## IMF Concludes 2002 Article IV Consultation with Mexico

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### Background and recent developments
- 2001: real GDP declined by 0.3 percent; this recession was the first in Mexico’s recent history not associated with a domestic economic crisis.
- 12-month inflation rate: slowed to 4.4 percent at end-2001 (target was 6.5 percent).
- External current account deficit: narrowed to 2.8 percent of GDP in 2001 from 3.1 percent of GDP in 2000.
- Financing of the current account deficit: more than financed by foreign direct investment (FDI), reflecting the US$12.5 billion purchase of Banamex by Citibank.
- 2002 Q2 rebound: exports supported by stronger demand from the United States and final domestic demand grew sharply.
- 12-month inflation rate: rose to 5.3 percent in August 2002; core inflation continued to decline to under 4 percent.
- External current account deficit: continued to moderate in the first half of 2002; about 90 percent of the deficit during this period was financed by net inflows of foreign direct investment.
- Net international reserves: increased by US$1.7 billion during the first eight months of 2002, following a gain of over US$9 billion in 2001.
- Gross international reserves: amounted to more than US$46½ billion at the end of August 2002, equivalent to 125 percent of short-term debt by residual maturity and 82 percent of annual gross external financing requirements.
- Monetary and fiscal policy: authorities rebalanced the policy mix in 2001 (fiscal policy tightened on a cyclically-adjusted basis; monetary policy relaxed); monetary policy tightened in September 2002 in response to an uptick in inflation expectations and international market turbulence.
- Peso and competitiveness: the peso depreciated from end-March 2002; nevertheless, the peso has appreciated significantly in real effective terms in recent years in relation to relative consumer prices and (by less) unit labor costs.
- Public sector debt management: substantial progress led to lower cost of funding, longer maturities, and reduced external vulnerability, though exposure to short-term interest rates and large gross financing needs remain vulnerabilities.

### Executive Board assessment — findings and risks
- Commendations:
  - Directors commended authorities for maintaining prudent fiscal and monetary policies amid weak economic activity.
  - Inflation has declined, the external current account deficit is moderating, and international reserves have strengthened significantly.
  - Mexico demonstrated resilience and was seen as a relatively “safe haven” among emerging markets.
- Growth outlook and policy imperatives:
  - Growth began to rebound in 2002 in line with the pick up in activity in the United States.
  - Continued skillful macroeconomic management, strong focus on trade, and further progress in structural reforms are essential to achieve faster growth and continue reducing poverty.
- Structural reform priorities emphasized by Directors:
  - Reforms in the tax system to reduce reliance on oil revenues.
  - Reforms in the energy and telecom sectors.
  - Reforms in the labor market and the judicial system.
  - Improvements in governance.
- Fiscal framework and adjustment:
  - Directors welcomed the authorities’ medium-term economic program (PRONAFIDE) and their commitment to a fiscal framework aimed at a sizable reduction in the fiscal deficit and public debt by 2006.
  - Successful implementation of the authorities’ objective of a front-loaded fiscal adjustment in 2003 would:
    - enhance Mexico’s market credibility following the easing of fiscal policy in 2002,
    - reduce pressure on real interest rates,
    - allow room for increased private sector activity,
    - raise Mexico’s resilience against external shocks.
  - Authorities committed to curtail spending as needed to achieve medium-term fiscal targets while maintaining marked increases in social expenditures.
  - Directors supported continued efforts to harmonize VAT rates and improve tax administration.
- Transparency and fiscal governance:
  - Fiscal ROSC mission found considerable progress in transparency and compliance with international standards (reforms to the budgetary process, timely disclosure of fiscal information, strengthening internal controls).
  - Additional actions needed: redefinition of institutional coverage of government, presentation of the budget within a medium-term context.
- Monetary policy and inflation targeting:
  - Mexico’s central bank has gained considerable credibility.
  - Directors endorsed the Bank of Mexico’s tightening in light of an uptick in inflation expectations and international turbulence.
  - An easing of monetary conditions could be considered if the recovery weakens and inflationary expectations are reduced.
  - Authorities intend to strengthen the inflation targeting framework and adopt a long-term inflation objective for 2004 and beyond.
  - Some Directors saw merit in shifting toward direct targeting of short-term interest rates to enhance transparency and reduce interest rate volatility; others cautioned this could increase exchange rate volatility.
- Financial sector and credit:
  - Continued strengthening of the financial system welcomed, including measures to reduce Bank of Mexico credit risk in the payments system and legislation to modernize state-owned development banks.
  - Concern noted about stagnation in bank credit to the private sector; reforms to improve credit infrastructure, creditor rights, and bank supervision may facilitate resumption of lending.
- Reserves and external sector resilience:
  - Present level of international reserves viewed as broadly adequate under a flexible exchange rate; reserves more than fully cover short-term debt.
  - A few Directors preferred further reserve accumulation as extra margin of safety.
  - Timely implementation of productivity-enhancing measures would help address concerns about real exchange rate appreciation; Mexican exports continue to gain market share in the United States.
- Risks highlighted:
  - Uncertainties about the strength of the U.S. recovery, equity market volatility, and weakening sentiment toward other emerging markets.
  - Risks related to large public sector financing requirement and the structure of public and corporate debt.
  - Delays in implementing medium-term fiscal adjustment and structural reforms could increase vulnerability and lower growth prospects.
  - Stress simulations suggest the external sector could weather a sizable capital account crisis.
- Debt management and corporate governance:
  - Directors welcomed efforts to improve public debt management via continued issues of long-term fixed-rate instruments and establishing domestic debt market benchmarks.
  - Authorities’ intention to undertake a World Bank-led ROSC on corporate governance was encouraged; close monitoring of the corporate sector was recommended.
- Data quality:
  - Mexico’s data are generally of good quality, timely, and adequate for conducting surveillance effectively.

### Key statistics (selected)
- Real GDP (annual percentage change): 1997 6.8; 1998 5.0; 1999 3.6; 2000 6.6; 2001 -0.3 (Prel.).
- Real GDP per capita (annual percentage change): 1997 5.1; 1998 3.4; 1999 2.0; 2000 5.0; 2001 -1.7 (Prel.).
- Gross domestic investment (percent of GDP): 1997 25.9; 1998 24.3; 1999 23.5; 2000 23.5; 2001 20.7 (Prel.).
- Gross national savings (percent of GDP): 1997 24.0; 1998 20.5; 1999 20.5; 2000 20.4; 2001 17.8 (Prel.).
- Consumer prices (end of year): 1997 15.7; 1998 18.6; 1999 12.3; 2000 9.0; 2001 4.4 (Prel.).
- Exports, f.o.b. (annual percentage change): 1998 15.0; 1999 6.4; 2000 16.1; 2001 22.0; 2002 (Prel.) -4.8.
- Imports, f.o.b. (annual percentage change): 1998 22.7; 1999 14.2; 2000 13.2; 2001 22.9; 2002 (Prel.) -3.5.
- External current account (percent of GDP): 1997 -1.9; 1998 -3.8; 1999 -2.9; 2000 -3.1; 2001 -2.9 (Prel.).
- Change in net international reserves (in billions of U.S. dollars, IMF definition): 1997 13.5; 1998 3.7; 1999 3.9; 2000 8.2; 2001 9.2 (Prel.).
- Outstanding external debt (percent of GDP): 1997 34.0; 1998 41.1; 1999 34.4; 2000 25.9; 2001 22.3 (Prel.).
- Total external debt service (percent of exports of goods, services, and transfers): 1997 62.6; 1998 47.9; 1999 43.8; 2000 41.8; 2001 39.4 (Prel.).
- Nonfinancial public sector primary balance (percent of GDP): 1997 3.3; 1998 1.7; 1999 2.6; 2000 2.6; 2001 2.6 (Prel.).
- Nonfinancial public sector overall balance (percent of GDP): 1997 -0.7; 1998 -1.2; 1999 -1.1; 2000 -1.1; 2001 -0.7 (Prel.).
- Net public external debt (including IMF, percent of GDP): 1997 27.0; 1998 20.1; 1999 19.7; 2000 15.9; 2001 15.3 (Prel.).
- Monetary base (annual percentage change): 1997 29.6; 1998 20.8; 1999 43.5; 2000 10.7; 2001 8.0 (Prel.).
- Broad money (M4a, annual percentage change): 1997 29.0; 1998 24.2; 1999 19.4; 2000 -12.2; 2001 16.1 (Prel.).
- Treasury bill rate (28-day cetes, percent, annual average): 1997 19.8; 1998 24.8; 1999 21.4; 2000 15.2; 2001 11.3 (Prel.).

### Statement by Mr. Hernan Oyarzábal, Executive Director for Mexico
- 2001 slowdown described as an orderly adjustment of economic activity, attributed to timely and appropriate policy response.
- 2001: GDP contracted 0.3 percent after growing 6.6 percent in 2000.
- Inflation reduced to 4.4 percent in 2001 (official target was not greater than 6.5 percent).
- Nominal and real interest rates declined and the peso remained stable in 2001.
- Public sector finances were affected by the slowdown, the strength of the peso and lower international oil prices; authorities nonetheless reached the fiscal deficit target for the year.
- Cyclically adjusted public finances recorded one of the most important adjustments in recent years.
- Social program expenditures increased 6.1 percent in real terms during 2001.
- External accounts in 2001:
  - Current account deficit: 2.8 percent of GDP.
  - Capital account surplus: 22.7 billion US dollars.
  - FDI flows: 24.7 billion US dollars (1.4 times the current account deficit).
  - Net international reserves increased by 7.3 billion US dollars.
  - Ratio of gross official reserves to short-term debt by residual maturity: increased from 86.8 percent in 2000 to 122.4 percent at end-2001.
- Ratings: Standard & Poor’s and Fitch IBCA upgraded Mexico’s external sovereign debt rating to investment grade at the beginning of 2002; Moody’s upgraded Mexico to investment grade in March 2000 and improved the country’s rating one additional notch.
- Upgrades have diversified the investor base and increased resilience to external shocks.

*Public Information Notice (PIN) No. 02/109, September 26, 2002.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2002/_cr02237.pdf_