water.
- Given fiscal constraints, private sector participation will be key, which will require improving the business climate by streamlining procedures and clarifying regulations.
- Support to strategic sectors, including under Plan Mexico, should be narrowly targeted, focused on addressing market failures, time-bound, and should avoid introducing barriers to trade and investment.
- Raising human capital and addressing low female labor force participation and informality remain essential.
- Plans to further increase the minimum wage and shorten the working week should carefully consider the potential impacts on employment and informality, particularly for low-income workers.

### Rule of law and governance
- Strengthening the rule of law is essential.
- Crime needs to be tackled through stronger international cooperation and more effective action against drug trafficking.
- Recent changes in regulatory bodies, the anti-corruption system, and the judiciary call for additional steps to dispel concerns about transparency, effectiveness, and autonomy of these institutions, all of which are critical for investor confidence.

*International Monetary Fund — Mexico country assessment (excerpt).*

### 49.      It is recommended that the next Article IV consultation take place on the standard 12-

### It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Real Sector: High-Frequency and Quarterly Indicators
- Economic activity has been decelerating, driven primarily by the industrial sector; indicators show:
  - Economic Activity IGAE (In percent, y/y, 3-m average): charted series shown for Jul-22 to Jul-25 (no numeric table values provided).
  - IGAE Construction Activity (Index, 3m moving avg.): charted series for Jun-22 to Jun-25.
  - Confidence Indicators (Index, 50+=Optimistic): Manufacturing and Consumer series for Jun-22 to Jun-25.
  - Consumption and Investment Indicators (In percent, y/y): Household Consumption and Gross Fixed Investment series for Jun-22 to Jul-25.
  - Exports and Imports to the U.S. (Index 2022=100, nominal US$, 3-m moving avg.): Exports and Imports series Aug-22 to Aug-25.
  - Cars Production (Volumes): Cars exports and Cars production series Aug-22 to Aug-25.
- Quarterly/annual real-sector summary indicators:
  - Global Indicator of Economic Activity (IGAE) (Index, 3m moving avg, SA): Total, Secondary activities, Tertiary activities displayed Jun-22 to Jun-25.
  - Supply Contributions to Growth (In percent, y/y SAAR): sectoral contributions (Services, Finance and Real Estate, Transportation, Retail, Manufacturing, Construction, Mining) Mar-24 to Jun-25.
  - Domestic and External Demand (In percent, y/y, SA, real terms): Exports and Domestic demand Jun-22 to Jun-25.
  - Investment (In percent, y/y, SA, real terms): Private investment and Public investment Jun-22 to Jun-25.
  - Consumption (In percent, y/y, SA, real terms): Total consumption, Private consumption, Public consumption Jun-22 to Jun-25.
  - 2025 GDP Growth Forecasts (In percent): 20-80th Percentile and Average for Jun-24 to Sep-25.

### Labor Market
- Unemployment remains at historically low levels although labor participation has weakened:
  - Labor Force Participation and Unemployment Rates (In percent, 3-m avg): series Jul-19 to Jul-25; Labor Force Participation (RHS) and Unemployment Rate plotted.
- Wages and employment:
  - Average Real Wages (In percent, y/y growth): Overall wages and Formal IMSS wages Jun-19 to Jun-25.
  - Minimum Wage and Formal Sector Salaries (Index, 2018=100, real terms): Minimum Wage and Total across sectors Jun-19 to Jun-25.
  - Total, Formal and Informal Employment (Index, 2015=100): Total, Formal, Informal Jun-19 to Jun-25.
  - Contributions to Employment Growth by Sector (In percent, y/y): Other, Services, Commerce, Construction, Manufacturing, Total and Historical avg. (2008-19Q2) Jun-22 to Jun-25.
  - Contributions to Employment Growth by Hours (In percent, y/y): < 35 hours and 35+ hours Jun-22 to Jun-25.

### Prices and Inflation
- Disinflation has mostly stalled in recent months:
  - Contributions to Headline Inflation (In percent, y/y, in deviation from target): Non-Core, Core, Headline Aug-19 to Aug-25.
  - Imported Goods Inflation (In percent, y/y): Jun-22 to Jun-25.
  - Nominal Exchange Rate (In Pesos/USD): Aug-22 to Aug-25 (series 16–21 shown).
  - Policy Rates (In percent): Real Neutral Rate, Policy Rate, Ex-ante Real Rate using 12-months ahead inflation expectations Aug-19 to Aug-25.
  - Inflation Expectations (In percent, y/y): Variability interval, 12 months ahead, 5-8 years ahead, Target Aug-19 to Aug-25.
  - Contributions to Core Inflation (In percent, y/y, in deviation from target): Services, Non-Food, Food, Core Aug-19 to Aug-25.
- Observations: core services inflation remains elevated, core goods inflation ticked up, imported inflation picked up, and there have been large currency movements; monetary policy remains contractionary despite recent cuts, and inflation expectations remain above the inflation target.

### External Sector
- Current account and trade:
  - Current Account Balance (In percent of GDP, 12-months rolling sum): series Jun-22 to Jun-25 showing broadly balanced current account.
  - Trade Balance (In percent of GDP, 12-months rolling sum): Petroleum products trade balance, Non-petroleum products trade balance, Balance of trade Jun-22 to Jun-25.
  - Exchange Rate (Index, 2019=100): Real effective exchange rate and Nominal (MXN/USD) Aug-22 to Aug-25.
  - Terms of Trade (Index, Jul 2022=100): Import prices, Export prices, Terms of trade Jul-22 to Jul-25.
- Flows and reserves:
  - Investment Flows (In percent of GDP, 12-months rolling sum): Portfolio Investment, Other investment Net balance, FDI Jun-22 to Jun-25.
  - Gross International Reserves (In USD billions): Jul-22 to Jul-25 series showing increase since last year.
- Observations: trade deficit has faded, helped by a somewhat weaker currency and stronger terms of trade; FDI remains healthy; gross international reserves have risen since last year.

### Fiscal Sector
- Public debt and fiscal dynamics:
  - Public Sector Debt (In percent of GDP): Gross public debt and Net public debt 2019–2027 plotted, indicating public debt rose sharply in 2024.
  - Expenditures (In percent of GDP): category breakdown (Others, Wages, Pensions, Capital) 2018–2024.
  - Revenues (In percent of GDP): Non-oil tax revenue, Oil revenue, Non-oil non-tax revenue 2018–2024; revenues remained flat with compositional shift.
  - Cumulative Overall Balance (In percent of GDP): monthly Jan–Dec series for 2021–2025 showing deterioration in 2024 and improvement/cumulative path in 2025.
  - Revenues and Expenditure (In percent, y/y, real growth - 3m moving avg.): Revenue and Expenditure Jan-22 to Jan-25.
  - Sovereign Local Currency Yield Curve (In percent): Cetes (avg.) 3Y 5Y 10Y 20Y 30Y dated 12/29/2023, 12/31/2024, 9/8/2025 shown.
- Policy path:
  - The 2025 consolidation is underway, reflecting strong contraction in expenditure and robust growth in non-oil revenues; financial conditions have improved.

### Financial Markets
- Exchange rate and yields:
  - Exchange Rate (Index, 2019=100): Real effective exchange rate and Nominal (MXN/USD) 2019–2025 plotted; after depreciation in 2024 the peso appreciated in 2025.
  - Local Government Bonds Yields (In percent): 1-Year, 4-Year, 10-Year, 20-Year Apr-20 to Apr-25 showing shorter-dated yields fell following policy cuts and yield curve steepened.
- Foreign participation and flows:
  - Sovereign Debt Holdings in Local Currency (In percent of GDP): Short-term (CETES) and Long-term series and Foreign Holdings % of LCU debt (RHS) 2015–2024.
  - Foreign Inflows in Local Currency Debt (30 day Moving Sum, MXN bn): Mbonos, Cetes, Bondes D, Udibonos, Total Dec-23 to Sep-25 showing tepid portfolio inflows and continued decline in foreign participation.
- Risk spreads:
  - Sovereign Risk Spreads (In basis points, 5Y CDS spread): Brazil, Colombia, Mexico Sep-20 to Sep-25 showing Mexico's sovereign spreads remain below peers.
  - Corporate Risk Spread (In basis points, CEMBI spread): Global, Latin America, Mexico Sep-20 to Sep-25 showing corporate spreads lower for Mexico.

### Banking System and Financial Soundness
- Banking sector metrics:
  - Commercial and Development Banking Sector (In percent): Return on equity, Capital to risk-weighted assets, Return on assets Apr-20 to Apr-25.
  - Capital to Risk-Weighted Assets (In percent, June 2025): Tier 1 Capital, Tier 2 Capital; all major banks exceed capital requirements (Basel III net capital requirement in Mexico shown).
- Credit and asset quality:
  - Commercial Bank Real Credit Growth by Sector (In percent, y/y): Companies, Consumption, Housing Jul-20 to Jul-25 showing some deceleration.
  - Development Bank Real Credit Growth by Sector (In percent, y/y): Companies, Consumption, Housing, States and municipalities Jul-20 to Jul-25; Development banks expanding corporate credit.
  - Commercial Bank NPLs (In percent): Companies, Consumers, Housing Jul-20 to Jul-25 — NPLs remain low among commercial banks.
  - Development Bank NPLs 1/ (In percent): Companies, Consumers, Housing Jul-20 to Jul-25 — NPLs remain low among development banks; note: 1/ increase in Development Bank's NPLs reflects changes in accounting criteria to adopt IFRS 9.
- Financial Soundness Indicators (selected latest values, percent unless indicated):
  - Regulatory capital to risk-weighted assets: 20.0 (June).
  - Regulatory Tier 1 capital to risk-weighted assets: 17.9 (June).
  - Nonperforming loans to total gross loans: 2.1 (June).
  - Return on assets: 2.7 (June).
  - Return on equity: 17.7 (June).
  - Liquid assets to short-term liabilities: 114.8 (June).

### Nonfinancial Corporate Sector
- Creditworthiness and leverage:
  - Interest Coverage Ratio (Earnings in multiples of Interest Expense, median): series 2015–2025Q1 (median around 4.0–7.5 range shown).
  - Total Debt to Total EBITDA (In percent, median): series 2015–2025Q1 (1.5–3.0 range shown).
  - Current Ratio (Current Assets to Current Liabilities, Multiples, median): series 2015–2025Q1 (1.0–1.8 range shown).
  - Debt Service to EBITDA (In percent): series 2016–2025 showing levels around mid-teens to high-teens.
- Market activity and maturities:
  - Hard Currency Issuance 1/ (In USD billions): series to 2025 (2025 refers to issuances up until May).
  - Nonfinancial Corporate Bond Maturity Profile (In USD billions, as of April 2025): maturities 2025-2027, 2028-2032, >2032 split by FX-denominated and Peso; most existing corporate debt comes due on or after 2028, contributing to subdued debt issuance.

### Social Indicators (Regional Context)
- Long-run outcomes (selected cross-country indicators, charts comparing BRA, CHL, COL, MEX, PER, URY, LAC6):
  - Poverty Headcount Ratio at $2.15 (In percent of population, 2017 PPP): declines over 1992–2022 shown; Mexico value in table below.
  - Poverty Headcount Ratio at $3.65 (In percent): declines over 1992–2022 shown.
  - Income Share Held by Highest 10 Percent (In percent): improvement indicated 1992–2022.
  - Infant Mortality Rate (per 1,000 live births): declines shown 1992–2022.
  - Share of Youth not in Education, Employment or Training (In percent of youth population): fell (2010, 2020, 2022).
  - Intentional Homicides (per 100,000 people): remain high (2010, 2020, 2022).

### Key National-Level Indicators and Projections (Table 1 and Summary Series)
- Headline national and social indicators:
  - GDP per capita (U.S. dollars, 2024): 14,034.2
  - Population (millions, 2024): 132.3
  - Life expectancy at birth (years, 2024): 75.5
  - Infant mortality rate (per thousand, 2023): 13.6
  - Poverty headcount ratio (% of population, 2023) 1/: 29.6
  - Income share of highest 20 perc. / lowest 20 perc. (2022): 8.4
  - Adult literacy rate (2020): 95.0
  - Gross primary education enrollment rate (2022) 2/: 102.0
- National accounts (Annual percentage change, selected series as they appear in table):
  - GDP6.03.73.41.41.01.52.02.12.12.1
  - Consumption7.14.44.02.60.51.82.12.02.02.0
  - Private8.44.84.32.80.41.72.12.02.02.0
  - Public-0.52.02.31.61.12.42.42.42.42.4
  - Investment11.47.315.73.3-5.11.23.12.82.82.8
  - Exports of goods and services7.19.5-7.23.36.61.02.73.94.04.0
  - Imports of goods and services15.78.63.72.81.62.63.33.84.04.0
- External sector and reserves:
  - External current account balance (in percent of GDP)-0.3-1.3-0.7-0.9-0.2-0.3-0.5-0.5-0.6-0.6
  - Gross international reserves (in billions of U.S. dollars)207.7201.1214.4232.1249.7259.0268.1276.4284.9293.0
- Inflation and monetary conditions:
  - Consumer prices (end-of-period)7.47.84.74.23.73.03.03.03.03.0
  - Core consumer prices (end-of-period)5.98.35.13.73.63.03.03.03.03.0
  - Monetary policy rate5.5010.5011.2510.007.506.006.006.006.006.00
- Labor and credit:
  - National unemployment rate (annual average)4.13.32.82.72.93.13.03.03.03.0
  - Financial system credit to non-financial private sector 7/4.210.98.711.34.05.05.55.65.65.6
  - Broad money9.57.311.013.85.55.85.55.65.65.6
- Public finances (in percent of GDP):
  - General government revenue22.924.224.224.624.224.224.224.324.324.3
  - General government expenditure26.728.528.530.328.528.327.727.327.327.3
  - Overall fiscal balance-3.7-4.3-4.3-5.7-4.3-4.1-3.5-3.0-3.0-3.0
  - Gross public sector debt 10/56.753.852.658.358.959.960.761.061.261.5
- Memorandum:
  - Nominal GDP (billions of pesos)26,69029,52631,93633,98136,08538,29940,42342,68445,05447,558
  - Output gap (in percent of potential GDP)-2.00.01.40.7-0.2-0.10.00.00.00.0

### Public Sector Operations and Fiscal Details (Table 2 Highlights)
- Budgetary Revenue, By Type (In percent of GDP):
  - Budgetary Revenue, By Type22.322.422.022.121.921.922.222.222.222.2
  - Oil revenue4.35.03.42.82.72.72.82.82.82.8
  - Non-oil tax revenue13.412.914.114.614.714.814.814.814.814.8
  - Non-oil non-tax revenue4.64.44.54.74.54.44.64.64.64.6
- Budgetary Expenditure (In percent of GDP)25.225.625.427.025.525.525.124.624.724.6
  - Primary22.722.822.223.622.022.722.522.522.622.8
  - Programmable19.219.218.519.818.218.918.818.818.919.1
  - Current14.814.914.915.915.415.615.916.016.216.4
  - Capital4.44.33.63.92.83.33.02.82.72.7
- Public Sector Borrowing Requirements3.74.34.35.74.34.13.53.03.03.0
- Memorandum items:
  - Structural current spending 9.89.910.010.8
  - Structural current spending real growth (y/y, in percent) -0.34.14.69.7

### Balance of Payments and External Financing (Tables 4a/4b Highlights)
- Summary Balance of Payments (In billions of U.S. dollars):
  - Current account-4.6-18.9-12.6-16.7-4.6-7.0-11.0-11.9-13.8-14.5
  - Merchandise goods trade balance-10.8-28.1-12.3-18.5-6.7-10.6-14.2-15.6-16.4-17.0
  - Exports, f.o.b.494.9577.7593.0617.7639.6644.9664.1695.5728.4763.1
  - Imports, f.o.b.505.7605.8605.3636.2646.3655.5678.3711.0744.7780.1
  - Secondary income (mostly remittances), net52.558.763.064.361.964.567.470.772.775.3
  - Financial Account (Net lending (+)/Net borrowing (-))-3.6-14.3-8.2-12.1-4.7-7.1-11.1-12.0-13.8-14.6
  - Foreign direct investment, net -35.8-21.7-30.2-32.3-18.6-22.2-25.8-30.8-36.5-37.9
  - Change in Reserves Assets10.3-1.77.613.917.69.39.18.38.48.2
  - International Investment Position, net-552.2-613.8-758.1-592.1-582.2-588.8-599.0-609.7-621.8-634.2
- Balance of Payments (In percent of GDP):
  - Current account-0.3-1.3-0.7-0.9-0.2-0.3-0.5-0.5-0.6-0.6
  - Exports, f.o.b.37.639.433.033.334.331.831.231.231.231.2
  - Imports, f.o.b.38.441.333.734.334.732.331.931.931.931.9
  - Financial Account (Net lending (+)/Net borrowing (-))-0.3-1.0-0.5-0.7-0.3-0.3-0.5-0.5-0.6-0.6

### External Vulnerabilities and Financial Indicators (Table 6 Highlights)
- Financial market indicators (period average, Aug-25):
  - Exchange rate (per U.S. dollar, period average): 20.117.818.319.7 (Aug-25)
  - 28-day treasury auction rate (percent; period average): 7.611.110.78.6 (Aug-25)
  - EMBIG Mexico spread (basis points; period average): 404.5377.7319.2304.7 (Aug-25)
  - Sovereign 10-year local currency bond yield (period average): 8.89.19.79.5 (Aug-25)
- External vulnerability metrics (latest/proj.):
  - Gross financing needs (billions of US$) 2/: 67.385.595.787.6 (Proj.)
  - Gross international reserves (end-year, billions of US$): 201.1214.4232.1247.5 (Jul-25)
  - Months of imports of goods and services: 3.63.83.94.1 (Proj.)
  - Percent of broad money (reserves adequacy): 31.826.531.028.5 (Proj.)
  - Gross total external debt (percent of GDP): 31.026.024.525.6 (Proj.)
  - External debt service (in percent of GDP): 5.85.55.65.5 (Proj.)

### Monetary and Banking Sector Aggregates (Table 7 Highlights)
- Banco de México (In billions of Pesos, selected rows):
  - Net foreign assets3,8763,9453,6403,3834,5364,504
  - Net international reserves3,9664,2573,9233,6324,8324,796
  - Net domestic assets-1,709-1,496-932-417-1,223-1,031
  - Monetary base 2,1182,4412,7002,9603,2933,473
- Other Depository Corporations and Total Banking System (selected):
  - Liquid liabilities10,69111,68812,54013,92315,82816,944
  - Bank credit to the non-financial private sector (as percent of GDP)27.726.126.025.326.626.0
- Monetary and credit growth rates (Memorandum Items):
  - Monetary base (percent change)21.615.210.69.611.25.5
  - Broad money (percent change)13.49.57.311.013.85.5
  - Bank credit to the non-financial private sector (growth rate)-4.54.610.15.211.84.0

*Sources: National authorities, INEGI, Haver Analytics, Banxico, Ministry of Finance and Public Credit, Bloomberg, Tullet Prebon, World Economic Outlook, World Bank Development Indicators, and IMF staff calculations.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall Assessment
- The external position in 2024 was broadly in line with the level implied by medium-term fundamentals and desirable policies.
- Mexico’s current account (CA) deficit widened slightly to 0.9 percent of GDP in 2024, reflecting a modest increase in the trade deficit.
- The CA balance is expected to improve in 2025, mainly reflecting weak domestic demand.
- Over the medium term, the CA balance is projected to stabilize at around -0.6 percent of GDP.
- Potential Policy Responses:
  - Structural reforms to boost investment in the medium to long term and maintain external balance, including: tackling infrastructure and governance gaps, reducing informality, promoting financial deepening, and increasing private sector participation in the energy sector.
  - Trade policies should seek to address trade tensions, promote clarity and transparency, and deepen economic integration.
  - Maintain a floating exchange rate as a shock absorber; use FX interventions only in exceptional circumstances to counter disorderly market conditions.
  - The IMF’s Flexible Credit Line with Mexico continues to provide an added buffer against global tail risks.
  - Ensuring fiscal sustainability is vital to buttress external stability.

### Foreign Asset and Liability Position and Trajectory
- Background:
  - The NIIP stood at -32 percent of GDP in 2024, improving from -42 percent in 2023, and compared to the -45 percent average during 2019-23.
  - While net transactions decreased slightly, the main driver was valuation adjustments from the depreciation of the peso, which led to a decline in the market value of Mexico’s liabilities in US dollar terms.
  - Foreign assets in 2024 were mostly direct investment (14 percent of GDP) and international reserves (12½ percent).
  - Foreign liabilities primarily consist of direct investment (42 percent of GDP) and portfolio investment (25¼ percent).
  - IMF staff projects the NIIP to slightly improve over the medium term to about -30 percent of GDP.
- Assessment:
  - The NIIP remains sustainable, with the relatively high share of local-currency denomination in foreign public liabilities limiting FX risks.
  - Gross foreign portfolio liabilities could be a source of vulnerability during global financial distress, although the share of foreign holdings in local debt markets has fallen considerably in recent years.
  - Vulnerabilities from exchange rate volatility are moderate, as most Mexican firms with FX debt have natural hedges and actively manage their FX exposures.
- Key 2024 (% GDP) figures:
  - NIIP: -32
  - Gross Assets: 43
  - Debt Assets: 13
  - Gross Liab.: 75
  - Debt Liab.: 32

### Current Account
- Background:
  - The CA deficit widened slightly to 0.9 percent of GDP in 2024, compared to the level observed in 2023, primarily reflecting a modest increase in the trade deficit.
  - The secondary income surplus remained robust, driven by remittances.
  - The expansion of the primary income deficit (owing to increased retained earnings paid to foreign firms) was offset by improvements in the service balance (owing to lower service imports).
  - The CA balance is expected to improve in 2025 and is projected to stabilize at around -0.6 percent of GDP over the medium term.
- Assessment:
  - The EBA model estimates a cyclically-adjusted CA balance of -0.5 percent of GDP and a cyclically-adjusted CA norm of -1.3 percent of GDP.
  - Based on the CA model, IMF staff estimates the 2024 CA gap midpoint at 0.8 percent of GDP, with a range of 0.4 to 1.2 percent of GDP.
  - The overall contribution from identified policy gaps is assessed to be -0.1 percent of GDP, with the negative contribution from the credit gap largely offset by positive contributions from other policy gaps, primarily from health expenditure.
  - Despite a notable domestic fiscal policy gap from loose fiscal policy, the contribution from the fiscal policy gap is zero, as Mexico’s fiscal policy gap is similar to the rest of the world.
  - The large residual may reflect country-specific or policy distortions not included in the model.
- Key 2024 (% GDP) figures:
  - CA: -0.9
  - Cycl. Adj. CA: -0.5
  - EBA Norm: -1.3
  - EBA Gap: 0.8
  - Staff Adj.: 0
  - Staff Gap: 0.8

### Real Exchange Rate
- Background:
  - The peso displayed a modest average depreciation of 3 percent against the US dollar in 2024 compared to 2023, although the end-of-period change was significantly larger (at nearly 20 percent) due to a sharper depreciation in the second half of 2024 (following the appreciating trend in 2023 and early 2024).
  - As of July 2025, the REER stood about 1½ percent lower than its 2024 average.
- Assessment:
  - The IMF staff CA gap implies a REER that was undervalued by 2.3 percent in 2024 (applying an estimated semi-elasticity of 0.33).
  - The EBA REER index and level models point to overvaluations of 5.7 percent and 24.3 percent.
  - Staff’s overall assessment for 2024, based on the CA gap approach, is a REER undervaluation in the range of 1.1 to 3.5 percent, with a midpoint of 2.3 percent.

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - In 2024, Mexico recorded net financial account inflows of 0.2 percent of GDP, slightly lower than 2023 (0.3 percent of GDP).
  - Net inflows of FDI remained stable at about 1.7 percent of GDP, partially offset by net portfolio outflows (0.4 percent of GDP) and other investment outflows (0.7 percent), as well as reserve accumulation.
- Assessment:
  - The long maturity of sovereign debt and the relatively high share of local-currency-denominated debt reduce exposure of government finances to FX depreciation and refinancing risks.
  - The banking sector is resilient, and FX risks of nonfinancial corporate debt are generally covered by natural and financial hedges.

### FX Intervention and Reserves Level
- Background:
  - The authorities remain committed to a free-floating exchange rate and have used FX intervention in limited occasions on extreme volatility, in line with their policy framework.
  - At the end of 2024, gross international reserves were $232 billion (12½ percent of GDP), up from $214 billion at the end of 2023.
  - No FX intervention was conducted.
- Assessment:
  - Mexico’s foreign reserves, at 135 percent of the ARA metric and 309½ percent of short-term debt (at remaining maturity), remain adequate at the end of 2024.
  - The Flexible Credit Line arrangement continues to provide an additional buffer.

### Risk Assessment Matrix — Selected Risks, Likelihood, Impact, and Policy Responses
- Global Risks:
  - Escalating Trade Measures and Prolonged Uncertainty.
    - Likelihood: High
    - Impact: High. Global trade disruptions affect Mexico’s exports and investment in Mexico, weakening economic activity.
    - Policy Response: Take advantage of proximity and GVC integration with the U.S.; foster compliance with USMCA requirements and certifications; promote trade diversification.
  - Commodity Price Volatility.
    - Likelihood: High
    - Impact: Medium. Energy and food price shocks contribute to inflation.
    - Policy Response: Monetary policy should respond if shocks feed into core inflation or inflation expectations become de-anchored.
  - Financial Market Volatility and Correction.
    - Likelihood: High
    - Impact: High. Spillovers to financial markets affect Mexico through tighter financial conditions and capital outflows.
    - Policy Response: Let exchange rate act as a shock absorber; tighten monetary policy, consistent with Banxico’s price-stability mandate, if inflation in Mexico is affected; frontload fiscal consolidation plans.
  - Geopolitical Tensions.
    - Likelihood: High
    - Impact: Low. While geopolitical tensions on average adversely affect the global economy, a reshaping of global supply chains could have a net positive impact for Mexico.
    - Policy Response: Strengthen governance, tackle corruption and crime, improve physical infrastructure, and mobilize private saving to fund private investments by expanding coverage of financial intermediation.
  - Cyberthreats.
    - Likelihood: High
    - Impact: Medium. High financial integration exposes Mexico to global threats; cyberattacks can also be of domestic origin.
    - Policy Response: Enhance cyber response and recovery capabilities; deploy established protocols in the face of cyberattacks.
  - Climate Change.
    - Likelihood: Medium
    - Impact: Low. Climate risks could disrupt energy and food systems and accelerate asset stranding if global decarbonization speeds up.
    - Policy Response: If lower oil prices create stranded assets, restrict Pemex projects to the most efficient fields and accelerate the transition to green energy, including the production of electrical vehicles.
  - New Trade Agreements.
    - Likelihood: Low
    - Impact: High. Greater trade policy certainty could boost Mexico’s exports and investment.
    - Policy Response: Promote clear, transparent, and non-discriminatory trade policies; avoid distorting measures; diversify trade partnerships.
  - Rising Social Discontent.
    - Likelihood: Medium
    - Impact: Medium. High living costs, weak growth, and inequality may fuel social unrest.
    - Policy Response: Increase and better target social transfers while offsetting the fiscal impact through savings in other areas; accelerate investment plans in low-income regions.
- Domestic Risks:
  - Slower-than-anticipated fiscal consolidation, leading to steady increase in public debt and an increase in country risk premiums.
    - Likelihood: Medium
    - Impact: Medium. A moderate risk of debt distress and the strength of the fiscal framework would dampen market stress.
    - Policy Response: Tighten monetary policy if price pressures are observed; resume the consolidation effort, especially if country risk premiums rise; strengthen the fiscal framework to enhance credibility of future plans.

*IMF staff assessment as presented in Annex I. External Sector Assessment.*

### Annex III. Key FSAP Recommendations

### Annex III. Key FSAP Recommendations

### Cross-Cutting Themes
- Enhance the autonomy of regulatory government agencies and legal protection of supervisors.
  - CNBV maintains a trust fund to support legal defense for its supervisory staff.
- Assess and enhance the organizational structure and resource needs of individual agencies.
  - Efforts are underway to address fragmented supervision, particularly in the context of open finance, where coordination across agencies remains a challenge.
  - Authorities are advancing reforms under the principle of “same risk, same regulation”, aiming to harmonize regulatory treatment across financial entities.
- Enhance the oversight of the Interbank Electronic Payment System (SPEI) relative to the PFMI and cybersecurity.
  - Banxico is evaluating the creation of an independent oversight unit within the Directorate General of Payment Systems and Market Infrastructures.
  - In December 2024, Banxico published its 2024–27 Cybersecurity Strategy (Estrategia de Ciberseguridad 2024–27). Full alignment with PFMI remains work in progress.

### Systemic Risk Analysis
- Monitor the dynamics of contingent credit lines and portfolio concentration closely and use Pillar 2 requirements to address relevant risks, as needed.
  - Authorities are monitoring contingent credit lines and working to improve their regulatory reporting.
  - Laws and initiatives such as LEX, the Total Loss-Absorbing Capacity (TLAC) and the capital supplement for local systemic institutions allow for differentiation of Systemically Important (SI) institutions.
  - Basel Pillar 2 is not yet in place for a few smaller banks with high concentration and reliance on large corporate clients.
  - The possibility for CNBV/Banxico to supervise financial conglomerates on a consolidated basis remains work in progress as it requires legal changes and no draft legislation is currently in place.
- Expand the liquidity stress test framework; incorporate in the Supervisory Review Process to inform Pillar 2 requirements for banks.
  - Banxico and CNBV require annual stress tests to assess resilience against systemic and idiosyncratic shocks.
  - In 2022Q4 Banxico implemented a liquidity stress test based on cashflows and maturity ladder, and the distance to liquidity stress indicator.
  - In 2023, the stress test was expanded to include concentration risks.
  - Since 2024, Banxico is actively working on a system-wide credit and liquidity stress tests.

### Financial Sector Oversight
- Develop and publish a macroprudential policy strategy.
  - Authorities continue to work on a review of macroprudential strategies. The development or publication of a macroprudential policy strategy remains pending.
- Consider expanding the macroprudential toolkit with limits on loan-to-value and debt-service-to-income ratios.
  - LTV and DSTA ratios are not in place.
  - The CCyB has remained at 0%, as authorities judge its activation as low priority, supported by a persistently negative financing gap in recent years (FSAP Technical Note).
- Ensure effective consolidated supervision of financial holding companies.
  - CNBV monitors indirect risks from non-regulated financial entities by overseeing ownership links and all related-party transactions, even if these are excluded from net capital calculations.
  - Large Exposures Framework (LEX) facilitates the exposures’ diversification in common risk groups, including those that correspond to non-regulated financial entities belonging to the same control group.
  - CNBV and other supervisory commissions use both the Financial Groups Law and the Financial System Stability Council (CESF) mandating consolidated supervision for financial groups, their member entities, and affiliated companies.
  - Authorities have established information-sharing mechanisms; safeguards include exposure limits and minimum requirements for related-party transactions.
  - CNBV can request relevant data and take precautionary actions—such as imposing additional capital requirements—if any group entity faces insolvency, illiquidity, or is subject to financial intervention.
- Refine the risk-based supervisory methodology (CEFER) to effectively assess banks’ adherence to adequate risk management practices.
  - Efforts are underway to streamline risk indicators and place greater emphasis on expert judgment in evaluating mitigants.
  - CNBV is analyzing the suitability of using the CEFER under the existing supervisory framework.
  - The annual Capital Adequacy Assessment (ICAAP, SRP) is part of the additional capital requirements set by banks and CNBV.
  - CNBV has been working to incorporate Capital Recovery Action Plans into its supervisory process, and since 2014, 81 preventive action plans have been issued based on supervisory assessments.
- Continue developing the cybersecurity strategy for the financial system; improve cybersecurity regulatory and supervisory practices.
  - Implementation of the FSAP 2022 recommendation on cyber risk roles and responsibilities is in progress.
  - Authorities have enhanced the structures and procedures to exchange information in the Information Security Sensitive Incident Response Group (GRI).
  - Cybersecurity regulation is being strengthened through updated strategies, clearer roles, and new requirements for Financial Market Infrastructures (FMIs) like DALI, CCV, and Asigna.
  - CNBV has revised DALI’s internal rules to secure connections with INDEVAL, while Banco de México updated CCV regulations based on international standards.
  - In December 2024, Banxico published its 2024–27 Cybersecurity Strategy; CNBV is working with Banxico to update their Memorandum of Understanding on cyber and tech risk.
  - CNBV is strengthening financial system resilience through sector-specific cyber risk regulation; risk-based entity ratings and prioritized supervision; use of third-party compliance reports to guide oversight; intrusive on-site and focused off-site supervision; enhanced cyber intelligence sharing; regular incident response drills and playbooks; cybersecurity promotion through industry associations.
  - CNBV is developing a new cybersecurity framework to set minimum standards across all financial sectors, aligned with international best practices (Basel, NIST, IMF).
    - Using a proportional approach, baseline requirements will apply to all entities, with additional measures based on risk.
    - A draft is expected in Q1 2026, following a review of current regulations to identify gaps.
    - The IMF has assisted the Mexican authorities in conducting two exercises, in 2023 and 2024. A third exercise is scheduled for October 2025.
- Improve cyber response and recovery capabilities; conduct market-wide cyber crisis simulation exercises.
  - Implementation of the FSAP 2022 recommendation on cyber resilience is underway. Key progress includes:
    - Cyber crisis and red team exercises on Banxico’s IT systems;
    - Development of a cyber-map to assess risk transmission channels for systemically important FMIs;
    - Adoption of incident response protocols and playbooks for off-site supervision;
    - Launch of the GRI Collaboration Site and Cyber Intelligence Exchange Platform (MISP) to support secure information sharing among financial authorities;
    - Publication of a forensic evidence guide (May 2022) to strengthen cyber deterrence;
    - Inclusion of cybersecurity clauses in all new MoUs signed by CNBV with foreign financial authorities.
  - Mexico has not yet formally adopted ISO/IEC 27001 or the NIST Cybersecurity Framework at the national level.
- Issue supervisory guidance on climate-related risk management, governance, and business strategies; introduce disclosure requirements of climate and ESG information.
  - In August of 2023, Banxico submitted amendments to Provisions 4/2012 (in relation to derivatives) to incorporate the identification, measurement, assessment, and track-keeping of climate and environmental risks stemming from derivative products under the functions of the Risk Management Unit.
  - In early 2025, the Consejo Mexicano de Normas de Información Financiera y Sostenibilidad (CINIF) issued the first two Sustainability Information Standards (NIS A-1 and B-1), requiring private companies reporting under Mexican Financial Reporting Standards to include sustainability information in their statement.
  - The issuance of supervision expectations and guidelines will be part of an institutional project of Mexican Financial Authorities for 2024/2025.
  - CNBV included in its 2025 work program the development of disclosure requirements for banks to report both qualitative and quantitative information on climate risks affecting them and their borrowers.
  - In January 2025, CNBV amended the General Provisions for securities market participants (CUE), requiring issuers to disclose sustainability information aligned with IFRS Sustainability Disclosure Standards.

### Financial Integrity
- Implement the remaining 2018 Mutual Evaluation Report recommendations.
  - Authorities have adopted several high-level actions for the mitigation of the risks identified in the Mutual Evaluation Report of 2018, implementing reforms in 2019, 2020, 2021, 2022 and 2024 to its General Provisions with the aim of:
    - Adding criteria to differentiate the risks of Terrorist Financing from Money Laundering.
    - Adopting new technologies and alert systems for the mitigation of ML/TF risks.
    - Requiring banks to submit to CNBV an annual report regarding their individual exposure to ML/TF risks.
    - Developing best practices for banks operating in high-risk jurisdictions or with low ML/TF risks mitigation regimes, including an alert system for operations involving people on the List of Blocked People, Politically Exposed People or sanctioned jurisdictions.
  - In 2024, CNBV advanced its risk-based supervision by updating operational questionnaires to improve data quality for its AML/CFT Risk Matrix (CEFER).
  - CNBV published two key guidelines—one on illicit financing during elections and another on proliferation financing.
  - The AML/CFT Risk Matrix was expanded to cover additional sectors, including fintech and unregulated entities.
  - Supervision was further supported by updated inspection guidelines tailored to risk levels.

### Systemic Liquidity and Crisis Management
- Review the liquidity risk mitigation framework for development banks.
  - The 2022 FSAP identified a group of banks whose liquidity remained low, given regulatory standards, and with high reliance on wholesale fundings.
  - Authorities note that although development banks are not subject to minimum regulatory liquidity ratios, they report liquidity indicators monthly to Banxico, and CNBV monitors this data continuously.
  - In case of potential liquidity shortfall, development banks remain backed by federal guarantees and can issue debt or use credit lines. Liquidity metrics are also regularly reviewed by each bank’s risk committee.
- Explore options to enhance the ELA framework.
  - In 2024, Banxico replaced the Ordinary Additional Liquidity Facility (FLAO) with the Permanent Liquidity Facility (FPL) to better meet temporary liquidity needs.
- Further strengthen mechanisms to ensure the credibility and feasibility of banks’ financial contingency arrangements while preserving resolvability and cost-effective resolutions.
  - CNBV does not mandate a fixed sequence for activating recovery, capital conservation, restoration, or resolution measures.
- Introduce statutory bail-in powers and eliminate barriers to the effective use of the P&A and bridge bank tools.
  - Authorities are currently working on a legislative proposal to introduce bail-in as a complementary resolution tool.
  - The Instituto para la Protección al Ahorro Bancario (IPAB) has developed a specific proposal to adjust relevant regulation to allow for the effective operational use of the P&A and bridge bank tools. This proposal has been shared among authorities.
- Shorten the resolution planning cycle for D-SIBs and midsize banks, and eliminate impediments to banks’ resolvability.
  - In the 2Q23, IPAB reformed its rules to shorten the resolution planning cycle for DSIBs and midsize banks, reducing the time intervals for updating their resolution plans. This proposal has been shared among the authorities.
  - Supplementary capital requirement for SIBs is expected to be phased in by end-2025.

### Financial Development Issues
- Broaden the scope of regulated fintech activities; finalize the implementation of open finance (¶61–62).
  - The implementation of the FSAP 2022 recommendation on Fintech activities, including their competition regulation, the implementation of article 76 the Financial Technological Institutions Law, as well as open finance digital lending platforms, its governance structure, APIs implementation and consent-based architecture, is in progress.
  - As part of the activities of the National Council for Financial Inclusion (CONAIF), in 2023 CNBV and Banco de México launched several working groups aimed at discussing consumers’ consent and personal data protections, authentication methods, the architecture for data exchange through APIs and cybersecurity considerations.
  - In 2023, CNBV presented to the CONAIF a roadmap to implement open banking in the context of art. 76 of the Financial Technological Institutions Law.
  - CNBV continues to monitor compliance with data-sharing requirements through APIs, as mandated by the 2020 regulation concerning ATMs.
  - CNBV is developing a regulation to set a minimum capital adequacy ratio for fintech institutions, factoring in their risk exposure. This includes defining Tier 1 capital and calculating operational risk using the business indicator approach. A draft is expected by end-2025.
- Establish a national climate finance strategy; set ambitious climate finance targets for development financial institutions (¶64).
  - In March 2023, the Ministry of Finance published the “Sustainable Taxonomy" to help identify activities, assets or investment projects with positive environmental and social impacts.
  - In September 2023, the Ministry published the Sustainable Finance Mobilization Strategy, which seeks to redirect capital flows toward sustainable projects, with the Taxonomy as a central tool.
  - Amendments made in November 2023 to the Securities Market Law and the Mutual Funds Law authorized the Ministry of Finance to establish regulations for tracking progress on sustainable development and gender equality within securities markets.
  - In May 2024, the Mexican Council for Financial Information and Sustainability Standards introduced NIS A-1 and B-1 standards ensuring Mexico’s alignment with global practices:
    - NIS A-1 – establishes a conceptual framework for sustainability disclosures, providing quality and consistency standards.
    - NIS B-1 – requires disclosure of Basic Sustainability Indicators (IBSO), promoting transparency on entities’ sustainability performance.
  - In January 2025, CNBV amended regulations to require non-financial issuers to disclose sustainability-related information in line with ISSB Standards S1 and S2.

*Source: Annex III. Key FSAP Recommendations (IMF staff).*

### Annex IV. Figure 2. Mexico: Debt Coverage and Disclosures

### Annex IV. Figure 2. Mexico: Debt Coverage and Disclosures

### Debt coverage in the DSA
- Coverage label shown: CGGGNFPSCPSOther
- 1a. If central government, are non-central government entities insignificant? n.a.

### Subsectors included in the chosen coverage
- Subsector inclusion in baseline:
  - 1 Budgetary central government: Ye s
  - 2 Extra budgetary funds (EBFs): Ye s
  - 3 Social security funds (SSFs): Ye s
  - 4 State governments: No
  - 5 Local governments: No
  - 6 Public nonfinancial corporations: Ye s
  - 7 Central bank: No
  - 8 Other public financial corporations: Ye s

### Instrument coverage
- (Instrument coverage header present; detailed instrument list not provided in supplied content.)

### Accounting principles
- (Accounting principles header present; detailed accounting principles not provided in supplied content.)

### Debt consolidation across sectors (holdings by holder / issuer)
- Color code: █ chosen coverage     █ Missing from recommended coverage     █ Not applicable
- Holder / Issuer matrix highlights (numbers preserved as presented):
  - Budget. central govt: 490.37 49.17 20.41 959.8
  - Extra-budget. funds: 0
  - Social security funds: 0
  - State govt.: 1.20 1.4 2.6
  - Local govt.: 0
  - Nonfin pub. corp.: 1.11 7.1 18.2
  - Central bank: 000
  - Oth. pub. fin. corp: 43.9 0.1 44
  - Total: 00000 535.4 750.3 738.9 2024.6

### Reporting and valuation notes / commentary
- Basis of recording: See commentary below.
- Valuation of debt stock: See commentary below.
- Reporting on Intra-Government Debt Holdings: Nonfin. pub. corp. GG: expected State govt.Local govt. CG CPS
- Notes and clarifications (preserved wording):
  - Debt securities
  - Commentary: Data on debt of sub-national governments are not readily available. Regulatory limits on state and local government's debt burden limits risks. Debt is consolidated across the Federal government and Non-Financial Public Sector. The perimeter does not include other accounts payable, such as Pemex’s debt with suppliers. Arrears on Pemex's debt with suppliers, which stood at 0.6 percent of GDP at end-2024 and 0.1 percent of GDP as of September 12, 2025, are also excluded. Staff is evaluating the statistical treatment of recently issued pre-capitalized notes by a non-resident SPV for the purpose of supporting Pemex, which are currently not included in gross public debt. Including the pre-capitalized notes would not change the current overall assessments of risks and debt sustainability.
- Table footnotes preserved (numeric labels retained):
  - 1/ CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector.
  - 2/ Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable.
  - 3/ Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities.
  - 4/ Includes accrual recording, commitment basis, due for payment, etc.
  - 5/ Nominal value at any moment in time is the amount the debtor owes to the creditor. It reflects the value of the instrument at creation and subsequent economic flows (such as transactions, exchange rate, and other valuation changes other than market price changes, and other volume changes).
  - 6/ The face value of a debt instrument is the undiscounted amount of principal to be paid at (or before) maturity.
  - 7/ Market value of debt instruments is the value as if they were acquired in market transactions on the balance sheet reporting date (reference date). Only traded debt securities have observed market values.

---

### Annex IV. Figure 3. Mexico: Public Debt Structure Indicators

### Key structural observations (commentary-preserved)
- The increased share of "domestic other creditors" reflects the increased holdings of public debt liabilities by domestic pension funds following pension reforms.
- Small amounts of non-marketable debt principally relate to external official lending.
- The share of local currency debt and liabilities with longer maturities is expected to increase relative to the pre-projection period, in-line with the government’s debt management strategy.

### Visual indicators referenced (perimeter shown is consolidated public sector)
- Debt by Currency (Percent of GDP) — projection series includes years 2015, 2017, 2019, 2021, 2023, 2025, 2027, 2029, 2031, 2033 with categories:
  - Foreign currency
  - Local currency
  - Local-linked
- Public Debt by Holder (Percent of GDP) — categories:
  - External private creditors
  - External official creditors
  - Domestic other creditors
  - Domestic commercial banks
- Debt by Instruments (Percent of GDP) — categories:
  - Marketable debt
  - Nonmarketable debt
- Public Debt by Maturity (Percent of GDP) — categories:
  - ≤ 1 year
  - 1-5 years
  - > 5 years
  - Residual maturity: 7.8 years
- Public Debt by Governing Law, 2024 (In percent) — categories:
  - Domestic law
  - Foreign law ex. multilateral
  - Multilateral

---

### Annex IV. Figure 4. Mexico: Baseline Scenario (Percent of GDP, unless indicated otherwise)

### Public debt and change
- Public debt:
  - Actual 2024: 58.3
  - 2025: 58.9
  - 2026: 59.9
  - 2027: 60.7
  - 2028: 61.0
  - 2029: 61.2
  - 2030: 61.5
  - 2031: 61.6
  - 2032: 61.7
  - 2033: 61.6
  - 2034: 61.5
- Change in public debt:
  - 2024: 5.7
  - 2025: 0.5
  - 2026: 1.1
  - 2027: 0.8
  - 2028: 0.3
  - 2029: 0.3
  - 2030: 0.2
  - 2031: 0.2
  - 2032: 0.0
  - 2033: -0.1
  - 2034: -0.2

### Contribution of identified flows
- Contribution of identified flows:
  - 2024: 4.2
  - 2025: 1.8
  - 2026: 1.2
  - 2027: 0.9
  - 2028: 0.3
  - 2029: 0.3
  - 2030: 0.3
  - 2031: 0.2
  - 2032: 0.0
  - 2033: 0.0
  - 2034: -0.1
- Primary deficit:
  - 2024: -0.2
  - 2025: -1.5
  - 2026: -1.6
  - 2027: -1.8
  - 2028: -1.9
  - 2029: -1.8
  - 2030: -1.8
  - 2031: -1.8
  - 2032: -1.8
  - 2033: -1.8
  - 2034: -1.8
- Noninterest revenues:
  - 2024: 24.0
  - 2025: 23.7
  - 2026: 23.8
  - 2027: 23.8
  - 2028: 23.9
  - 2029: 23.9
  - 2030: 24.0
  - 2031: 24.0
  - 2032: 24.0
  - 2033: 24.0
  - 2034: 24.0
- Noninterest expenditures:
  - 2024: 23.8
  - 2025: 22.2
  - 2026: 22.2
  - 2027: 22.0
  - 2028: 22.0
  - 2029: 22.2
  - 2030: 22.2
  - 2031: 22.2
  - 2032: 22.2
  - 2033: 22.2
  - 2034: 22.2

### Automatic debt dynamics and components
- Automatic debt dynamics:
  - 2024: 3.6
  - 2025: 3.2
  - 2026: 3.0
  - 2027: 2.7
  - 2028: 2.2
  - 2029: 2.1
  - 2030: 2.1
  - 2031: 1.9
  - 2032: 1.8
  - 2033: 1.7
  - 2034: 1.6
- Real interest rate and relative inflation:
  - 2024: 4.3
  - 2025: 3.8
  - 2026: 3.9
  - 2027: 3.9
  - 2028: 3.5
  - 2029: 3.3
  - 2030: 3.3
  - 2031: 3.2
  - 2032: 3.0
  - 2033: 3.0
  - 2034: 2.9
- Real interest rate:
  - 2024: 4.0
  - 2025: 3.4
  - 2026: 3.6
  - 2027: 3.7
  - 2028: 3.3
  - 2029: 3.2
  - 2030: 3.1
  - 2031: 3.0
  - 2032: 2.9
  - 2033: 2.8
  - 2034: 2.7
- Relative inflation:
  - 2024: 0.3
  - 2025: 0.3
  - 2026: 0.3
  - 2027: 0.2
  - 2028: 0.2
  - 2029: 0.2
  - 2030: 0.2
  - 2031: 0.2
  - 2032: 0.2
  - 2033: 0.2
  - 2034: 0.2
- Real growth rate:
  - 2024: -0.7
  - 2025: -0.6
  - 2026: -0.9
  - 2027: -1.2
  - 2028: -1.3
  - 2029: -1.2
  - 2030: -1.3
  - 2031: -1.3
  - 2032: -1.3
  - 2033: -1.3
  - 2034: -1.3

### Other flows and transactions
- Other identified flows:
  - 2024: 0.7
  - 2025: 0.2
  - 2026: -0.2
  - 2027: 0.0
  - 2028: 0.0
  - 2029: 0.0
  - 2030: 0.0
  - 2031: 0.0
  - 2032: 0.0
  - 2033: 0.0
  - 2034: 0.0
- Contingent liabilities: 0.0 for all years shown (2024–2034)
- (minus) Interest Revenues:
  - 2024: -0.6
  - 2025: -0.5
  - 2026: -0.4
  - 2027: -0.4
  - 2028: -0.4
  - 2029: -0.4
  - 2030: -0.4
  - 2031: -0.4
  - 2032: -0.4
  - 2033: -0.4
  - 2034: -0.4
- Other transactions:
  - 2024: 1.3
  - 2025: 0.6
  - 2026: 0.2
  - 2027: 0.4
  - 2028: 0.4
  - 2029: 0.4
  - 2030: 0.4
  - 2031: 0.4
  - 2032: 0.4
  - 2033: 0.4
  - 2034: 0.4

### Contribution of residual
- Contribution of residual:
  - 2024: 1.5
  - 2025: -1.3
  - 2026: -0.2
  - 2027: -0.1
  - 2028: -0.1
  - 2029: -0.1
  - 2030: -0.1
  - 2031: 0.0
  - 2032: 0.0
  - 2033: 0.0
  - 2034: 0.0

### Gross financing needs and debt service (percent of GDP)
- Gross financing needs:
  - 2024: 14.5
  - 2025: 13.6
  - 2026: 14.5
  - 2027: 14.4
  - 2028: 15.1
  - 2029: 16.4
  - 2030: 15.6
  - 2031: 17.9
  - 2032: 16.5
  - 2033: 17.1
  - 2034: 17.5
- of which: debt service:
  - 2024: 15.2
  - 2025: 15.6
  - 2026: 16.5
  - 2027: 16.6
  - 2028: 17.4
  - 2029: 18.6
  - 2030: 17.7
  - 2031: 20.0
  - 2032: 18.6
  - 2033: 19.2
  - 2034: 19.6
- Local currency gross financing needs:
  - 2024: 10.1
  - 2025: 14.2
  - 2026: 15.0
  - 2027: 14.8
  - 2028: 15.5
  - 2029: 16.8
  - 2030: 15.9
  - 2031: 18.3
  - 2032: 17.1
  - 2033: 17.7
  - 2034: 18.2
- Foreign currency gross financing needs:
  - 2024: 5.1
  - 2025: 1.4
  - 2026: 1.5
  - 2027: 1.9
  - 2028: 1.9
  - 2029: 1.7
  - 2030: 1.8
  - 2031: 1.7
  - 2032: 1.5
  - 2033: 1.6
  - 2034: 1.5

### Memo indicators
- Real GDP growth (percent):
  - 2024: 1.4
  - 2025: 1.0
  - 2026: 1.5
  - 2027: 2.0
  - 2028: 2.1
  - 2029: 2.1
  - 2030: 2.1
  - 2031: 2.1
  - 2032: 2.1
  - 2033: 2.1
  - 2034: 2.1
- Inflation (GDP deflator; percent):
  - 2024: 4.9
  - 2025: 5.2
  - 2026: 4.5
  - 2027: 3.4
  - 2028: 3.4
  - 2029: 3.4
  - 2030: 3.4
  - 2031: 3.4
  - 2032: 3.4
  - 2033: 3.4
  - 2034: 3.4
- Nominal GDP growth (percent):
  - 2024: 6.4
  - 2025: 6.2
  - 2026: 6.1
  - 2027: 5.5
  - 2028: 5.6
  - 2029: 5.6
  - 2030: 5.6
  - 2031: 5.6
  - 2032: 5.6
  - 2033: 5.6
  - 2034: 5.6
- Effective interest rate (percent):
  - 2024: 13.1
  - 2025: 11.4
  - 2026: 11.1
  - 2027: 10.0
  - 2028: 9.1
  - 2029: 8.9
  - 2030: 8.8
  - 2031: 8.6
  - 2032: 8.3
  - 2033: 8.2
  - 2034: 8.0

### Baseline scenario commentary (preserved)
- After the fiscal expansion and weakening of the exchange rate in 2024 exerted strong upwards pressure on debt ratios, debt is projected to continue to increase over the medium-term. High real interest rates (reflecting structural and conjunctural factors) and looser budget targets explain these dynamics. A tight fiscal stance and trend growth are expected to dominate other debt drivers and serve to stabilize debt ratios over the extended projection horizon. The pace of fiscal tightening and sustained tight fiscal stance, is consistent with Mexico's track record of fiscal prudence and the new administration's emphasis on maintaining this record. The contribution of growth to the reduction in debt levels is expected to be slightly larger compared to the pre-pandemic period due to higher potential growth following increased investment in recent years.

---

### Annex IV. Figure 5. Mexico: Realism of Baseline Assumptions

### Forecast track record and comparators
- Forecast track record is generally within bounds for optimism, excepting the SFA projections.
- Larger debt-reducing contributions of GDP growth and primary balance, compared to the last 5 years, are expected to keep the increase in the debt ratio limited.
- Higher contribution of GDP growth over the next 5 years is substantiated by potential output growth above the previous 10-year average real growth rate.
- Higher contribution of the primary balance is predicated on the ongoing adjustment, which appears feasible given the three-year debt and CAPB adjustment are well below Mexico's past maximum adjustment.
- Spreads are expected to contract relative to the Laubach rule given sensitivity to monetary policy and tighter fiscal policy geared towards preserving fiscal sustainability.
- The effect of fiscal adjustments on growth reflects the pace and size of fiscal consolidation efforts.
- Real projected potential growth is expected to outstrip the average of the preceding ten years given increases in investment in recent years, including government infrastructure spending.

### Comparative percentiles and signals (visuals referenced)
- Comparator Group: Emerging Markets, Non-Commodity Exporter, Program
- Reference to Laubach (2009) rule: bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio.

---

### Annex IV. Figure 6. Mexico: Medium-Term Risk Assessment

### Index values and risk signals (values preserved)
- Debt fanchart module:
  - Fanchart width: 30.2 0.4 (percent of GDP)
  - Probability of debt non-stabilization (percent): 53.2 0.4
  - Terminal debt-to-GDP x: 39.6 0.9
  - Debt fanchart index (DFI): 1.7
  - Risk signal: 3/Moderate
- Gross financing needs (GFN) module:
  - Average baseline GFN (percent of GDP): 15.0 5.1
  - Initial Banks' claims on the gen. govt (pct bank assets): 26.3 8.5
  - Chg. In banks' claims in stress (pct banks' assets): 5.3 1.8
  - GFN financeability index (GFI): 15.4
  - Risk signal: 4/Moderate
- Medium-term index:
  - Value (normalized) examples: 0.39 0.50 0.2; 0.30 0.50 0.1
  - Risk signal: Moderate / Moderate

### Final assessment probabilities
- Prob. of missed crisis, 2025-2030, if stress not predicted: 18.2 pct.
- Prob. of false alarms, 2025-2030, if stress predicted: 21.6 pct.

### Medium-term commentary (preserved)
- The medium-term analysis indicates a moderate risk of sovereign stress over that time horizon. The probability of debt non-stabilization, terminal debt-to-GDP ratio and average baseline GFN increased compared to the 2024 AIV, reflecting looser medium-term targets and tighter real interest rates. Banks' claims on the Federal government as share of their assets remain in the upper quartile relative to comparator countries. Yet, the increase in gross financing needs under a stress scenario is moderate and the change in bank claims under stress scenarios is relatively small. Thus, the banking system should be able to absorb higher government financing needs in a stress scenario. Other institutional investors, particularly pension funds, could also absorb additional financing needs. Undertaking the contingent liability stress test to account for subnational borrowing, both the debt fanchart and GFN analysis show only modest deteriorations relative to the baseline, given low debt of state and local government.

---

### Annex IV. Figures 7–8. Long-Term Analysis: Large Amortization Module and Natural Resource Module

### Large amortization module (summary)
- Staff's baseline scenario, Baseline with t+5, shows both GFN- and public debt-to-GDP ratios declining over the long-term as Mexico converges to steady-state growth and a concomitant fiscal stance.
- In all scenarios, government policy is assumed to be passive; staff judge the likelihood of preemptory action averting worst case scenarios to be high given Mexico's track record of fiscal prudence and proactive debt management policies.

### Natural resource module — External debt sustainability (text preserved)
- Mexico’s external debt has fallen from 44.4 percent in 2020 to 24.5 percent in 2024, driven by sustained growth, robust remittances and FDI inflows.
- It is projected to stabilize at around 26 percent in the medium term, still well below the pre-pandemic baseline.
- Main risks to the external debt trajectory:
  - Deterioration of the current account and growth underperformance
  - Large currency depreciation
  - Weaker-than-expected growth, including a decline in exports amid higher global trade tensions
  - Global policy uncertainty, climate-change related risks, and a sharp tightening of global financial conditions (could lead to a spike in risk premia on Mexico’s external debt liabilities, a weaker peso, and more capital flow volatility)
- Example sensitivity:
  - A 30 percent depreciation of the peso in real effective terms could raise the external debt to about 41 percent of GDP—roughly the level observed during the pandemic.
- Mitigating factors cited:
  - Favorable maturity and currency structures of public and private external debt
  - Rollover risks for the public sector external debt (around two-thirds of Mexico’s external debt) are mitigated by:
    - A favorable maturity structure (more than 90 percent of debt has a residual maturity of more than one year)
    - Currency composition (around 30 percent of external public debt is denominated in peso)
    - Prudent debt management by the government
    - Growing capacity of domestic institutional investors, particularly pension funds, to absorb public debt
  - Private sector external debt (concentrated in the non-financial corporate sector) consists mostly of medium- and long-term maturities, with foreign exchange risks well covered by natural and financial hedges.
  - The banking sector is well capitalized and liquid and assessed to be resilient to large shocks under prudent macroprudential policies.

*Source: Annex IV. Figure 2–8, "Mexico: Debt Coverage and Disclosures" (IMF staff material contained in the supplied PDF content).*

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

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

### Baseline external debt and projections
- Baseline: External debt (in percent of GDP)
  - 2020: 44.4
  - 2021: 36.0
  - 2022: 31.0
  - 2023: 26.0
  - 2024: 24.5
  - 2025: 25.6
  - 2026: 24.8
  - 2027: 25.2
  - 2028: 25.4
  - 2029: 25.7
  - 2030: 26.0
- Debt-stabilizing non-interest current account: -1.2

### Change in external debt and identified debt-creating flows
- Change in external debt (line 2, percent of GDP)
  - 2020: 7.0
  - 2021: -8.4
  - 2022: -5.0
  - 2023: -5.0
  - 2024: -1.6
  - 2025: 1.2
  - 2026: -0.8
  - 2027: 0.3
  - 2028: 0.3
  - 2029: 0.3
  - 2030: 0.3
- Identified external debt-creating flows (line 3 = 4+8+9, percent of GDP)
  - 2020: 1.7
  - 2021: -8.2
  - 2022: -4.4
  - 2023: -6.5
  - 2024: -1.4
  - 2025: -0.7
  - 2026: -0.8
  - 2027: -1.0
  - 2028: -1.2
  - 2029: -1.3
  - 2030: -1.2

- Components:
  - Current account deficit, excluding interest payments (line 4, percent of GDP)
    - 2020: -4.6
    - 2021: -1.4
    - 2022: -0.4
    - 2023: -1.0
    - 2024: -0.9
    - 2025: -1.2
    - 2026: -1.1
    - 2027: -0.9
    - 2028: -0.8
    - 2029: -0.7
    - 2030: -0.6
  - Deficit in balance of goods and services (line 5, percent of GDP)
    - 2020: 1.9
    - 2021: -1.8
    - 2022: -3.0
    - 2023: -1.8
    - 2024: -1.5
    - 2025: -1.1
    - 2026: -1.2
    - 2027: -1.5
    - 2028: -1.5
    - 2029: -1.5
    - 2030: -1.5
  - Exports (line 6, percent of GDP)
    - 2020: 39.8
    - 2021: 40.8
    - 2022: 43.0
    - 2023: 36.1
    - 2024: 36.7
    - 2025: 37.8
    - 2026: 35.0
    - 2027: 34.5
    - 2028: 34.5
    - 2029: 34.5
    - 2030: 34.6
  - Imports (line 7, percent of GDP)
    - 2020: -37.8
    - 2021: -42.6
    - 2022: -46.0
    - 2023: -37.9
    - 2024: -38.2
    - 2025: -38.8
    - 2026: -36.3
    - 2027: -35.9
    - 2028: -36.0
    - 2029: -36.1
    - 2030: -36.1
  - Net non-debt creating capital inflows (line 8, negative values reduce debt, percent of GDP)
    - 2020: -2.1
    - 2021: -1.9
    - 2022: -2.0
    - 2023: -1.5
    - 2024: -1.5
    - 2025: -0.7
    - 2026: -0.8
    - 2027: -1.0
    - 2028: -1.2
    - 2029: -1.4
    - 2030: -1.3

### Automatic debt dynamics (line 9) and contributions
- Automatic debt dynamics (line 9, percent of GDP)
  - 2020: 8.3
  - 2021: -4.9
  - 2022: -2.0
  - 2023: -4.0
  - 2024: 1.0
  - 2025: 1.2
  - 2026: 1.1
  - 2027: 0.9
  - 2028: 0.9
  - 2029: 0.8
  - 2030: 0.7
- Contribution from nominal interest rate (line 10, percent)
  - 2020: 2.2
  - 2021: 1.7
  - 2022: 1.7
  - 2023: 1.7
  - 2024: 1.8
  - 2025: 1.5
  - 2026: 1.4
  - 2027: 1.4
  - 2028: 1.4
  - 2029: 1.3
  - 2030: 1.2
- Contribution from real GDP growth (line 11, percent)
  - 2020: 3.6
  - 2021: -2.3
  - 2022: -1.2
  - 2023: -0.8
  - 2024: -0.4
  - 2025: -0.2
  - 2026: -0.4
  - 2027: -0.5
  - 2028: -0.5
  - 2029: -0.5
  - 2030: -0.5
- Contribution from price and exchange rate changes (line 12, percent)
  - 2020: 2.5
  - 2021: -4.3
  - 2022: -2.5
  - 2023: -4.9
  - 2024: -0.5
  - 2025: ...... (no further values provided in source extract)

### Residual and ratios
- Residual, including change in gross foreign assets (line 13, percent of GDP)
  - 2020: 5.3
  - 2021: -0.3
  - 2022: -0.6
  - 2023: 1.5
  - 2024: -0.2
  - 2025: 1.9
  - 2026: 0.0
  - 2027: 1.3
  - 2028: 1.4
  - 2029: 1.6
  - 2030: 1.6

- External debt-to-exports ratio (in percent)
  - 2020: 111.7
  - 2021: 88.1
  - 2022: 72.1
  - 2023: 72.0
  - 2024: 66.6
  - 2025: 67.9
  - 2026: 70.9
  - 2027: 73.0
  - 2028: 73.7
  - 2029: 74.4
  - 2030: 75.2

### Gross external financing needs
- Gross external financing needs (in billions of US dollars)
  - 2020: 39.2
  - 2021: 70.3
  - 2022: 73.9
  - 2023: 72.2
  - 2024: 78.1
  - 2025: 70.0
  - 2026: 85.6
  - 2027: 105.0
  - 2028: 111.9
  - 2029: 125.9
  - 2030: 139.0
- Gross external financing needs (in percent of GDP)
  - 2020: 3.5
  - 2021: 5.3
  - 2022: 5.0
  - 2023: 4.0
  - 2024: 4.2
  - 10-Year (listed separately): 3.8, 4.2, 4.9, 5.0, 5.4, 5.7 (as presented in source)

### Scenario with key variables at their historical averages
- Scenario external debt (percent of GDP)
  - 2025 historical-average scenario: 25.6
  - 2026: 25.0
  - 2027: 24.4
  - 2028: 24.1
  - 2029: 23.9
  - 2030: 23.7
- Scenario debt-stabilizing non-interest current account: -1.8

### Key macroeconomic assumptions underlying the baseline (selected series)
- Real GDP growth (in percent)
  - Historical: -8.4
  - 2021: 6.0
  - 2022: 3.7
  - Baseline projections: 3.4, 1.4, 1.4, 3.8, 1.0, 1.5, 2.0, 2.1, 2.1, 2.1 (as listed in source across periods)
- GDP deflator in US dollars (change in percent)
  - Historical: -6.2
  - 2021: 10.7
  - 2022: 7.4
  - Baseline projections include: 18.6, 1.8, 2.2, 9.7, -0.6, 7.4, 2.6, 2.6, 2.6, 2.6 (as listed)
- Nominal external interest rate (in percent)
  - Historical/selected values: 5.0, 4.5, 5.1, 6.8, 7.2, 5.4, 1.0, 6.0, 6.1, 6.0, 5.7, 5.3, 5.0 (as presented in source)
- Growth of exports (US dollar terms, in percent)
  - Historical and projections: -11.7, 20.6, 17.2, 3.1, 4.9, 5.1, 9.6, 3.2, 1.1, 3.0, 4.9, 4.9, 4.9 (as presented)
- Growth of imports (US dollar terms, in percent)
  - Historical and projections: -16.7, 32.2, 20.2, 1.1, 4.0, 5.5, 13.5, 2.0, 1.9, 3.7, 5.0, 4.9, 4.9 (as presented)
- Current account balance, excluding interest payments (percent of GDP)
  - Series: 4.6, 1.4, 0.4, 1.0, 0.9, 0.8, 1.6, 1.2, 1.1, 0.9, 0.8, 0.7, 0.6 (as presented)
- Net non-debt creating capital inflows (percent of GDP)
  - Series: 2.1, 1.9, 2.0, 1.5, 1.5, 2.2, 0.5, 0.7, 0.8, 1.0, 1.2, 1.4, 1.3 (as presented)

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

*Source: Annex IV. Table 1. Mexico: External Debt Sustainability Framework (extracted from the supplied IMF content).*

### Annex VI. Figure 2. Mexico: U.S. Tariffs on Imports from Mexico

### Annex VI. Figure 2. Mexico: U.S. Tariffs on Imports from Mexico

### Tariff Scenarios and Potential Changes to USMCA
- Analysis uses a static general equilibrium trade model (CFRT, 2023) covering 60 countries and 19 sectors, with heterogeneous firms under increasing returns to scale, detailed input-output linkages, and trade elasticities.
- Scenarios considered:
  - Universal tariffs:
    - U.S. imposes a general 10 percent tariff on imports from all non-USMCA trading partners and 30 percent on imports from China.
    - Certain sectors face higher tariffs: 25 percent on autos and auto parts; 50 percent on steel, aluminum, and copper.
    - Specific electronic products benefit from exemptions.
    - Within North America, non-U.S. sourced autos and other imports not qualifying under USMCA provisions are subject to a 25 percent tariff.
    - For Mexico, the average effective tariff rate on its exports reaches about 13 percent, assuming no change in the share of exports utilizing USMCA preferences (relative to end-2024).
  - Scenarios affecting regional content requirements or content origin:
    - Tighter rules of origin (ROO): ROO thresholds increased by 10 percentage points for all sectors; tariffs remain as in the universal tariffs scenario.
    - U.S. tariffs on all non-U.S. content: tariffs imposed on all non-U.S. content imported from Mexico, regardless of existing USMCA ROO compliance (akin to current treatment of automobiles).
    - U.S. tariffs on all non-USMCA content: tariffs imposed on all non-USMCA content imported from Mexico, regardless of existing USMCA ROO compliance.
  - Scenarios furthering trade diversion:
    - Higher universal tariffs: general tariff rates increased from 10 to 20 percent for non-USMCA trading partners, and from 30 to 60 percent for China.
    - Increased USMCA utilization by Mexico: Mexican exports adapt by increasing the share of exports that qualify for tariff-free treatment within USMCA to 85 percent; tariffs mirror the universal scenario.

### Effective Tariffs Implications (how scenarios map to effective tariff rates)
- Stricter content requirements:
  - A 10-percentage point increase in ROO thresholds across all sectors is estimated to translate into a rise in the effective tariff rate to 14 percent. (Scenario assumes no additional adaptation by firms; represents an upper-bound effect.)
- Tariffs based on content origin:
  - Tariffs applied based on the share of non-U.S. content: effective tariff rate rises to around 16.6 percent.
  - Tariffs levied exclusively on non-USMCA content: effective tariff rate declines to 5.8 percent, reflecting the relatively higher share of USMCA-content in Mexico’s exports to the U.S.
- Trade diversion from higher U.S. tariffs:
  - If the U.S. doubles tariff rates on all non-USMCA partners and Mexican firms increase USMCA-qualifying exports to about 85 percent, the effective tariff rate would decline to 4.3 percent.

### Model Simulation Results — Aggregate impacts
- Exports:
  - Scenario 1 (Universal tariffs; Mexico effective tariff ~13 percent): U.S. tariffs on Mexico would lead to a decline in Mexico’s exports, with magnitude depending on regional content requirements; in Scenario 1 exports decline by 6 percent (text).
- GDP / Output:
  - Scenario 1: Negative impact on output and exports.
  - Scenario 2 (Tighter ROO): export and output losses twice as large as those under the universal tariffs scenario.
  - Scenario 3 (U.S. content restriction): output losses nearly three times greater than those under the universal tariffs scenario.
  - Scenario 4 (USMCA content restriction — i.e., eliminating ROO while maintaining tariff-free treatment for USMCA content): would boost trade and output in Mexico.
- Trade diversion effects:
  - Scenario 5 (Higher U.S. tariffs on non-USMCA partners — doubling relative to universal tariffs): would more than fully offset the negative direct impact of U.S. tariffs on Mexico.
  - A U.S. tariff regime of 45 percent on imports from China and 15 percent on imports from other countries would roughly offset the adverse impact of current tariffs on Mexico.
  - Scenario 6 (Increased USMCA utilization to 85 percent): Mexico’s exports and output would experience large positive gains; effective tariff rate declines to 4.3 percent.

### Sectoral Vulnerabilities and Heterogeneity
- Automotive and electronics sectors:
  - Automotive sector: substantially higher share of USMCA content; less exposed to restrictions relative to electronics.
  - Electronics sector: relies more heavily on content from outside the region (particularly Asia); U.S. and USMCA contents are low.
  - Implications:
    - Stricter ROO (Scenario 2) and U.S. content restrictions (Scenario 3) would negatively affect both sectors, with especially pronounced losses for electronics.
    - A tariff regime based on USMCA content (Scenario 4) would be largely beneficial to transportation (given its high USMCA content) while continuing to weigh on electronics.
    - Scenarios leading to higher trade diversion (Scenarios 5 and 6) would boost exports of both transport and electronics sectors.

### Key Quantitative Findings and Simulation Magnitudes
- Average effective tariff outcomes by scenario (as reported):
  - Universal tariffs: about 13 percent effective tariff for Mexico (assuming no change in USMCA preference utilization).
  - Tightening ROO (10 percentage point increase): effective tariff ~14 percent.
  - U.S. content restriction: effective tariff ~16.6 percent.
  - USMCA content restriction (tariffs on non-USMCA content only): effective tariff ~5.8 percent.
  - Increased USMCA utilization to 85 percent: effective tariff ~4.3 percent.
- Export and output multipliers:
  - Scenario 1: exports decline by 6 percent (text).
  - Scenario 2: export/output losses ~2 times Scenario 1.
  - Scenario 3: output losses ~3 times Scenario 1.
- Trade diversion thresholds:
  - Doubling tariffs on non-USMCA partners can more than offset negative impact on Mexico.
  - Specific illustrative tariff profile noted: 45 percent on China and 15 percent on other countries roughly offsets adverse impacts under current tariffs.

### Policy-relevant Conclusions
- Mexico’s benefits from USMCA depend on sector-specific regional content and value chain structures; reliance on USMCA varies widely across industries.
- Tighter U.S. or regional content requirements could significantly constrain export growth, particularly in sectors with limited U.S. and/or USMCA contents (notably electronics).
- Eliminating minimum regional content requirements while maintaining tariff-free treatment for USMCA content would yield substantial gains for Mexico, including through trade diversion.
- Mexico could benefit if its effective tariff rates remain lower than those applied to other U.S. trading partners; conversely, tariffs tied to non-U.S. content could substantially raise effective protection and harm competitiveness.

*Source: IMF staff estimates and CFRT (model) results as presented in Annex VI of the source PDF.*

### Annex VII. Figure 2. Mexico: Mexican-Born Population and Remittances Flows from the US

### Annex VII. Figure 2. Mexico: Mexican-Born Population and Remittances Flows from the US to Mexico

### Geographic concentration of migration and remittances
- "Most Mexican migration flows are directed to California, Texas, and Florida."
- "The largest share of remittances from the US to Mexico originate from California, Texas, and Arizona."

### Migrant stocks (2018–2023) — Mexican migrants in the US
- Chart axis label: "Mexican Migrant in US, 2018-2023 (In thousands of people)"
- Migrant counts shown on chart scale: 0; 1000; 2000; 3000 (thousands of people)
- Data sources: ENADID, MigrationPolicy Index (MPI), and IMF staff calculations.
- Note: "The totals were calculated using 2023 Mexican immigration population estimated by MPI, with data from U.S. Census Bureau's 2006 to 2023 American Community Survey (ACS)."

### Remittances to Mexico (2022)
- Chart axis label: "Remittances to Mexico, 2022 (In millions of USD)"
- Remittance scale points shown on chart: 0; 7000; 14000; 21000 (millions of USD)
- Data sources: Banxico, US Census, BEA, and IMF staff calculations.

### State-level relationships: migration, poverty, and remittances
- "States with the highest migration rates also exhibit high poverty rates (e.g. Veracruz, Oaxaca, Chiapas) ... and some of them have become increasingly reliant on remittances."
- Chart: "Migrants to U.S. and Poverty, 2018-2023 (In thousands of people and percent)"
  - Left-hand series: "Migrants to U.S. (LHS, 2018-2023)"
  - Right-hand series: "In-work Poverty Rate, 2023Q4" and "In-work Poverty Rate, 2018Q4"
- State list on chart (order preserved as shown):
  - Baja California Sur
  - Quintana Roo
  - Campeche
  - Colima
  - Tlaxcala
  - Yucatán
  - Tabasco
  - Morelos
  - Coahuila
  - Nayarit
  - Aguascalientes
  - Durango
  - Baja California
  - Nuevo León
  - Sonora
  - Chihuahua
  - Tamaulipas
  - Ciudad de México
  - Sinaloa
  - Hidalgo
  - Zacatecas
  - San Luis Potosí
  - Querétaro
  - Guerrero
  - Michoacán
  - Puebla
  - Guanajuato
  - México
  - Chiapas
  - Jalisco
  - Oaxaca
  - Veracruz

### Remittances' share of state GDP — bottom 5% states (2003–2022)
- Chart label: "Remittances GDP Ratio for Bottom 5% States (In percent of GDP)"
- States highlighted: Chiapas; Guerrero; Michoacan de Ocampo; Oaxaca
- Time series axis labels: 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022
- Data sources: Banxico, INEGI, and IMF staff calculations.

### Remittances versus state GDP indices (2005=100)
- Oaxaca
  - Chart label: "Oaxaca (Index, 2005=100)"
  - Series: "GDP" and "Remittances"
  - Time series axis labels include: 2005–2022
  - Data sources: Banxico, and IMF staff calculations.
- Chiapas
  - Chart label: "Chiapas (Index, 2005=100)"
  - Series: "GDP" and "Remittances"
  - Time series axis labels include: 2005–2022
  - Data sources: Banxico, and IMF staff calculations.
- Observation text from figure: remittances "have outpaced growth in average state income, for example in Oaxaca ... and Chiapas."

### Chart and data sources consolidated
- ENADID
- MigrationPolicy Index (MPI)
- U.S. Census Bureau's American Community Survey (ACS) 2006–2023
- Banxico
- BEA
- INEGI
- IMF staff calculations

*Annex VII. Figure 2. Mexico: Mexican-Born Population and Remittances Flows from the US — source PDF.*

### References

### References

### Trade Linkages and Productivity Growth in Mexico (Annex X)
- Key finding: The gap in per capita output between Mexico and the United States remained broadly unchanged between 2000 and 2019 despite narrowing gaps in capital and labor per capita.
- 2019 gap: Mexico's GDP per capita remained approximately 70 percent below the U.S. level—unchanged from 2000.
- Factor convergence:
  - Capital stock gap reduced from 75 to 61 percent (reflecting faster capital accumulation in Mexico).
  - Labor input gap reduced from 38 to 20 percent (reflecting Mexico’s demographic dividend).
- Growth-accounting results (2000–23):
  - Real GDP grew by an average of 1.5 percent per year.
  - Factor accumulation contributed 2.0 percentage points to growth.
  - TFP subtracted 0.5 percentage points (TFP decline offsetting factor gains).
- Penn World Tables based results (2000–19):
  - Annual real GDP growth averaged 1.9 percent.
  - Factor accumulation contributed 2.7 percentage points.
  - TFP decline contributed -0.8 percentage points.
- Sectoral TFP performance (annual TFP growth, 2000–2023):
  - Primary sector: 3.3 percent.
  - Secondary sector: -0.9 percent.
  - Tertiary sector: -0.4 percent.
  - Note: Minima and maxima reported across industries within a sector; some sectors missing detailed industry-level data.
- Within manufacturing:
  - Export-focused industries (e.g., automobiles and electronics) registered positive TFP growth.
  - Domestically oriented industries (e.g., petroleum refining and chemical manufacturing, excluding pharmaceuticals) experienced declining productivity.
  - Tradable services, particularly information technology services, showed concentrated productivity gains.
- Empirical (IV) estimates linking external exposure to outcomes (manufacturing, 2011–23, shift-share IV):
  - A 10 percent increase in Mexican exports driven by external demand is associated with a 0.5 percent increase in annual industry-level productivity growth.
  - External exposure and value added growth (IV regression estimates, observations = 189):
    - Export Intensity coefficient: 0.04*** (standard error 0.012) and 0.022* (standard error 0.013) in two specifications.
    - FDI Intensity coefficient: 0.176* (standard error 0.09) and 0.186** (standard error 0.088) in two specifications.
  - External exposure and 5-year productivity growth (IV regression estimates, observations = 189):
    - Export Intensity coefficient: 0.053*** (standard error 0.016) and 0.063*** (standard error 0.016) in two specifications.
    - FDI Intensity coefficient: -0.131 (standard error 0.12) and -0.105 (standard error 0.109) in two specifications.
- Mechanism: Export exposure appears to operate through efficiency gains (technology adoption, scale economies, knowledge spillovers) rather than through factor accumulation; export exposure fully accounts for its impact on value-added growth but shows no significant relationship with factor accumulation.
- FDI effects: Exposure to foreign direct investment shows no significant relationship with productivity growth; FDI fosters industry growth primarily via faster factor accumulation rather than productivity improvements.
- Policy implication: Strengthening trade linkages and maintaining integration with international markets are important to support sustained productivity growth. Deterioration in Mexico's access to U.S. markets could have significant adverse effects on productivity; reductions in foreign capital would likely constrain growth mainly through reduced factor accumulation.

### Rising Minimum Wages and Labor Market Outcomes in Mexico (Annex XI)
- Overall context:
  - Mexico’s minimum wage has increased by 125 percent in real terms since 2018.
  - Nominal increase since 2018: 215 percent.
  - Minimum-to-median wage ratio rose from around 0.42 in 2018 to above 0.68 by 2023.
  - Result: Mexico now stands among the highest minimum-to-median wage ratios of OECD countries.
- Labor market performance alongside wage increases:
  - Informality and poverty declined during the period of minimum wage increases.
  - The unemployment rate reached a historic low in 2025.
- Policy developments and projections:
  - October 2024: Congress approved a constitutional reform requiring annual minimum wage increases at least as high as prevailing inflation.
  - Administration plan: increase the nominal minimum wage by close to 12 percent per year until 2030 to ensure it reaches 2.5 times the basic consumption basket (currently about 10,000 pesos or US$500 per month).
  - Projected labor share at or below minimum wage: increase from 19 percent of the workforce in 2024 to about 35 percent by 2030 (compared to less than 5 percent in 2018).
  - Projection assumptions: based on ENOE data for 2024 and an assumed growth rate of wage of 7 percent in absence of the minimum wage hike. Formal and informal sector workers included. For formal sector workers, coverage in 2024 was 10 percent and is projected to rise to close to 25 percent or above by 2030.
- Empirical strategy for impact assessment:
  - Microdata: ENOE individual-level data for 2016Q1–2024Q4, respondents aged 16 to 55, 26 Mexican states (non-border states).
  - Identification: variation in exposure to the minimum wage measured by the share of formal workers earning up to the minimum wage in 2016–17 (“bite”), following a Dube and Lindner approach.
  - Analysis compares states with high and low ‘bite’ over 2016–2024, controlling for state and quarter fixed effects and leave-one-out state-level controls based on long-run state industry and age structure.
- Empirical findings:
  - Rising minimum wages up to 2024 did not have material adverse effects on labor force participation, employment, hours worked, or formalization—these indicators evolved similarly in the most and least exposed state groups despite diverging minimum wage bites.
  - Formal-sector reported wages did not respond strongly to the minimum wage increases:
    - An increasing share of formal workers in ENOE report a wage below the minimum wage—rising from close to (percent unspecified) in 2018 to 10 percent as of 2024.
    - This raises questions about enforcement of the minimum wage or the accuracy of ENOE wage reporting at the bottom of the distribution.
  - Robustness and methodological notes:
    - The empirical design absorbs long-run differences across states and aggregate shocks via state and quarter fixed effects.
    - The “bite” measure constructed using 2016–17 wage distribution and the 2019 minimum wage due to low variation in earlier years.
    - States grouped into groups of 3 by exposure level; main analysis compares most and least exposed groups.
- Caution and policy recommendation:
  - Model results suggest limited impact of the minimum wage at current levels but indicate potentially large and adverse labor market consequences for planned increases over the next few years.
  - Recommendation: Carefully monitor labor market developments before implementing future hikes to assess enforcement, informality, and wage reporting dynamics.

*Source: 1mexea2025001-source-pdf - References (excerpts including Annex X and Annex XI).*

### 6.      Model results confirm that

### 6. Model results confirm that

### Model setup and scope
- Two quantitative labor market models, in the spirit of Machado Parente (2024) and Amodio and others (2025), were calibrated to the Mexican context to evaluate the impact of rising minimum wages on the economy.
- Sources: ENOE, and IMF staff calculations.
- Note: Chart reports coefficient estimates for most exposed group. Least exposed group is the reference group. Data for 26 non-border states. Formal status determined by IMSS membership. Controls include Leave-One-Out measures based on industry-occupation and age-gender groups with weights fixed in 2016-17.

### Main findings on current minimum wage levels
- The models confirm that the current levels of the minimum wage may have limited, if any, impact on the economy due to the limited number of workers in the formal sector affected at current minimum wage levels.

### Projected effects of planned minimum wage increases
- An increase in the minimum wage along the lines of the authorities’ medium-term plans, if not accompanied by an equivalent increase in productivity, would likely have material side effects on:
  - output,
  - employment,
  - informality,
  - overall inequality.

### Empirical coefficient estimates reported (most exposed group; 2016–2024)
- Estimates For Labor Market Participation (Coefficient for group-year indicator)
  - x-axis years indicated: 2016 2017 2018 2019 2020 2021 2022 2023 2024
  - y-axis tick values shown: -0.02, -0.01, 0.00, 0.01, 0.02, 0.03
- a) Labor Force Participation
  - plotted tick values: -0.02, -0.01, 0.00, 0.01, 0.02, 0.03 (years 2016–2024)
- b) Employment
  - plotted tick values: -0.01, -0.01, 0.00, 0.01, 0.01, 0.02 (years 2016–2024)
- c) Hours Worked
  - plotted tick values: -0.04, -0.02, 0.00, 0.02, 0.04 (years 2016–2024)
- d) Formal Status
  - plotted tick values: -0.04, -0.02, 0.00, 0.02, 0.04 (years 2016–2024)

### Policy recommendations and monitoring
- It will be key to carefully monitor labor market developments before implementing future minimum wage hikes.
- Authorities should continue to monitor the impact of the minimum wage on labor markets and adjust their strategy if undesirable effects on employment and informality emerge.
- Investigate the degree to which a lack of rising formal wages at the bottom of the income distribution in ENOE data is driven by:
  - mismeasurement and survey design, or
  - a lack of minimum wage enforcement.

*International Monetary Fund — Staff analysis as presented in the source content.*

### 3.0 percent over the medium term, ensuring a stable debt-to -GDP ratio and reinforcing market

### 1mexea2025001-source-pdf - 3.0 percent over the medium term, ensuring a stable debt-to -GDP ratio and reinforcing market

### Fiscal policy and fiscal framework
- Target: "3.0 percent over the medium term, ensuring a stable debt-to -GDP ratio and reinforcing market confidence in Mexico’s fiscal sustainability."
- Authorities' stance:
  - Acknowledge that IMF staff recommendations call for a faster fiscal adjustment due to staff’s more conservative growth assumptions.
  - Fiscal consolidation will proceed "gradually and prudently, balancing debt sustainability with the protection of social programs and investment."
- Reforms and technical assistance:
  - "Reforms to the fiscal framework are underway to enhance transparency, data coverage, and statistical comparability with international standards, supported by IMF technical assistance."

### Monetary Policy
- Regime and recent inflation history:
  - Mexico operates a "highly credible inflation-targeting regime" that has anchored inflation expectations.
  - Pandemic shocks are "already behind," beginning a new phase in the inflationary outlook.
  - Headline inflation peaked at "8.70% in August 2022" and has trended toward the Central Bank’s "3% target."
  - "Since July 2025, headline inflation has been within the variability interval of plus/minus one percentage point around the 3% target, standing at 3.76% in September."
  - Core inflation declined during 2024, "reaching a level of 3.65% in December."
- Banco de México forecasts and policy action:
  - Banco de México’s forecasts suggest headline inflation is "still expected to converge to the target in the third quarter of 2026."
  - The balance of risks for inflation within the forecast horizon "remains biased to the upside," but "the bias is less pronounced than that faced between 2021 and 2024."
  - Given exchange rate behavior, slack in economic activity, the inflationary outlook, and the level of monetary restriction implemented to date, the Governing Board "deemed it appropriate to continue the rate-cutting cycle, decreasing the policy rate to 7.50%."
- Communications and transparency:
  - Authorities consider improving monetary policy communications "a permanent effort."
  - Banco de México progress:
    - "Publishing specific projections for both headline and core inflation in its quarterly reports since 2018."
    - Since the "August 2021 meeting," those updates began appearing in the press releases accompanying monetary policy decisions.
    - Since "December 2021," publication has been supplemented with seasonally adjusted annualized quarterly changes in both headline and core price indices for the same forecast horizon.
    - The Central Bank has used forward guidance successfully, indicating possible future actions while preserving flexibility.
  - On publishing scenarios and policy rate paths:
    - Authorities believe "the risks outweigh the benefits for an emerging market economy."
    - The Central Bank acknowledges pronounced uncertainty and conveys it qualitatively, without using scenario analysis in communications, to avoid implying high probabilities for specific outcomes.
    - Banco de México emphasizes the need to "retain flexibility to respond to new shocks while safeguarding hard-won credibility."

### Financial Sector
- System soundness and prudential standards:
  - "Mexico’s financial system remains sound, supported by strong regulation and supervision."
  - Banks are "profitable, well-capitalized, liquid, and fully compliant with Basel III standards."
  - Stress tests by Banco de Mexico confirm capital and liquidity buffers are sufficient to absorb severe shocks.
- Cross-border exposures and supervisory progress:
  - Given significant participation of foreign banks, authorities "closely monitor cross-border exposures."
  - Progress made on the "2022 FSAP recommendations," particularly on cyber risk management and sustainability disclosures.
- Macroprudential stance and regulatory assessments:
  - With a stable, well-capitalized banking system, authorities "see no immediate need to introduce countercyclical buffers or new borrower-based limits."
  - "The Basel Committee has assessed Mexico’s framework as fully compliant," and banks maintain capital ratios "well above regulatory minima."
  - Authorities emphasize interagency coordination and advances in risk-based supervision to preserve financial stability.

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1mexea2025001-source-pdf.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1mexea2025001-source-pdf.pdf_