## _cr11250

## Source details

**Canonical URL:** [_cr11250](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11250.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11250.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11250.pdf.json)

---

### Recent economic developments
- V-shaped recovery in output and domestic demand driven by strong fundamentals and policy management.
- Manufacturing exports led the recovery, supported by strong links with the U.S.; consumption recovery pronounced and employment improving; investment recovery U-shaped but gaining momentum as excess capacity is absorbed.
- Credit to the private sector is recovering but remains below pre-crisis growth rates.
- Headline and core inflation have declined to close to the 3 percent target.
- Leverage:
  - Household debt about 20 percent of disposable income.
  - Consumer credit less than 7 percent of disposable income.
  - Mortgage lending below 15 percent of disposable income.
- Corporates: sample of 159 large corporates shows resilient profits and moderate leverage; share of foreign debt declined to about 30 percent of total, but short-term debt still accounts for about two-thirds of total debt.

### Capital flows, reserves, and insurance
- Portfolio inflows in 2010: US$37 billion; into government bonds: US$23 billion.
- Inclusion in the WGBI attracted long-term institutional investors.
- Foreign reserves and FCL:
  - Gross international reserves: US$131 billion, up US$27 billion over the last 12 months.
  - Intervention through rule-based options amounted to less than US$6 billion.
  - New FCL arrangement (January 2011) increased access from 1000 to 1500 percent of quota (about US$73 billion).

### Policy stance and public finances
- Fiscal consolidation underway to withdraw the 2009 fiscal stimulus (3 percent of GDP).
- 2010 tax package equivalent to 1 percent of GDP.
- Gross public debt has stabilized at about 43 percent of GDP.
- Average maturity of government debt increased from 6.4 years to 7.3 years over the last twelve months.
- Policy rate: 4.5 percent; real policy rate (ex-ante): around 1 percent.
- Peso appreciation nearly 10 percent against the U.S. dollar (past year referenced).
- REER: appreciated 18 percent through April 2011 but remains about 4 percent below the average pre-crisis level.
- CGER approaches: macroeconomic balance: REER marginally 6 percent above medium-term value; equilibrium real exchange rate: -11 percent below estimated norm; external sustainability: -1 percent below estimated norm; on average, no strong indication that the peso is significantly apart from its equilibrium level.

### Monetary policy and inflation
- Inflation pressures subdued; medium-term inflation expectations firmly anchored but somewhat above target.
- Monetary conditions relatively accommodative; market expects very gradual move toward neutral rates.
- Real interest rate defined as overnight interest rate minus 12 months ahead inflation expectations.

### External sector and vulnerabilities
- Current account deficit expected to widen gradually to about 1½ percent of GDP by 2016.
- Mexico’s oil balance expected to deteriorate gradually; non-oil balance expected to improve partially offsetting oil deterioration.
- Foreign investment largely in government securities; short-term inflows have increased.
- CETES held by non-residents increased alongside improved Sharpe ratio vis-à-vis the U.S.
- Long-standing central bank regulation: FX liquidity coefficient to limit twin currency/maturity mismatches and costly for banks to borrow in foreign currency and lend in pesos; coefficient includes peso-denominated notes linked to the exchange rate to prevent regulatory avoidance.

### Financial sector soundness
- Financial soundness indicators did not deteriorate significantly during the global crisis.
  - Capital adequacy ratios and liquidity indicators are above pre-crisis levels.
  - Non-performing loans rose only moderately, have fallen back, and are well provisioned.
- Stress testing by Mexico’s Financial Stability Council confirmed banking system resilience.
- Sovereign spreads at historically low levels have facilitated corporate access to foreign funding.
- Corporate foreign currency debt share: about 30 percent of total (sample); short-term debt accounts for about two-thirds of total corporate debt (sample).

### Growth outlook and risks (Section 7)
- Strong growth envisaged to continue into 2012, bringing output in line with potential.
- Mexico’s potential growth rate estimated at 3¼ percent in the absence of comprehensive structural reforms.
- Near-term balance of risks tilted to the downside, linked to the global outlook:
  - Protracted slowdown in the U.S., particularly manufacturing, would materially drag Mexico’s growth.
  - Renewed global financial turmoil from Europe could adversely affect Mexico via contagion, counterparty uncertainty, and generalized risk aversion.
  - Persistent increase in oil prices could have limited direct positive effect but strong indirect negative effect via a U.S. slowdown.
- Longer-term domestic structural risks:
  - Decline in oil revenues as a share of GDP; rise in age-related spending.
  - Effective implementation of productivity-enhancing reforms could provide considerable upside.

### Near-term macro policy stance: fiscal and monetary
- Fiscal policy:
  - Authorities intend to continue fiscal consolidation in 2012 to unwind the past stimulus.
  - Negative fiscal impulse envisaged for 2011 and 2012: about ¾ percent of GDP in each year.
  - Augmented primary balance envisaged to improve by about 1 percentage points of GDP in 2011 (to -0.5 percent of GDP) and by ½ percentage point in 2012 (to balance).
  - Continuing gradual adjustment of domestic fuel prices would reduce current fiscal cost (about 1 percent of GDP in 2011) and remove the untargeted subsidy.
- Monetary policy:
  - Challenge: balance domestic cyclical conditions against increased global downside risks while assessing speed of recovery and remaining slack.
  - Potential supply shocks with second-round effects warrant Banxico’s close monitoring.
  - Peso appreciation has contributed to some tightening in monetary conditions.
  - Room exists for Banxico to continue assessing developments before tightening; enhanced Banxico communications expected to strengthen public understanding and anchor expectations.

### Exchange rate, reserves, and contingency buffers
- Floating exchange rate is an important buffer against external shocks.
- Recent reserve build-up mostly through higher Pemex revenues; rule-based intervention limited.
- Level of reserves appears adequate for normal times; FCL seen as a useful complement to self-insurance and buffer against tail risks.

### Central bank communication and inflation dynamics
- Inflation targeting adoption: inflation fell from nearly 20 percent in 1999 to an average of about 4 percent since 2003, close to the 3 percent target.
- Banxico 2011 communication initiatives:
  - Publish minutes of policy meetings with detailed analyses.
  - Increase quantitative assessment granularity (e.g., fan charts).
  - Increase public speeches and presentations by authorities.
- Staff research suggests clearer central bank communication helps anchor market perceptions and stabilize inflation and interest rate adjustments.

### Prudential framework, Basel III readiness, and financial stability institutions
- Prudential framework ahead of new international standards; banks well positioned to implement Basel III.
- Key Basel III elements and Mexico’s position:
  - Common equity requirement: 4.5 percent plus capital conservation buffer of 2.5 percent and counter-cyclical buffer (0-2.5 percent); common equity at end-2010: 13.8 percent.
  - Tier 1 capital requirement: 6 percent; end-2010 Tier one capital ratio: 14.7 percent.
  - Leverage ratio: 3 times Tier 1 capital; expected effective by 2018 and not currently binding.
  - LCR and NSFR to be subject to an observation period; most banks already compliant with short-term liquidity requirement.
- Financial Stability Council (FSC) established in 2010; chaired by Minister of Finance; four working groups; first annual report used stress testing to assess resilience and systemic risks.
- Concerns:
  - Capital surcharges for systemic institutions could disproportionately affect Mexico, reducing credit growth and raising intermediation margins.
  - Capital surcharges for trading risks could reduce market liquidity and increase spreads.
  - Recalibration of sovereign risks could lead global banks to treat domestic debt holdings by subsidiaries as foreign debt, requiring higher capital.

### Global spillovers and external integration
- Spillovers from advanced-economy stimuli (particularly the U.S.) largely positive via trade and external financing.
- Mexico–U.S. integration:
  - About 80 percent of Mexican non-oil exports go to the U.S.
  - Contemporaneous correlation of industrial production between the U.S. and Mexico nearly 0.9 in 2006–10.
  - Swiston and Bayoumi (2008) estimate: a 1 percent change in U.S. GDP → 1½ percent change in Mexico’s GDP.
- If U.S. monetary conditions remain loose, capital inflows to Mexico could intensify; flexible exchange rate and fiscal consolidation would help contain excesses.
- Authorities caution that capital controls elsewhere could have negative spillovers for open economies like Mexico.

### Europe-related risk and transmission (Section 16)
- Main direct link with Europe: large presence of Spanish banks (Santander and BBVA) in Mexico.
- Authorities tightened regulations and supervision of foreign bank subsidiaries, including limits on dividend distribution and related-party lending.
- Direct impact from European unsettled conditions seen as limited, but increased global risk aversion could affect Mexico.
- Foreigners’ holdings of peso-denominated government securities increased by about US$40billion since end-2009 to around US$70billion.

### Competition with China and structural reforms
- China a key competitor in manufacturing; recent renminbi appreciation and higher relative wage inflation in China helped reverse some competitiveness loss.
- Policy implication: unleash Mexico’s productivity growth to recover export potential and market share.
- Structural reform priorities:
  - Boost competition in concentrated sectors (telecommunications, transportation, energy).
  - Broaden access to credit for SMEs and households; improve information flows and collateral framework.
  - Improve education quality and labor flexibility.
  - Reinforce domestic security and strengthen AML framework.
  - Improve state energy companies performance, including limited-scope PPPs.

### Longer-term fiscal challenges (Section 16)
- Oil revenues:
  - Oil revenues currently account for a third of government revenues and about 8 percent of GDP.
  - Risk they could fall by about 4 percentage points of GDP by 2030 as the economy grows.
  - Non-oil revenue mobilization needed: broaden VAT and personal income tax bases and revamp subnational tax mobilization.
- Aging and pension/health pressures:
  - Population aging and transitional costs of pension reform could increase public spending by about 3 percent of GDP by 2030.
  - Staff noted need to revisit pension system parameters, including retirement age.

### Tax structure and subnational finances
- Non-oil tax revenue around 10 percent of GDP; lowest among OECD countries.
  - Income taxes: 50 percent of non-oil tax revenues.
  - VAT: 40 percent of non-oil tax revenues.
- PIT collections: 2.3 percent of GDP in 2010 despite a 30 percent top rate; base narrow because of uncapped deductions and exemptions.
- Subnational taxation:
  - Local tax collection around 1.3 percent of GDP.
  - Municipal real estate taxation yields ¼ percent of GDP compared to about 1 percent in OECD.
  - Over 90 percent of subnational revenues come from central transfers; subnational debt about 2½ percent of GDP; implicit pension liabilities estimated considerably higher.

### Fiscal DSA (Debt Sustainability Framework, 2002–2016)
- Summary finding: public debt moderate and will remain stable under baseline at around 43 percent of GDP.
- Standard DSA shocks increase public debt by generally less than 10 percentage points of GDP over the medium term.
- Debt-stabilizing primary balance: -0.5 (percent of GDP).
- Baseline gross public sector debt (percent of GDP), selected years:
  - 2002: 45.7; 2003: 45.6; 2004: 41.4; 2005: 39.8; 2006: 38.4; 2007: 37.8; 2008: 43.1; 2009: 44.7; 2010: 42.9; 2011: 42.5; 2012: 42.5; 2013: 42.7; 2014: 42.7; 2015: 42.5; 2016: 42.4.
- o/w foreign-currency denominated (percent of GDP), selected years:
  - 2002: 15.5; 2003: 16.0; 2004: 14.6; 2005: 12.8; 2006: 10.2; 2007: 10.2; 2008: 12.8; 2009: 12.1; 2010: 10.0; 2011: 9.2; 2012: 8.5; 2013: 8.0; 2014: 7.6; 2015: 7.1; 2016: 6.7.
- Change in gross public sector debt (percent of GDP), selected years:
  - 2002: 3.7; 2003: -0.1; 2004: -4.2; 2005: -1.6; 2006: -1.5; 2007: -0.5; 2008: 5.3; 2009: 1.6; 2010: -1.8; 2011: -0.4; 2012: 0.0; 2013: 0.2; 2014: 0.0; 2015: -0.2; 2016: -0.1.
- Primary deficit (percent of GDP), selected years:
  - 2002: 0.1; 2003: -0.9; 2004: -1.6; 2005: -1.5; 2006: -1.5; 2007: -1.1; 2008: -1.3; 2009: 2.2; 2010: 1.8; 2011: 0.6; 2012: 0.0; 2013: -0.1; 2014: -0.2; 2015: -0.3; 2016: -0.5.
- Gross financing need (percent of GDP), selected years:
  - 2002: 11.0; 2003: 10.9; 2004: 8.8; 2005: 10.4; 2006: 8.4; 2007: 8.2; 2008: 10.9; 2009: 15.4; 2010: 13.1; 2011: 11.9; 2012: 10.4; 2013: 10.4; 2014: 10.1; 2015: 9.9; 2016: 9.6.
- Scenario with no policy change (constant primary balance) gross public debt (percent of GDP):
  - 2011: 43.3; 2012: 45.0; 2013: 47.1; 2014: 49.0; 2015: 50.9; 2016: 53.1.

### Key macro and statistical indicators (selected)
- Real GDP growth (percent), selected years:
  - 2007: 3.2; 2008: 1.2; 2009: -6.2; 2010: 5.4; 2011 (proj.): 4.4; 2012 (proj.): 4.1.
- Real GDP per capita (U.S. dollars, 2009): 8,143.
- Poverty headcount ratio (% of population, 2008): 47.4.
- Population (millions, 2009): 107.4.
- Life expectancy at birth (years, 2009): 75.3.
- Under 5 mortality rate (per thousand, 2009): 16.8.
- Consumer prices (end of year), selected years:
  - 2007: 3.8; 2008: 6.5; 2009: 3.6; 2010: 4.4; 2011 (proj.): 3.4.
- Government revenue (percent of GDP), selected years:
  - 2007: 22.8; 2008: 22.2; 2009: 22.2; 2010: 22.2; 2011 (proj.): 21.5; 2012 (proj.): 21.9.
- Government expenditure (percent of GDP), selected years:
  - 2007: 24.4; 2008: 27.0; 2009: 26.3; 2010: 24.7; 2011 (proj.): 24.4; 2012 (proj.): 24.4.
- Augmented balance (percent of GDP), selected years:
  - 2007: -1.6; 2008: -1.4; 2009: -4.8; 2010: -4.1; 2011 (proj.): -3.2; 2012 (proj.): -2.5.
- Net international reserves (billions of U.S. dollars), selected years:
  - 2006: 78.0; 2007: 85.4; 2008: 90.8; 2009: 113.6; 2010: 133.6; 2011 (proj.): 143.6.
- Exports, f.o.b. growth (annual percent change), selected years:
  - 2007: 8.8; 2008: 7.2; 2009: -21.2; 2010: 29.9; 2011 (proj.): 21.5; 2012 (proj.): 8.1.
- Oil export price, Mexican mix (US$/bbl), selected years:
  - 2006: 61.8; 2007: 79.0; 2008: 52.5; 2009: 67.7; 2010: 91.1; 2011 (proj.): 90.2.

### Statistical quality and FX liquidity framework (ANNEX 3 & Annex 4 excerpt)
- Overall quality of Mexican statistics assessed as good; SDDS-observed; ROSC completed May 23, 2003 and update October 8, 2010.
- Balance of payments: partial conformity with BPM5; Banco de México publishing new format since Q2 2010 following BPM5 guidelines.
- National accounts: generally follow 1993 SNA; limitations include exclusion of random sample of small enterprises and inventories measured as residuals.
- Price indices: CPI and PPI meet international standards; PPI compiled only by product.
- Fiscal statistics: compiled on national concepts; new government accounting law mandates standards following international norms; authorities committed to GFSM 2001 reporting.
- Monetary statistics: methodological foundations sound; recording of financial derivatives and repurchase agreements may overstate aggregated ODC balance sheet.
- FX liquidity and structural requirements (key rules and parameters):
  - Net open position limited to 15 percent of Tier-1 capital (including peso-denominated products linked to the exchange rate).
  - Liquidity ratio on foreign currency requires banks to hold liquid FX assets to meet short-term obligations across buckets: 1 day, 1–7 days, 1–30 days, 1–60 days.
  - Structural FX requirement: at end of each day, banks need Net Foreign Currency Liabilities (NFCL) of less than 1.83 times core capital.
  - Table of liability maturity weights and asset-type weights specified for structural FX calculation.
  - Haircuts on traded securities provided by credit rating categories (e.g., > AA / > Aa3: 100; A+ / A1: 90; BBB / Baa2: 80; BB+ / Ba1: 50; < BB / < Ba2: 0).

*Source: _cr11250 - IMF staff report excerpts (2011 Article IV report).*

### 1. Selected Economic, Financial, And Social Indicators, 2007–2012 ______________________________ 31

### 1. Selected Economic, Financial, And Social Indicators, 2007–2012

### Recent economic developments
- V-shaped recovery in output and domestic demand driven by strong fundamentals and policy management.
- Manufacturing exports have led the recovery, supported by strong links with the U.S.; recovery in consumption pronounced and employment improving; investment recovery U-shaped but gaining momentum as excess capacity is absorbed.
- Credit to the private sector is recovering but remains below pre-crisis growth rates.
- Headline and core inflation have declined to close to the 3 percent target.
- Leverage: government debt manageable; corporate and household leverage modest.
  - Household debt about 20 percent of disposable income.
  - Consumer credit less than 7 percent of disposable income.
  - Mortgage lending below 15 percent of disposable income.
- Corporates: sample of 159 large corporates shows resilient profits and moderate leverage; share of foreign debt declined to about 30 percent of total, but short-term debt still accounts for about two-thirds of total debt.

### Capital flows, reserves, and insurance
- Portfolio inflows reached US$37 billion in 2010, with US$23 billion into government bonds.
- Inclusion in the WGBI attracted long-term institutional investors.
- Foreign reserves and FCL:
  - Gross international reserves: US$131 billion, up US$27 billion over the last 12 months.
  - Intervention through rule-based options amounted to less than US$6 billion.
  - New FCL arrangement (January 2011) increased access from 1000 to 1500 percent of quota (about US$73 billion).

### Policy stance and public finances
- Fiscal consolidation underway to withdraw the 2009 fiscal stimulus (3 percent of GDP).
  - 2010 tax package equivalent to 1 percent of GDP.
- Gross public debt has stabilized at about 43 percent of GDP.
- Average maturity of government debt increased from 6.4 years to 7.3 years over the last twelve months.
- Policy rate kept at 4.5 percent (lowest level since mid-2009), equivalent to around 1 percent (ex-ante) in real terms.
- Peso appreciation nearly 10 percent against the U.S. dollar over the past year has partially offset monetary stimulus.
- The real effective exchange rate (REER) appreciated 18 percent through April 2011 but remains about 4 percent below the average pre-crisis level.
- CGER and other exchange rate approaches:
  - Macroeconomic balance approach: REER marginally 6 percent above medium-term value.
  - Equilibrium real exchange rate approach: -11 percent below estimated norm.
  - External sustainability approach: -1 percent below estimated norm.
  - On average, no strong indication that the peso is significantly apart from its equilibrium level.

### Monetary policy and inflation
- Inflation pressures subdued; medium-term inflation expectations firmly anchored but somewhat above target.
- Monetary conditions relatively accommodative; market expects very gradual move toward neutral rates.
- Real interest rate defined as overnight interest rate minus 12 months ahead inflation expectations.

### External sector and vulnerabilities
- Current account developments:
  - Current account deficit expected to widen gradually to about 1½ percent of GDP by 2016.
  - Mexico’s oil balance expected to deteriorate gradually; non-oil balance expected to improve partially offsetting oil deterioration.
- External inflows:
  - Foreign investment largely in government securities; short-term inflows have increased.
  - CETES held by non-residents increased alongside improved Sharpe ratio vis-à-vis the U.S.
- FX liquidity and banking sector:
  - Long-standing central bank regulation: FX liquidity coefficient to limit twin currency/maturity mismatches and costly for banks to borrow in foreign currency and lend in pesos.
  - The coefficient includes peso-denominated notes linked to the exchange rate to prevent regulatory avoidance.

### Financial sector soundness
- Financial soundness indicators did not deteriorate significantly during the global crisis.
  - Capital adequacy ratios and liquidity indicators are above pre-crisis levels.
  - Non-performing loans rose only moderately, have fallen back, and are well provisioned.
- Stress testing by Mexico’s Financial Stability Council confirmed banking system resilience.
- Credit growth to the private sector recovered in line with cyclical financing needs.
- Sovereign spreads at historically low levels have facilitated corporate access to foreign funding.
- Corporate foreign currency debt share and leverage:
  - Share of FX debt shown at series values (chart data), with leverage (assets to equity ratio) presented for corporates.

### Key quantitative figures (as reported)
- Portfolio inflows in 2010: US$37 billion; into government bonds: US$23 billion.
- 2009 fiscal stimulus: 3 percent of GDP.
- 2010 tax package: 1 percent of GDP.
- Gross public debt: about 43 percent of GDP.
- Policy rate: 4.5 percent.
- Real policy rate (ex-ante): around 1 percent.
- Peso appreciation: nearly 10 percent against the U.S. dollar (past year referenced).
- Gross international reserves: US$131 billion (up US$27 billion over the last 12 months).
- Rule-based intervention: less than US$6 billion.
- FCL access increase: from 1000 to 1500 percent of quota (about US$73 billion).
- Average maturity of government debt: increased from 6.4 years to 7.3 years.
- REER increase through April 2011: 18 percent; still about 4 percent below average pre-crisis level.
- Projected current account deficit by 2016: about 1½ percent of GDP.
- Household debt: about 20 percent of disposable income.
- Consumer credit: less than 7 percent of disposable income.
- Mortgage lending: below 15 percent of disposable income.
- Corporate foreign debt share: about 30 percent of total; short-term debt accounts for about two-thirds of total corporate debt (sample).

*Source: _cr11250 - 1. Selected Economic, Financial, And Social Indicators, 2007–2012*

### 7.      Strong growth is envisaged to

### _cr11250 - 7.      Strong growth is envisaged to

### Growth outlook and downside risks
- Strong growth is envisaged to continue this year and into 2012, bringing output in line with potential.
- Mexico’s potential growth rate is estimated at 3¼ percent in the absence of comprehensive structural reforms (Selected Issues Paper).
- Near-term balance of risks appears tilted to the downside, linked to the global outlook:
  - A more protracted slowdown in the U.S., particularly if it involved manufacturing, would represent a material drag on Mexico’s growth given its close integration with the U.S. economy.
  - Renewed global financial turmoil from unsettled conditions in Europe could adversely affect Mexico, especially if contagion spilled beyond the epicenter and rekindled counterparty uncertainty and generalized risk aversion.
  - Downside global risks could also arise from a persistent increase in oil prices, which could have a limited positive direct effect on Mexico but a strong indirect negative effect associated with a slowdown in the U.S. economy.
- Longer-term domestic structural risks:
  - Rise in fiscal pressures, notably a decline in oil revenues as a share of GDP.
  - An increase in age-related spending.
  - Effective implementation of productivity-enhancing reforms could provide considerable upside to the growth outlook.

### Near-term macroeconomic policy stance (fiscal and monetary)
- Fiscal policy
  - Authorities intend to continue with fiscal consolidation in 2012 to unwind the past stimulus.
  - A gradual fiscal consolidation in 2011–12 was viewed as warranted to withdraw the fiscal stimulus introduced in 2009.
  - The negative fiscal impulse envisaged for 2011 and 2012 is about ¾ percent of GDP in each year.
  - The 2010 fiscal package already envisaged reducing the fiscal deficit during the 2010–12 period through higher tax rates and contained expenditure growth.
  - Plan to return to the balanced-budget rule and lift again the ceiling on the accumulation of resources in the oil stabilization fund, as done in 2010 and 2011.
  - The augmented primary balance is envisaged to improve by about 1 percentage points of GDP in 2011 (to -0.5 percent of GDP) and by ½ percentage point in 2012 (to balance).
  - Continuing gradual adjustment of domestic fuel prices to align with international prices would reduce the current fiscal cost (about 1 percent of GDP in 2011) and remove the untargeted subsidy.
- Monetary policy
  - With fiscal consolidation underway, monetary policy faces the challenge of balancing domestic cyclical conditions against increased global downside risks.
  - Staff and authorities concurred demand pressures appear muted; the task is to assess the speed of recovery and the level of remaining slack in resource utilization.
  - Potential supply shocks with second-round effects and possible impacts on inflation expectations warrant Banxico’s close monitoring.
  - Recent appreciation of the peso has effectively contributed to some tightening in Mexico’s monetary conditions.
  - Given a still-benign inflation landscape and firmly-anchored inflation expectations, authorities and staff saw room for Banxico to continue assessing domestic and external developments in deciding the timing of future monetary policy tightening.
  - Enhanced Banxico communications are expected to strengthen public understanding of monetary policy trade-offs and help further anchor inflation expectations.

### Exchange rate, reserves, and contingency buffers
- Mexico’s floating exchange rate has been an important buffer against external shocks.
- Appreciation since the crisis has mainly reflected improved cyclical position and increased recognition among foreign investors as a strong sovereign credit.
- Appropriate response to increased capital inflows remains an adequate macro policy mix (fiscal, monetary, and financial) and the full working of the flexible exchange rate regime.
- Mexico’s long-standing FX liquidity coefficient and prudential framework mitigate risks associated with a surge in inflows.
- International reserves
  - Recent build-up of reserves has been mostly through higher revenues from Pemex with rule-based intervention playing a limited role.
  - The level of reserves appears adequate for normal times.
  - Given global uncertainty, the FCL is a useful complement to self-insurance and an important buffer against potential tail risks.

### Central bank communication and inflation dynamics
- Adoption of an inflation targeting (IT) framework in the early 2000s was a key milestone.
  - Inflation fell from nearly 20 percent in 1999 to an average level of about 4 percent since 2003, or close to the authorities’ 3 percent target.
  - Price formation became less persistent and medium-term inflation expectations have been very firmly anchored—albeit somewhat above the target.
- Banxico efforts to enhance communication (2011 initiatives):
  - Publishing minutes of policy meetings with detailed analyses and extensive coverage of board discussions.
  - Increasing quantitative assessment granularity, e.g., fan charts showing baseline projections and balance of risks.
  - Increasing public speeches and presentations by Banxico authorities.
- Staff research (Tang and Yu, forthcoming) suggests clearer central bank communication helps anchor market perceptions of the policy response function and can produce more stable inflation and smoother interest rate adjustments.

### Prudential framework, Basel III readiness, and financial stability institutions
- Mexico’s prudential framework is ahead of new international standards; banks are well positioned to implement Basel III.
  - Capital requirements broadly compliant with future Basel III guidelines.
  - Subordinated debt counting toward Tier-2 will be phased out.
  - Most banks already compliant with the short-term liquidity requirement of Basel III.
- Key Basel III elements and Mexico’s position:
  - Common equity requirement: common equity of 4.5 percent of assets plus a capital conservation buffer of 2.5 percent, and a counter-cyclical buffer (ranging from 0-2.5 percent). Pending decision on counter-cyclical buffers, common equity is to be increased by 2.5 percentage points in the meantime.
    - At end-2010, all banks complied with the minimum requirements set for 2019, with common equity at 13.8 percent.
    - Introduction of expected loan-loss provisioning has brought an element of counter-cyclicality.
  - Tier 1 capital requirement: 6 percent. At end-2010, Mexican banks had an average Tier one capital ratio of 14.7 percent.
  - Leverage ratio: 3 times Tier 1 capital; expected to become effective by 2018 and not currently binding for any bank in Mexico.
  - Liquidity requirements (LCR and NSFR) to be subject to an observation period:
    - Liquidity Coverage Ratio (LCR): banks’ liquid assets are large in relation to short-term liabilities; a mid-2010 assessment suggests only some smaller banks may not comply.
    - Net Stable Funding Ratio (NSFR): Mexico’s significant deposit base places it well with respect to this requirement.
- Financial Stability Council (FSC)
  - Established in 2010 to identify and address systemic risk, chaired by the Minister of Finance and including Banxico, CNBV, CNSF, CONSAR, and IPAB.
  - Operates by consensus in practice; each institution implements policies within its legal mandate.
  - Four working groups: standardize and collect information; develop a framework to analyze vulnerabilities; design metrics for systemic risk measurement; ensure market participants have sufficient and timely information.
  - FSC’s first annual report assessed resilience via stress testing and highlighted systemic risks including potential reversion of capital flows, impact of the European crisis, and a protracted slowdown in global activity.
- Concerns about international regulatory reforms
  - Capital surcharges for systemic institutions could disproportionately affect Mexico because of the large share of systemic banks, potentially leading to lower credit growth and higher intermediation margins.
  - Capital surcharges for trading risks could reduce market liquidity and increase spreads, as banks’ trading activities provide important liquidity for domestic sovereign debt and derivative markets.
  - Recalibration of sovereign risks could lead global banks to treat holdings of domestic debt by subsidiaries as foreign debt, requiring higher capital and potentially creating incentives to divest from domestic debt holdings and increase required interest.

### Global spillovers and external integration
- Spillovers from fiscal and monetary stimuli in advanced economies (particularly the U.S.) after the global crisis have been largely positive for Mexico via real/trade channels and improved access to external financing.
- Mexico–U.S. integration:
  - About 80 percent of Mexican non-oil exports go to the U.S. market.
  - Mexico’s industrial production closely tracks that of the U.S.; contemporaneous correlation of industrial production between the U.S. and Mexico is nearly 0.9 in the period 2006–10.
  - Swiston and Bayoumi (2008) estimated that a 1 percent change in U.S. GDP would result in a 1½ percent change in Mexico’s GDP.
- Stabilized financial markets and low interest rates improved Mexico’s external financing conditions; capital inflows into Mexico have become increasingly important.
  - If U.S. monetary conditions remain loose for a protracted period, the pace of capital inflows to Mexico could intensify; Mexico’s flexible exchange rate would help contain excesses, and fiscal consolidation would be an opportunity to rebuild buffers.
  - Mexico is well prepared to absorb increased capital flows, with moderate household and corporate leverage and a sound prudential framework.
  - Authorities cautioned that the use of capital controls in other emerging market economies may have negative spillovers for financially open economies by diverting capital flows and limiting exchange rate adjustments.
- Withdrawal of stimuli in advanced economies could entail challenges, including the risk of a rapid reversal of capital flows.

*Source: MEXICO 2011 ARTICLE IV REPORT — excerpted section titled "7.      Strong growth is envisaged to" and associated Key Policy Issues and Boxes as provided.*

### 16.      A potential surge in global risk

### 16.      A potential surge in global risk

### Europe-related market-risk concern and transmission channels
- A potential surge in global risk aversion from unsettled market conditions in Europe remains a concern.
- Mexico’s main direct link with Europe is through the large presence of Spanish banks (Santander and BBVA) in its domestic financial system.
- Authorities have tightened regulations and supervision of subsidiaries of foreign banks, including with limits on dividend distribution (to avoid an erosion of capital) and related-party lending.
- The bank channel is viewed as well ring-fenced, an assessment shared by market participants and local analysts.
- Direct impact from unsettled conditions in Europe is seen as limited, but:
  - An increase in global risk aversion and generalized flight to quality could affect even strong sovereign credits like Mexico.
  - Mexico’s debt structure and reinforced reserve buffers would help limit the effect of an increase in global risk aversion.
  - Increased liquidity and participation of foreign investors in Mexican securities markets in recent years could be a potential channel in a tail scenario.
- Key statistics on foreign participation:
  - Foreigners’ holdings of peso-denominated government securities have increased by about US$40billion since end-2009 to around US$70billion.

### Competition with China in the U.S. market
- China is a key competitor in manufacturing with Mexico, despite limited direct trade and FDI linkages between China and Mexico.
- The authorities have viewed China’s undervalued currency as a contributing factor to Mexico’s loss of export market share in the U.S. in the 2000s and the relocation of manufacturing activities from North America to China and Asia more generally.
- More recently:
  - Appreciation of the renminbi against the peso, together with higher relative wage inflation in China, appears to have helped reverse part of the competitiveness disadvantage and regain some lost market share in the U.S.
- Policy implication:
  - Unleashing Mexico’s productivity growth would be important to recovering export potential and market share.

### Longer-term fiscal challenges: oil revenues and aging
- Mexico’s strong macroeconomic policies and frameworks are expected to continue to ensure stability over the medium-term.
- However, longer-term fiscal challenges arise from diminishing oil revenues and increasing age-related spending.
- Oil revenues and fiscal implications:
  - Oil revenues are expected to decline relative to GDP, in the context of broadly stable oil production and prices.
  - At present, oil revenues account for a third of government revenues.
  - There is a risk that they could fall by about 4 percentage points of GDP by 2030, as the economy grows.
  - At present, oil revenues accounts for about 8 percent of GDP.
  - Non-oil revenue mobilization efforts to compensate would need to focus, inter alia, on broadening the tax base of the value added and personal income taxes and revamping tax mobilization by subnational governments.
- Population aging and pension/health pressures:
  - Population aging and the transitional costs from the reform of the old pension system are expected to put significant pressure on health and pension spending.
  - Both effects could increase public spending by about 3 percent of GDP by 2030.
  - Staff noted the need to revisit the main parameters of the pension system, including the retirement age.

### Tax mobilization and revenue structure (Box 7)
- Current non-oil tax revenue is one of the lowest in the region and the lowest among OECD countries.
- Recent trends and composition:
  - Non-oil tax revenue in Mexico is around 10 percent of GDP.
  - Income taxes account for 50 percent of non-oil tax revenues.
  - VAT accounts for 40 percent of non-oil tax revenues.
- Personal income tax (PIT):
  - The PIT has a narrow base because of uncapped deductions, preferential regimes, and exemptions.
  - Revenue productivity is low despite a 30 percent top rate; collections amounted 2.3 percent of GDP in 2010.
  - Suggested reforms: simplify PIT, broaden base, enhance progressivity, bring exempt incomes into the base, replace existing deductions with higher basic exemption allowances.
- Corporate income tax (CIT):
  - Generally sound and competitive; base could be broadened by bringing medium and large businesses in agriculture, forestry, and transportation from the simplified regime.
- VAT:
  - VAT collections have been increasing slowly; widespread zero rates and exemptions reduce yield.
  - The VAT should be broadened by minimizing exemptions, unifying the rate across the country, and limiting zero rates to exports.
- Fuel taxation:
  - Domestic fuel prices are administered; a spike in oil prices at the end of 2010 led to a “negative” excise tax in 2011.
  - Gasoline pricing should continue to be increased and aligned with international process to regain a positive gasoline taxation in Mexico.
- Subnational taxation:
  - Subnational government revenue mobilization is very low and should be enhanced.
  - Local tax collection is around 1.3 percent of GDP.
  - Municipal taxation of real estate yields ¼ percent of GDP compared to about 1 percent of GDP on average in OECD countries and ¾ percent of GDP in other Latin American countries.

### Strengthening fiscal framework and subnational finances
- Further enhancing Mexico’s fiscal framework could help reduce procyclicality:
  - Permanently removing the ceilings on the accumulation of resources in the oil stabilization fund would help save oil revenue windfalls and mitigate potential procyclicality during upturns embedded in the fiscal rule.
  - Over the medium term, focusing on a structural balance measure could mitigate upturn procyclicality.
- Subnational finance issues:
  - Over 90 percent of subnational government revenues currently come from central government transfers.
  - Subnational government debt remains moderate, at about 2½ percent of GDP.
  - Implicit pension liabilities of subnational governments are estimated to be considerably higher.
  - Short-term borrowing by some local governments has increased, warranting close monitoring.
  - Broadening reporting and coverage of subnational governments’ accounts, including implicit pension liabilities, would help assess fiscal policy and public sector liabilities more comprehensively.

### Structural reforms to raise potential growth and employment
- Mexico’s growth averaged about 3¼ percent a year over the two decades preceding the global crisis and underperformed comparable peers.
- With a challenging global environment, pressing ahead with ambitious structural reforms is essential; priorities identified include:
  - Boosting competition:
    - High concentration in key sectors (telecommunications, transportation, energy).
    - Recent anti-trust reform enhances regulatory powers; open auctions for radio spectra to increase competition.
    - Further reforms of state-owned energy companies to strengthen productivity and governance, including limited-scope PPPs.
  - Broadening access to credit, including SMEs and households:
    - While financial system is sophisticated, access remains limited for segments.
    - Initiatives: improve information flows on borrowers, strengthen legal framework for use of collateral, promote private financing of infrastructure and PPPs.
    - Household debt is at a moderate 20 percent of disposable income.
  - Improving education and labor flexibility:
    - Quality of education remains below peers despite increased enrollment.
    - Measures: teacher incentives, improve education quality, expedite reforms to enhance labor flexibility to reduce contractual rigidities and boost formal employment.
  - Reinforcing domestic security:
    - Ongoing efforts to fight organized crime, including strengthening the AML framework, are important to foster investment and growth.

### Financial sector resilience and oversight
- Financial sector proved resilient during the global crisis; prudential framework is generally ahead in implementing new international standards.
- Most Basel III prudential regulations will be applied ahead of the internationally-agreed schedule, with banks well positioned to implement them.
- Mexico has set up a Financial Stability Council (FSC) to monitor systemic risks and coordinate efforts; the FSC’s broad data collection effort is welcomed.
- Monitoring needs:
  - External debt of corporates, including derivatives positions.
  - Lending to subnational governments is increasingly concentrated in a few smaller banks—close monitoring warranted.

### Staff appraisal and near-term policy challenges
- Mexico’s very strong fundamentals and policy track record were crucial to withstand the global crisis and achieve a V-shaped recovery.
- Near-term policy challenge:
  - Gradually adjust overall policy stance while accounting for significant global uncertainty; balance domestic cyclical conditions with global risks across fiscal and monetary timing choices.
- Medium-term challenge:
  - Unleash Mexico’s growth potential and employment generation while tackling long-term fiscal challenges through anticipated reforms.
- Fiscal consolidation:
  - Ongoing fiscal consolidation plans are judicious; planned return to the balanced-budget rule and lifting of the ceiling on the accumulation of resources in the oil stabilization fund will help unwind fiscal stimulus.
  - Gradual adjustment in gasoline prices should continue to bring them in line with international prices by next year; elimination of the fuel subsidy could be complemented by enhancements in the safety net to protect the most vulnerable.
- Rebuilding buffers and fiscal reporting:
  - Mexico would benefit from gradually rebuilding fiscal policy buffers over the medium term.
  - Permanently removing the ceiling on the oil stabilization fund would help save windfalls and reduce procyclicality.
  - Consideration could be given to enhancing the fiscal framework by focusing on a structural balance measure.
  - Broadening reporting of subnational governments’ accounts, including implicit pension liabilities, is recommended.
- Monetary and exchange-rate policy:
  - Monetary policy has supported the recovery; the challenge is to balance domestic cyclical conditions with global uncertainties.
  - Benign inflation dynamics and firmly-anchored inflation expectations provide room for policy timing decisions.
  - Flexible exchange rate regime has served Mexico well; real effective peso has appreciated since the global financial crisis and CGER estimates suggest the peso is broadly in line with fundamentals.
  - The FCL remains a significant additional insurance against global tail risks.

*Source: 2011 ARTICLE IV REPORT MEXICO, INTERNATIONAL MONETARY FUND.*

### 31.      Unleashing Mexico’s growth

### 31.      Unleashing Mexico’s growth

### Structural constraints and reform priorities
- Mexico’s growth over the last two decades has lagged comparable peers, in part due to negative external shocks.
- Given lackluster external demand prospects for Mexico, additional reform efforts are important to increase productivity and competitiveness and encourage domestic sources of growth.
- Reforms with potentially rapid payoffs:
  - Improving infrastructure.
  - Enhancing efficiency in the service sectors.
- Recent reform progress:
  - Improvements to anti-trust regulations are welcome; the task ahead is to establish the credibility of the improved regulatory power.
- Further reforms identified as needed:
  - Strengthen the quality of education.
  - Increase labor flexibility (the recent legislative proposal is noted as a welcome step).
  - Improve performance of state energy companies (building on recent efforts to promote limited-scope PPPs and improve governance).
  - Advance initiatives to facilitate access to credit for SMEs and financing for infrastructure.
- A comprehensive reform strategy would help assess the more pressing constraints and prioritize reform efforts going forward.
- These reform efforts would help improve limited employment opportunities, especially among young adults.

### Potential global spillovers and resilience
- Potential global spillovers warrant close monitoring.
- The authorities are carefully assessing possible implications of changes in the global environment for Mexico; these spillovers have informed assessments and policy analysis (for instance, in the report of the FSC and Central Bank publications).
- Economic prospects and policies in the U.S. remain critical for Mexico; a relapse in U.S. growth would have direct implications for growth in Mexico.
- The large presence in Mexico of subsidiaries of systemic foreign banks emphasizes the need to contain spillover risks through prudential regulation and active supervision, which the authorities have been proactively pursuing.
- The direct impact from unsettled global market conditions is expected to remain contained, but a surge in risk aversion could affect even strong sovereign credits, like Mexico’s.

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

### Key numeric indicators and projections (selected figures from source)
- GDP per capita (U.S. dollars, 2009): 8,143
- Poverty headcount ratio (% of population, 2008): 47.4
- Population (millions, 2009): 107.4
- Life expectancy at birth (years, 2009): 75.3
- Under 5 mortality rate (per thousand, 2009): 16.8
- Real GDP growth (selected years):
  - 2007: 3.2
  - 2008: 1.2
  - 2009: -6.2
  - 2010: 5.4
  - 2011 (proj.): 4.4
  - 2012 (proj.): 4.1
- Consumer prices (end of year):
  - 2007: 3.8
  - 2008: 6.5
  - 2009: 3.6
  - 2010: 4.4
  - 2011 (proj.): 3.4
- Government revenue (percent of GDP):
  - 2007: 22.8
  - 2008: 22.2
  - 2009: 22.2
  - 2010: 22.2
  - 2011 (proj.): 21.5
  - 2012 (proj.): 21.9
- Government expenditure (percent of GDP):
  - 2007: 24.4
  - 2008: 27.0
  - 2009: 26.3
  - 2010: 24.7
  - 2011 (proj.): 24.4
  - 2012 (proj.): 24.4
- Augmented balance (percent of GDP), selected years:
  - 2007: -1.6
  - 2008: -1.4
  - 2009: -4.8
  - 2010: -4.1
  - 2011 (proj.): -3.2
  - 2012 (proj.): -2.5
- Gross public sector debt (percent of GDP):
  - 2007: 43.1
  - 2008: 44.7
  - 2009: 42.9
  - 2010: 42.8
  - 2011 (proj.): 42.8
- Net international reserves (billions of U.S. dollars), selected years:
  - 2006: 78.0
  - 2007: 85.4
  - 2008: 90.8
  - 2009: 113.6
  - 2010: 133.6
  - 2011 (proj.): 143.6
- Non-oil current account balance (percent of GDP), selected years:
  - 2007: -2.5
  - 2008: -2.5
  - 2009: -2.8
  - 2010: -1.9
  - 2011 (proj.): -1.7
  - 2012 (proj.): -2.1
- Exports, f.o.b. growth (annual percent change):
  - 2007: 8.8
  - 2008: 7.2
  - 2009: -21.2
  - 2010: 29.9
  - 2011 (proj.): 21.5
  - 2012 (proj.): 8.1
- Oil export price, Mexican mix (US$/bbl), selected years:
  - 2006: 61.8
  - 2007: 79.0
  - 2008: 52.5
  - 2009: 67.7
  - 2010: 91.1
  - 2011 (proj.): 90.2

*Source: IMF staff report excerpt — "31. Unleashing Mexico’s growth" (2011 Article IV report).*

### 1. Mexico: Gross Public Sector Debt Sustainability Framework, 2002–2016 ________________________ 3

### 1. Mexico: Gross Public Sector Debt Sustainability Framework, 2002–2016

### Fiscal DSA: summary finding
- Mexico’s public debt is moderate and will remain stable over the medium term under the baseline scenario, at around 43 percent of GDP.
- Standard DSA shocks would increase public debt by generally less than 10 percentage points of GDP over the medium term.
- Mexico’s balanced-budget framework represents a strong fiscal anchor against the materialization of such scenarios.
- Figure summary (textual):
  - Baseline: 42 (gross public debt in percent of GDP, average projection box)
  - Growth shock box: 50 (growth shock in percent per year)
  - Primary balance shock box: 47 (primary balance shock)
  - Interest-rate shock box: 45 (interest rate shock in percent)
  - Combined shock box: 48
  - Real depreciation and contingent liabilities shocks boxes: 48 and 52
  - No policy change (constant primary) scenario: Scenario primary balance: -0.7; Baseline primary balance: 0.0; Historical primary balance: 0.5
  - Gross financing need under baseline (right scale) and primary balance numbers in figure boxes: Baseline:3.7; Scenario:2.0; Historical:1.7; Baseline:2.9; Scenario:4.1; Historical:1.7

### Key statistics from Table 1 (selected rows, percent of GDP unless indicated)
- Debt-stabilizing primary balance: -0.5
- Baseline: Gross public sector debt 1/:
  - 2002: 45.7
  - 2003: 45.6
  - 2004: 41.4
  - 2005: 39.8
  - 2006: 38.4
  - 2007: 37.8
  - 2008: 43.1
  - 2009: 44.7
  - 2010: 42.9
  - 2011: 42.5
  - 2012: 42.5
  - 2013: 42.7
  - 2014: 42.7
  - 2015: 42.5
  - 2016: 42.4
- o/w foreign-currency denominated (percent of GDP):
  - 2002: 15.5
  - 2003: 16.0
  - 2004: 14.6
  - 2005: 12.8
  - 2006: 10.2
  - 2007: 10.2
  - 2008: 12.8
  - 2009: 12.1
  - 2010: 10.0
  - 2011: 9.2
  - 2012: 8.5
  - 2013: 8.0
  - 2014: 7.6
  - 2015: 7.1
  - 2016: 6.7
- Change in gross public sector debt (percent of GDP):
  - 2002: 3.7
  - 2003: -0.1
  - 2004: -4.2
  - 2005: -1.6
  - 2006: -1.5
  - 2007: -0.5
  - 2008: 5.3
  - 2009: 1.6
  - 2010: -1.8
  - 2011: -0.4
  - 2012: 0.0
  - 2013: 0.2
  - 2014: 0.0
  - 2015: -0.2
  - 2016: -0.1
- Identified debt-creating flows (4+7+12):
  - 2002: 3.6
  - 2003: -1.5
  - 2004: -5.4
  - 2005: -2.5
  - 2006: -3.2
  - 2007: -2.3
  - 2008: 0.6
  - 2009: 3.8
  - 2010: -0.1
  - 2011: -1.0
  - 2012: -0.9
  - 2013: -0.6
  - 2014: -0.8
  - 2015: -0.9
  - 2016: -0.8
- Primary deficit (percent of GDP):
  - 2002: 0.1
  - 2003: -0.9
  - 2004: -1.6
  - 2005: -1.5
  - 2006: -1.5
  - 2007: -1.1
  - 2008: -1.3
  - 2009: 2.2
  - 2010: 1.8
  - 2011: 0.6
  - 2012: 0.0
  - 2013: -0.1
  - 2014: -0.2
  - 2015: -0.3
  - 2016: -0.5
- Revenue and grants (percent of GDP):
  - 2002: 19.7
  - 2003: 20.6
  - 2004: 19.3
  - 2005: 20.8
  - 2006: 21.4
  - 2007: 21.2
  - 2008: 22.8
  - 2009: 22.2
  - 2010: 22.2
  - 2011: 21.4
  - 2012: 21.8
  - 2013: 21.3
  - 2014: 20.7
  - 2015: 20.4
  - 2016: 20.1
- Primary (noninterest) expenditure (percent of GDP):
  - 2002: 19.8
  - 2003: 19.7
  - 2004: 17.7
  - 2005: 19.3
  - 2006: 19.9
  - 2007: 20.1
  - 2008: 21.5
  - 2009: 24.4
  - 2010: 24.0
  - 2011: 22.0
  - 2012: 21.8
  - 2013: 21.2
  - 2014: 20.5
  - 2015: 20.0
  - 2016: 19.6
- Automatic debt dynamics 2/ (percent of GDP):
  - 2002: 4.1
  - 2003: 0.0
  - 2004: -2.4
  - 2005: -0.7
  - 2006: -1.4
  - 2007: -0.6
  - 2008: 2.6
  - 2009: 3.1
  - 2010: -1.7
  - 2011: -1.1
  - 2012: -0.4
  - 2013: -0.1
  - 2014: -0.1
  - 2015: -0.1
  - 2016: 0.2
- Contribution from interest rate/growth differential 3/ (percent of GDP):
  - 2002: 2.3
  - 2003: -1.4
  - 2004: -2.5
  - 2005: -0.1
  - 2006: -1.5
  - 2007: -0.5
  - 2008: 0.1
  - 2009: 3.6
  - 2010: -1.7
  - 2011: -1.1
  - 2012: -0.4
  - 2013: -0.1
  - 2014: -0.1
  - 2015: -0.1
  - 2016: 0.2
- Contribution from exchange rate depreciation 4/ (percent of GDP):
  - 2002: 1.8
  - 2003: 1.3
  - 2004: 0.0
  - 2005: -0.6
  - 2006: 0.1
  - 2007: 0.0
  - 2008: 2.5
  - 2009: -0.5
  - 2010: (ellipsis in source)
- Other identified debt-creating flows (percent of GDP):
  - 2002: -0.6
  - 2003: -0.6
  - 2004: -1.3
  - 2005: -0.2
  - 2006: -0.3
  - 2007: -0.6
  - 2008: -0.7
  - 2009: -1.5
  - 2010: -0.2
  - 2011: -0.5
  - 2012: -0.5
  - 2013: -0.5
  - 2014: -0.5
  - 2015: -0.5
  - 2016: -0.5
- Privatization receipts (negative) (percent of GDP): same values as "Other identified debt-creating flows" row above.
- Residual, including asset changes (2-3) (percent of GDP):
  - 2002: 0.1
  - 2003: 1.4
  - 2004: 1.2
  - 2005: 0.9
  - 2006: 1.8
  - 2007: 1.8
  - 2008: 4.7
  - 2009: -2.2
  - 2010: -1.7
  - 2011: 0.6
  - 2012: 1.0
  - 2013: 0.8
  - 2014: 0.8
  - 2015: 0.7
  - 2016: 0.7
- Gross public sector debt-to-revenue ratio 1/:
  - 2002: 231.7
  - 2003: 221.7
  - 2004: 214.6
  - 2005: 191.3
  - 2006: 179.1
  - 2007: 178.4
  - 2008: 189.3
  - 2009: 201.6
  - 2010: 193.1
  - 2011: 199.0
  - 2012: 195.0
  - 2013: 200.9
  - 2014: 206.0
  - 2015: 208.5
  - 2016: 210.8
- Gross financing need 6/:
  - Percent of GDP:
    - 2002: 11.0
    - 2003: 10.9
    - 2004: 8.8
    - 2005: 10.4
    - 2006: 8.4
    - 2007: 8.2
    - 2008: 10.9
    - 2009: 15.4
    - 2010: 13.1
    - 2011: 11.9
    - 2012: 10.4
    - 2013: 10.4
    - 2014: 10.1
    - 2015: 9.9
    - 2016: 9.6
  - In billions of U.S. dollars:
    - 2002: 77.4
    - 2003: 76.4
    - 2004: 67.1
    - 2005: 88.1
    - 2006: 79.7
    - 2007: 84.7
    - 2008: 119.4
    - 2009: 135.5
    - 2010: 135.2
    - 2011: 140.2
    - 2012: 128.8
    - 2013: 135.6
    - 2014: 139.3
    - 2015: 143.1
    - 2016: 146.6
- Scenario with no policy change (constant primary balance) in 2010-2015 (gross public debt percent of GDP):
  - 2011: 43.3
  - 2012: 45.0
  - 2013: 47.1
  - 2014: 49.0
  - 2015: 50.9
  - 2016: 53.1

### Key macroeconomic and fiscal assumptions underlying baseline (selected series)
- Real GDP growth (in percent):
  - 2002: 0.1
  - 2003: 1.4
  - 2004: 4.0
  - 2005: 3.2
  - 2006: 5.2
  - 2007: 3.2
  - 2008: 1.2
  - 2009: -6.2
  - 2010: 5.4
  - 2011: 4.4
  - 2012: 4.1
  - 2013: 3.3
  - 2014: 3.3
  - 2015: 3.3
  - 2016: 3.2
- Average nominal interest rate on public debt (in percent) 8/:
  - 2002: 8.4
  - 2003: 7.6
  - 2004: 7.3
  - 2005: 7.6
  - 2006: 7.8
  - 2007: 7.5
  - 2008: 7.6
  - 2009: 5.9
  - 2010: 5.8
  - 2011: 6.4
  - 2012: 6.2
  - 2013: 6.3
  - 2014: 6.4
  - 2015: 6.5
  - 2016: 6.6
- Average real interest rate (nominal rate minus change in GDP deflator, in percent):
  - 2002: 5.8
  - 2003: -1.8
  - 2004: -1.8
  - 2005: 3.1
  - 2006: 1.1
  - 2007: 1.9
  - 2008: 1.4
  - 2009: 1.7
  - 2010: 1.5
  - 2011: 1.7
  - 2012: 3.2
  - 2013: 3.3
  - 2014: 3.2
  - 2015: 3.2
  - 2016: 3.7
- Nominal appreciation (increase in US dollar value of local currency, in percent):
  - 2002: -11.3
  - 2003: -8.2
  - 2004: -0.3
  - 2005: 4.5
  - 2006: -0.9
  - 2007: 0.1
  - 2008: -19.7
  - 2009: 3.7
  - 2010: (ellipsis in source)
- Inflation rate (GDP deflator, in percent):
  - 2002: 2.6
  - 2003: 9.4
  - 2004: 9.1
  - 2005: 4.6
  - 2006: 6.7
  - 2007: 5.6
  - 2008: 6.2
  - 2009: 4.1
  - 2010: 4.4
  - 2011: 4.7
  - 2012: 3.0
  - 2013: 3.0
  - 2014: 3.2
  - 2015: 3.3
  - 2016: 2.9
- Growth of real primary spending (deflated by GDP deflator, in percent):
  - 2002: 13.0
  - 2003: 0.6
  - 2004: -6.4
  - 2005: 12.3
  - 2006: 8.6
  - 2007: 4.4
  - 2008: 8.2
  - 2009: 6.3
  - 2010: 3.7
  - 2011: -4.4
  - 2012: 3.5
  - 2013: 0.3
  - 2014: 0.0
  - 2015: 0.9
  - 2016: 1.1
- Primary deficit (repeated here for clarity):
  - 2002: 0.1; 2003: -0.9; 2004: -1.6; 2005: -1.5; 2006: -1.5; 2007: -1.1; 2008: -1.3; 2009: 2.2; 2010: 1.8; 2011: 0.6; 2012: 0.0; 2013: -0.1; 2014: -0.2; 2015: -0.3; 2016: -0.5

### Scenario notes and sensitivities (from figure and table annotations)
- Individual shocks are permanent one-half standard deviation shocks (Figure 1 note).
- Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance (Figure notes).
- One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator) (Figure notes).
- Footnotes and definitions:
  - 1/ Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.
  - 2/ Derived formula for automatic debt dynamics provided in footnote text.
  - 3/ Real interest rate contribution derived as specified in footnote text.
  - 4/ Exchange rate contribution derived as specified in footnote text.
  - 5/ For projections, residual line includes exchange rate changes.
  - 6/ Gross financing need defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.
  - 7/ Scenario with key variables at their historical averages uses real GDP growth; real interest rate; and primary balance.
  - 8/ Average nominal interest rate derived as nominal interest expenditure divided by previous period debt stock.
  - 9/ Debt-stabilizing primary balance assumes key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

*Source: IMF staff estimates and country desk data as presented in the document.*

### ANNEX 3. MEXICO: STATISTICAL ISSUES

### ANNEX 3. MEXICO: STATISTICAL ISSUES

### Overall assessment
- The overall quality of Mexican statistics is good.
- A data ROSC for Mexico was completed on May 23, 2003 (published as IMF Country Report No. 03/150); a data ROSC update was completed on October 8, 2010 (published as IMF Country Report No. 10/330).
- Mexico observes the Special Data Dissemination Standards (SDDS) and its metadata are posted on the Dissemination Standards Bulletin Board (DSBB).
- In a number of cases, the periodicity and timeliness of disseminated data exceed SDDS requirements.
- The authorities are aware of areas for improvement and are continuing work.

### Balance of payments and external debt statistics
- Some items of the balance of payments statistics conform to the fifth edition of the Balance of Payments Manual, but a full transition has not yet been completed.
- Since the release of the balance of payments figures for the second quarter of 2010 (August, 25th, 2010), Banco de México has been publishing a new format that follows the guidelines of the fifth edition of the Balance of Payments Manual.
- Measures to improve external debt statistics include compilation of data on external liabilities of the private sector and publicly traded companies registered with the Mexican stock exchange, including:
  - external debt outstanding,
  - annual amortization schedule for the next four years broken down by maturity, and
  - type of instrument.
- International reserves data are compiled according to the Operational Guidelines for the Data Template on International Reserves and Foreign Currency Liquidity of the IMF (2001).

### National accounts
- National accounts statistics generally follow the System of National Accounts, 1993 (1993 SNA).
- Source data and statistical techniques are sound; most statistical outputs sufficiently portray reality.
- Data sources include economic censuses every five years and a broad program of monthly and annual surveys; scientific sampling techniques are used for most surveys.
- Limitations and methodological issues:
  - Most samples exclude a random sample of small enterprises.
  - Changes in inventories are obtained as residuals; there is no independent verification between the production and expenditure measures of GDP.
  - Taxes and subsidies on products at constant prices are estimated by applying the GDP growth rate, noted as a deviation from best practice.

### Price indices (CPI and PPI)
- Concepts and definitions for both the CPI and PPI meet international standards.
- The PPI is compiled only by product and not by economic activity.
- Source data for the CPI and PPI are comprehensive and meet needs for both indices.
- Price and product specification data for the fortnightly price survey, and expenditure data from ENIGH, are processed and audited according to ISO 9001 total quality management procedures.

### Fiscal statistics
- Fiscal statistics are compiled following national concepts, definitions, and classifications that make international comparison difficult.
- Statistics are comprehensive and timely, except for states and municipalities.
- The new government accounting law mandates accounting standards that follow international standards for all levels of government and consider the information needs of international organizations and national accounts.
- The authorities are committed to reporting government financial statistics in GFSM 2001 format, as well as data for the GFS Yearbook.

### Monetary and financial statistics
- Methodological foundations of monetary statistics are generally sound.
- Recording of financial derivatives and, to a lesser extent, repurchase agreements transactions are overstating the aggregated other depository corporations (ODC) balance sheet and survey.
- Accuracy and reliability of monetary statistics are supported by comprehensive source data.
- Coverage of nonbank ODC is complete.
- Availability of data on other financial intermediaries (insurance companies and pension funds) allows construction of a financial corporations survey with full coverage of the Mexican financial system, published monthly in International Financial Statistics.

### Mexico: Table of Common Indicators Required for Surveillance (selected metadata)
- As of June 23, 2011 — table shows variables with latest observation and reception dates (examples in table):
  - Exchange Rates — Date of latest observation: June 2011; Date received: June 2011; Frequency of Data/Reporting/Publication: D / D / D.
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of latest observation: May 2011; Date received: June 2011; Frequency: M / M / M.
  - Broad Money — Date of latest observation: April 2011; Date received: June 2011; Frequency: M / M / M.
  - Consumer Price Index — Date of latest observation: May 2011; Date received: June 2011; Frequency: Bi-W / Bi-W / Bi-W.
- Data quality assessments (from ROSC completed October 8, 2010, except consumer prices based on May 23, 2003 ROSC) use O (fully observed), LO (largely observed), LNO (largely not observed), NO (not observed) across methodological soundness and accuracy/reliability dimensions.

### Annex 4 excerpt — Foreign Exchange (FX) liquidity and structural requirements (key rules and parameters)
- Mexico’s regulation on FX operations is based on three pillars:
  - Net open position limited to 15 percent of Tier-1 capital (including peso denominated products linked to the exchange rate) to minimize potential balance-sheet losses from exchange rate changes.
  - Liquidity ratio on foreign currency requiring banks to hold enough liquid FX assets to meet short-term obligations.
  - Structural FX requirement mandating a balance in medium-term maturity structure of assets and liabilities.
- Liquidity ratio (maturity ladder):
  - Banks must cover the largest gap (outflows minus inflows) for buckets of 1 day, 1–7 days, 1–30 days and 1–60 days.
  - Institutions must hold additional liquid assets for a percentage of all liabilities up to 60 days not covered by “netting assets.”
  - Netting assets include term deposits, securities with secondary market that do not qualify as liquid assets, commercial paper due within 1 year, amounts in investments and mutual funds in excess of liquid asset limits; credit portfolio inflows are included only when computing the gaps for the specified buckets.
  - Securities traded in secondary markets are computed as if due in 5 days; commercial paper is computed as if due in 1 day.
  - Deposits and assets in investment and mutual funds exceeding liquid asset limits are classified by due date or as if due in 7 days (investment and mutual funds).
  - Securities traded in secondary markets receive a haircut depending on credit rating.
- Assets eligible as liquid assets without haircut include: cash, deposits in the central bank, sight deposits or deposits due within 7 days at highly rated institutions (minimum rating of A-2 or P-2), US T-bills/T-notes/T-bonds, securities issued by US agencies with unconditional US Government guarantee, holdings in approved investment and mutual funds, and irrevocable credit lines by foreign highly rated financial institutions (subject to limits).
- Treatment of derivatives: assets associated to derivatives are considered for GAPs and to net assets; derivatives included as asset or liability; if cash-settled, only the difference is included; if settled by delivery, full amount recorded.
- Structural FX requirement:
  - At end of each day, banks need Net Foreign Currency Liabilities (NFCL) of less than 1.83 times core capital.
  - NFCL defined as difference between liabilities weighted by maturity and assets weighted by maturity and liquidity.
  - Regulation effectively precludes borrowing short term to fund long term credit in foreign currency.
- Table of weights for structural FX requirement:
  - Liabilities — Maturity weights:
    - Up to 1 year: 1.00
    - 1 to 2 years: 0.20
    - 2 to 3 years: 0.10
    - More than 3 years: 0.05
  - Assets — Type of asset weights:
    - Liquid Assets and other high quality assets with maturity up to a year, credit lines granted by foreign financial institutions, and FX and derivatives operations with highly rated counterparts: 1.00
    - Outstanding loans graded A, B or C, as well as other assets and rights with maturity up to 1 year: 0.50
- Table of haircuts on traded securities (value after discount as a percentage of market value):
  - Investment grade:
    - > AA / > Aa3: 100
    - A+ / A1: 90
    - A / A2: 90
    - A- / A3: 90
    - BBB+ / Baa1: 80
    - BBB / Baa2: 80
    - BBB- / Baa3: 80
  - Speculative grade:
    - BB+ / Ba1: 50
    - < BB / < Ba2: 0

### Selected economic and financial indicators (annual % changes or levels; 2005–2010)
- Real GDP: 2005: 3.2; 2006: 5.2; 2007: 3.2; 2008: 1.2; 2009: -6.2; 2010: 5.4.
- Real GDP per capita (IMF staff estimates): 2005: 2.2; 2006: 4.2; 2007: 2.3; 2008: 0.3; 2009: -6.9; 2010: 4.4.
- Gross domestic investment (percent of GDP): 2005: 24.4; 2006: 26.3; 2007: 26.5; 2008: 26.8; 2009: 23.5; 2010: 25.0.
- Gross national savings (percent of GDP): 2005: 23.8; 2006: 25.7; 2007: 25.7; 2008: 25.5; 2009: 22.8; 2010: 24.4.
- Consumer price index (end period): 2005: 3.3; 2006: 4.1; 2007: 3.8; 2008: 6.5; 2009: 3.6; 2010: 4.4.
- Exports, f.o.b. (annual % change): 2005: 14.0; 2006: 16.7; 2007: 8.8; 2008: 7.2; 2009: -21.2; 2010: 29.9.
- Imports, f.o.b. (annual % change): 2005: 12.7; 2006: 15.4; 2007: 10.1; 2008: 9.5; 2009: -24.0; 2010: 28.6.
- External current account balance (percent of GDP): 2005: -0.6; 2006: -0.5; 2007: -0.9; 2008: -1.5; 2009: -0.7; 2010: -0.5.
- Change in net international reserves (end of period, billions of U.S. dollars): 2005: -7.2; 2006: 1.0; 2007: -10.4; 2008: -7.4; 2009: -5.4; 2010: -22.8.
- Outstanding external debt (percent of GDP): 2005: 20.4; 2006: 17.8; 2007: 18.7; 2008: 18.2; 2009: 21.8; 2010: 23.1.
- Total debt service ratio (percent of exports of goods, services, and transfers): 2005: 24.5; 2006: 14.2; 2007: 7.5; 2008: 6.8; 2009: 6.7; 2010: 4.8.
- Augmented overall balance (nonfinancial public sector, percent of GDP): 2005: -1.4; 2006: -1.3; 2007: -1.6; 2008: -1.4; 2009: -4.8; 2010: -4.1.
- Traditional overall balance (percent of GDP): 2005: -0.1; 2006: 0.1; 2007: 0.0; 2008: -0.1; 2009: -2.3; 2010: -2.8.
- Gross augmented public sector debt (percent of GDP): 2005: 39.8; 2006: 38.4; 2007: 37.8; 2008: 43.1; 2009: 44.7; 2010: 42.9.
- Net augmented public sector debt (percent of GDP): 2005: 35.2; 2006: 32.4; 2007: 31.1; 2008: 35.6; 2009: 39.1; 2010: 39.3.
- Broad money (M4a, annual % change): 2005: 14.8; 2006: 13.0; 2007: 11.2; 2008: 16.8; 2009: 5.9; 2010: 12.1.
- Treasury bill rate (28-day CETES, percent, annual average): 2005: 6.8; 2006: 9.2; 2007: 7.2; 2008: 7.2; 2009: 7.7; 2010: 5.4.

*Source: IMF staff report material contained in ANNEX 3. MEXICO: STATISTICAL ISSUES and associated tables (as provided).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11250.pdf_