## _cr12316

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---

### Corporate Sector Financial Position
- Mexico’s corporate sector appears resilient to potential adverse shocks, including a sudden depreciation of the exchange rate or a spike in interest rates.
- Median leverage ratios: 49 percent.
- Short-term maturity exposures have declined and are below Pre-Lehman levels.
- On-balance sheet currency mismatches (foreign currency debt minus natural hedges as a percent of total liabilities) reached the lowest point in the last 20 years by 1/2012Q1.
- Interest coverage ratios have improved and remain at comfortable levels.
- Derivatives and reporting:
  - No evidence of systemic risk build-up from foreign exchange derivative positions based on 1/2012Q1 firm reporting.
  - Stricter reporting and disclosure requirements introduced after end-2008 losses.
  - All publicly listed firms and bond issuers must report financial derivative operations and potential losses under adverse scenarios in quarterly financial statements.
  - 60 firms report derivative positions (as of the reporting period).
  - Since 2008, firms have been more conservative in derivative use and no concentration of derivative risk exposures observed.
- Supervisory focus and vigilance:
  - Continue monitoring and enforcement of disclosure requirements.
  - Monitor emerging concentrations or changes in maturity and currency mismatches.
  - Vigilance warranted in a low-volatility, high-global-liquidity environment.

### Corporate metrics: Pre-Lehman vs 1/2012Q1 (panel of 186 publicly listed firms)
- Total liabilities over total assets — Pre-Lehman: 48.5; 1/2012Q1: 49.9
- Short term liabilities over total liabilities — Pre-Lehman: 51.0; 1/2012Q1: 47.8
- Short term over total financial debt — Pre-Lehman: 35.5; 1/2012Q1: 30.5
- FX liabilities over total liabilities — Pre-Lehman: 27.3; 1/2012Q1: 27.4
- On-balance sheet currency mismatch (foreign currency liabilities minus exports, in percent of total liabilities) — Pre-Lehman: 3.2; 1/2012Q1: 2.0
- Current ratio (current assets to current liabilities) — Pre-Lehman: 1.9; 1/2012Q1: 2.0
- Interest coverage ratio (operating profits to gross interest expenses) — Pre-Lehman: 1.5; 1/2012Q1: 2.9
- Operating margin (Net profits (EBITDA) in percent of sales) — Pre-Lehman: 13.9; 1/2012Q1: 14.4

*Source of estimates: Economatica.*

### Outlook and Risks
- Growth outlook:
  - 2013 growth envisaged to converge to 3½ percent.
- Short-term downside risks:
  - Slowdown in the U.S. — major drag on growth, especially manufacturing.
  - Heightened global risk aversion — could materially affect Mexico due to substantial foreign equity and debt portfolio holdings (30 percent of GDP) and presence of Spanish banks.
  - Structural reform delays — pressures from declining oil revenues and increasing health and pension spending.
- Policy priorities:
  - Appropriate cyclical policy stance and policy mix to restore fiscal buffers.
  - Contingent policy responses emphasizing exchange rate flexibility if global downside risks materialize.

### Fiscal Policy: status, projections, and recommendations
- Authorities’ frameworks:
  - Fiscal policy anchored by the balanced budget rule.
  - Authorities committed to maintaining prudent policies.
- Staff projection for public debt stabilization: stabilize public debt at about 43 percent of GDP.
- Recommendations:
  - Step up fiscal consolidation to return to the primary surplus prevailing before the global crisis.
  - Consider revenue-enhancing reforms with frontloaded elements (example referenced: re-establishment of a positive excise tax on gasoline prices), broadening the VAT base, income tax reform including elimination of loopholes and special regimes.
- Subnational government finances:
  - Over 90 percent of states’ revenues come from central government transfers.
  - SNG debt doubled since 2008 but remains moderate at about 3 percent of GDP.
  - New Law on Government Accounting requires quarterly publication of detailed financial information and imposes stiffer penalties for noncompliance.

### Monetary and Financial Policies
- Monetary policy:
  - Banxico policy rate at 4½ percent since 2009.
  - Authorities view inflation breaches as primarily due to temporary supply shocks; medium-term inflation expectations remain anchored.
  - Communication priorities: prevent second-round effects and maintain anchored inflation expectations.
- Exchange rate and reserves:
  - Floating exchange rate is key buffer; FX intervention limited to smoothing disorderly market conditions.
  - Authorities consider international reserves adequate for normal times; FCL remains a key insurance complement.
  - Reserve build-up to continue primarily through acquisition of PEMEX’s net FX balance.
  - Projected rule-based reserve accumulation consistent with foreign portfolio liabilities and monetary aggregates.
- Financial sector resilience and regulatory priorities:
  - Banking system sound with good liquidity, capital and profitability.
  - FSAP Update identified limitations to consolidated supervision and portfolio concentration.
  - Rapid growth in lending to subnational governments and in consumer credit (particularly payroll lending) warrants close monitoring.
  - Recommended enhancements:
    - Tighten concentration limits.
    - Implement Pillar 2 of Basel II.
    - Refine pension fund investment guidelines to focus on long-term returns.
    - Enhance supervisory independence and CNBV powers.
  - Mexico’s high capitalization levels enable early adoption of most elements of Basel III.
  - FCL supported macro strategy and reduced Mexico’s EMBI spreads around the FCL announcement.

### International Financial Regulatory Reforms: authorities’ concerns
- Authorities’ concerns:
  - New capital surcharges for systemic and trading risks could negatively impact Mexican financial markets.
  - The Volcker rule could negatively impact Mexican markets by constraining activities of banks with U.S. presence; difficulty distinguishing market making from proprietary trading affects domestic sovereign debt liquidity.
- Actions taken:
  - Asked the FSB to study unintended consequences on emerging and developing economies.
  - Sent formal comments on the Volcker rule to U.S. agencies requesting an exemption for Mexican government securities.

### FSAP Update: findings and key recommendations
- Overall finding: Mexico’s banking system was profitable, liquid and well capitalized, and able to withstand severe shocks.
- Recommendations and progress:
  - Increase budget autonomy, independence and accountability of financial sector supervision (CNBV and CNSF).
  - Review supervisory architecture to reduce overlap for integrated financial sector supervision.
  - Mitigate portfolio concentration and conglomeration risks: implement Pillar 2, introduce a capital charge for concentration risk, tighten concentration limits, and transfer group regulatory powers from the SHCP to CNBV.
  - Improve financial sector safety net: strengthen deposit guarantee fund, set up emergency contingency funding mechanism, disclose ELA features, add liquidity triggers, and consider market-discipline measures for deposit insurance.
  - Enhance competition and capital market development: review retail banking fees, strengthen consumer protection, encourage pension funds’ long-term focus, improve derivatives legal framework, and promote regional capital market integration.
- Authorities’ implementation progress:
  - CONSAR revisions to pension fund guidelines.
  - CNBV working groups on Pillar 2 and pilot programs addressing concentration risks.
  - CNBV proposed concentration limits on loans to subnational governments guaranteed by federal transfers.
  - Banxico tightened related-party transaction rules.

### Global spillovers and policy scenarios
- Policy response depends on the nature of external shocks:
  - U.S. slowdown:
    - Exchange rate flexibility as first line of defense.
    - Room to reduce policy rate (currently at 4½ percent) if global conditions remain benign.
    - Allow automatic stabilizers to operate; limited room for discretionary fiscal stimulus.
  - Surge in global risk aversion:
    - Exchange rate flexibility as first line of defense; provision of FX liquidity and FCL as insurance.
    - Tight financing conditions and acute currency pressures constrain policy room.
- Selected entries from Risk Assessment Matrix:
  - Significant deceleration in the United States: Risk Up/Downside M; Risk Impact H; Policy Response: Exchange rate flexibility, monetary easing, automatic stabilizers.
  - Intensification of the euro area crisis and surge in global risk aversion: Risk Up/Downside M; Risk Impact H; Policy Response: Exchange rate flexibility, provision of FX liquidity.
  - Surge in portfolio inflows as investors differentiate across EMs: Risk Up/Downside L; Risk Impact L; Policy Response: Exchange rate flexibility.
  - Oil price supply shock: Risk Impact M; Policy Response: Exchange rate flexibility, monetary easing, automatic stabilizers.
  - U.S. fiscal cliff (fiscal withdrawal of over 4% of GDP in 2013): Risk Up/Downside L; Risk Impact H; Policy Response: Exchange rate flexibility, monetary easing, automatic stabilizers.

### Structural reforms and longer-term fiscal pressures
- Structural reform priorities:
  - Energy reform to address impediments to private investment and public-sector inefficiencies; consider opening the hydrocarbon sector to private participation.
  - Boost competition in concentrated sectors (telecommunications, transportation, energy).
  - Broaden access to credit, especially for SMEs: improve borrower information and collateral framework.
  - Improve education quality: OECD PISA rank 47th out of 65; gap equivalent to more than two years of schooling compared to highest-ranked OECD country.
  - Reinforce domestic security and strengthen AML framework.
- Fiscal medium- and long-term pressures:
  - Oil revenues currently account for a third of government revenues.
  - Oil revenues projected to fall by 2–3 percent of GDP through 2030 in absence of increased production.
  - Population aging and pension transition costs projected to increase health and pension spending by about 2 percent of GDP through 2030.
- Staff-recommended revenue measures:
  - Re-establish a positive excise tax on gasoline prices.
  - Broaden the base of the VAT.
  - Overhaul the property tax.
  - Eliminate preferential treatments in the income tax (e.g., special regime for maquiladoras).
- Staff-suggested expenditure measures:
  - Consolidate pension eligibility requirements.
  - Revisit retirement age in unreformed system.
  - Reform special regimes.
  - Rationalize fuel and electricity subsidies.
- Fiscal framework recommendations:
  - Enhance framework to reduce procyclicality and revisit stabilization funds’ design.

### Staff appraisal and overall policy recommendations (summary)
- Mexico’s performance reflects strong fundamentals and sound policy management; FCL arrangements provided a buffer against tail risks.
- Key policy implications:
  - Step up fiscal consolidation to restore fiscal buffers and support monetary policy flexibility.
  - Maintain exchange rate flexibility as a primary buffer against external shocks.
  - Use contingent measures and exchange rate flexibility if downside risks materialize.
  - Address longer-term challenges through decisive structural reforms (energy, competition, education), revenue mobilization and subsidy rationalization.
  - Enhance reporting and monitoring of subnational government finances; new General Law of Government Accounting should improve reporting and coverage.

### Key indicators and projections (selected figures)
- GDP per capita (U.S. dollars, 2011): 10,161.1
- Poverty headcount ratio (% of population, 2010) 1/: 51.3
- Population (millions, 2011): 113.7
- Real GDP (annual percent change): 2008: 1.2; 2009: -6.0; 2010: 5.6; 2011: 3.9; 2012: 3.8; 2013 (Proj.): 3.5
- Consumer prices (annual average): 2008: 5.1; 2009: 5.3; 2010: 4.2; 2011: 3.4; 2012: 4.1; 2013 (Proj.): 3.5
- Bank credit to non-financial private sector (percent growth): 2008: 13.5; 2009: -1.0; 2010: 10.0; 2011: 17.2; 2012: 15.9; 2013 (Proj.): 14.5
- Gross public sector debt (percent of GDP): 2008: 43.1; 2009: 44.5; 2010: 42.9; 2011: 43.8; 2012: 43.1; 2013 (Proj.): 43.2
- Crude oil export price, Mexican mix (US$/bbl): 2008: 84.4; 2009: 57.4; 2010: 72.3; 2011: 101.0; 2012: 103.1; 2013 (Proj.): 102.1
- Gross international reserves end-year (US$ billions): 2008: 95.3; 2009: 99.9; 2010: 120.6; 2011: 149.2; 2012: 170.2; 2013 (Proj.): 186.2

### External Sector Assessment (selected findings)
- Current account deficit stable at about 1 percent of GDP.
- Manufacturing ~80 percent of total exports; ~80 percent of exports destined for the U.S.
- Reserve accumulation mainly from PEMEX’s foreign exchange balance; reserves seen as adequate for normal times; FCL is an important complement.
- Stock of foreign portfolio investment rose from about US$200 billion at end-2009 to US$355 billion in mid-2012.
- Stock of foreign portfolio holdings in domestic sovereign debt increased from about US$30 billion in 2009 to US$100 billion in mid-2012.
- Reserve coverage metrics (Mexico values plus FCL):
  - Reserves to Broad Money: Mexico: 21.2% plus 10.3% of FCL
  - Reserves to STD at remaining maturity plus current account: Mexico: 167.5% plus 81.5% of FCL
  - Reserves to Foreign Portfolio Investment: Mexico: 48.2% plus 23.5% of FCL
  - Reserves to months of imports: Mexico: 4.7 plus 2.3 of FCL
  - Reserves to ARA Metric: Mexico: 130% plus 64% of FCL
  - Reserves to GDP: Mexico: 12.9% plus 6.3% of FCL
- Net foreign assets as of end-2Q 2012: about negative 31 percent of GDP (from negative 36 percent at end-2007).
- Medium-term NFA expectation: broadly stable with current account projected near NFA-stabilizing level of 1.1 percent.

### External Debt Sustainability Framework (2007–2017) — key results
- Public debt baseline (percent of GDP): 2007: 37.8; 2008: 43.1; 2009: 44.5; 2010: 42.9; 2011: 43.8; 2012: 43.1; 2013: 43.2; 2014: 43.2; 2015: 43.1; 2016: 43.0; 2017: 42.9
- Foreign-currency public debt (percent of GDP): 2007: 10.2; 2008: 12.8; 2009: 12.0; 2010: 10.0; 2011: 10.8; 2012: 9.9; 2013: 9.4; 2014: 8.8; 2015: 8.3; 2016: 7.8; 2017: 7.0
- Public sector debt-to-revenue ratio (percent): 2007: 176.8; 2008: 187.6; 2009: 199.7; 2010: 193.2; 2011: 198.5; 2012: 189.2; 2013: 188.6; 2014: 188.7; 2015: 186.2; 2016: 189.4; 2017: 192.3
- Gross financing need under baseline (percent of GDP): 2007: 8.2; 2008: 8.8; 2009: 16.6; 2010: 13.3; 2011: 10.7; 2012: 10.8; 2013: 10.6; 2014: 10.6; 2015: 10.2; 2016: 10.2; 2017: 10.4
- Scenario with no policy change (constant primary balance) — public sector debt (percent of GDP): 2012: 43.1; 2013: 43.7; 2014: 44.4; 2015: 45.1; 2016: 45.9; 2017: 46.7
- External debt baseline (percent of GDP): 2007: 19.0; 2008: 18.8; 2009: 22.1; 2010: 23.9; 2011: 24.3; 2012: 27.4; 2013: 28.1; 2014: 28.0; 2015: 27.6; 2016: 27.1; 2017: 25.7
- Most extreme external shock reported: one-time real depreciation of 30 percent raises external debt-to-GDP ratio to 37 (percent).
- Policy implications:
  - Balanced-budget framework is a strong fiscal anchor.
  - Denominational shift to peso debt and longer external debt maturities mitigate external vulnerability.

### Statistical Issues and Data Quality (selected)
- Mexico observes SDDS; metadata posted on DSBB.
- Data ROSC update completed October 8, 2010 (IMF Country Report No. 10/330).
- Mexico reports Financial Soundness Indicators for Deposit Takers monthly.
- Balance of payments: transition to BPM5 partly completed since Q2 2010; external debt statistics improvements include compilation of private-sector external liabilities and amortization schedules.
- National accounts generally follow 1993 SNA; some methodological enhancements recommended (e.g., taxes and subsidies on products at constant prices).
- Prices: CPI and PPI concepts meet international standards; PPI compiled by product only.
- Fiscal statistics: new government accounting law to harmonize and enhance transparency across all government levels; authorities committed to GFSM 2001 reporting.
- Monetary and financial statistics: methodological foundations sound; recording of derivatives and repos overstates aggregated ODC balance sheet; consolidated banking and central bank balance sheets published regularly.
- Key data frequency (as of October 10, 2012): Exchange Rates — latest observation September 2012, Frequency Daily; International Reserve Assets — latest observation August 2012, Frequency Monthly; External Current Account Balance — latest observation Q2 2012, Frequency Quarterly; International Investment Position — latest observation Q2 2012, Date received October 2012, Frequency Quarterly.
- Selected statistical indicators (annual): Real GDP 2012: 3.8; Consumer price index (period average) 2012: 4.1; Outstanding external debt (percent of GDP) 2012: 27.4; Bank credit to non-financial private sector (percent growth) 2012: 15.9; Broad money (M4a) 2012: 15.3.

*Source: IMF staff report excerpts from _cr12316 (IMF staff).*

### 1. Corporate Sector Financial Position _________________________________________________________________  12

### 1. Corporate Sector Financial Position

### Financial resilience and key metrics
- Mexico’s corporate sector appears resilient to potential adverse shocks, including a sudden depreciation of the exchange rate or a spike in interest rates.
- Median leverage ratios are contained at 49 percent.
- Short-term maturity exposures have continued to decline and are below the levels observed before the Lehman crisis.
- On-balance sheet currency mismatches (foreign currency debt minus natural hedges as a percent of total liabilities) have fallen steadily and by the first quarter of 2012 reached the lowest point in the last 20 years.
- Average interest coverage ratios (operating profits to gross interest expenses) have improved and remain at comfortable levels.

### Derivatives exposures and reporting regime
- No evidence of a build-up of systemic risk from foreign exchange derivative positions in the corporate sector, based on first quarter information reported by firms.
- Following large losses at end-2008, supervisory agencies introduced stricter reporting and disclosure requirements on financial derivative instruments and associated exposures.
- All publicly listed firms and those issuing bonds are required to provide in their quarterly financial statements detailed information about:
  - financial derivative operations, and
  - potential losses under adverse scenarios.
- At present, 60 firms report derivative positions, including several that suffered losses in the past.
- Since 2008, firms have become more conservative in their use of derivatives and there appears to be no concentration of risk exposures associated with derivative instruments.

### Risks, vigilance, and policy implications
- Continued monitoring and enforcement of disclosure requirements remain important to ensure transparency and timely detection of risks.
- Vigilance is warranted in a low-volatility and high global liquidity environment, which can increase incentives for search for yield and risk taking.
- Supervisory focus should remain on:
  - compliance with derivative disclosure requirements by market participants, and
  - monitoring emerging concentrations or changes in maturity and currency mismatches.

*Source: _cr12316 - 1. Corporate Sector Financial Position; IMF staff.*

### Box 1. Mexico: Corporate Sector Financial Position (concluded)

### Box 1. Mexico: Corporate Sector Financial Position (concluded)

### Corporate sector leverage, maturity, currency, liquidity and profitability (comparison Pre-Lehman and 1/2012Q1)
- Total liabilities over total assets — Pre-Lehman: 48.5; 1/2012Q1: 49.9
- Short term liabilities over total liabilities — Pre-Lehman: 51.0; 1/2012Q1: 47.8
- Short term over total financial debt — Pre-Lehman: 35.5; 1/2012Q1: 30.5
- FX liabilities over total liabilities — Pre-Lehman: 27.3; 1/2012Q1: 27.4
- On-balance sheet currency mismatch (foreign currency liabilities minus exports, in percent of total liabilities) — Pre-Lehman: 3.2; 1/2012Q1: 2.0
- Current ratio (current assets to current liabilities) — Pre-Lehman: 1.9; 1/2012Q1: 2.0
- Interest coverage ratio (operating profits to gross interest expenses) — Pre-Lehman: 1.5; 1/2012Q1: 2.9
- Operating margin (Net profits (EBITDA) in percent of sales) — Pre-Lehman: 13.9; 1/2012Q1: 14.4

Notes:
- Panel covers 186 publicly listed firms through the first quarter of 2012.
- Median values for each year (unless noted).
- On-balance sheet currency mismatch median calculated over firms with foreign currency debt.
- Source of estimates: Economatica.

### Recent reforms of labor market regulations and reporting of subnational government finances (Box 2)
- Labor reform (final stage of approval by Congress) — main features:
  - New types of temporary employment contracts (per project, for a specific period of time, per season, on a trial basis and/or for training purposes) with accrual of wages, social security and other benefits.
  - Hourly pay contracts, provided pay is not below the equivalent of the minimum wage.
  - Streamlined settlement of labor lawsuits and limit compensation for unjustified dismissals to one year of salary.
  - More flexible seniority rules; recognition of training and establishment of a National Committee for Productivity.
  - New social protection guarantees: formally ban child labor under 14 years of age; promote gender equality at work; improve labor conditions for mining, rural, and domestic workers; provide five days of paid paternity leave.
  - New regulatory framework for outsourcing, banning the transfer of the majority of workers in a firm to an outsourcing company to reduce labor benefits.
- Law on Government Accounting — main provisions to harmonize and enhance transparency of subnational finances:
  - Subnational governments required to publish all financial information (revenues, expenditures, debt and financing sources) in a detailed and homogenous format; budget expenditures to include expenditure priorities and detailed breakdown of current and investment outlays (including wages and pensions); public debt reporting to contain all obligations, including short-term supplier credit.
  - Financial information to be published quarterly and posted on the internet for at least six years.
  - Requirements to enhance accountability of public programs: specific information on beneficiaries, indicators to evaluate performance, and beneficiary payments to be made electronically through bank accounts.
  - Stiffer penalties for government officials who fail to fulfill the law, including prison.

### Outlook and risks
- Growth:
  - 2013 growth envisaged to converge to 3½ percent (close to Mexico’s long-term potential growth rate).
  - External demand expected to contribute moderately; domestic demand expected to maintain momentum.
- Short-term risks (tilted to the downside):
  - Slowdown in the U.S. — major drag on growth, especially manufacturing.
  - Heightened global risk aversion — surge could affect even strong sovereigns; a generalized pullback from the emerging market asset class would be a material risk due to substantial equity and debt portfolio holdings of foreign investors (30 percent of GDP), including short-term government paper; large presence of Spanish banks also represents a risk.
  - Structural reforms — need to address pressures from a decline in oil revenues and increasing health and pension spending; decisive productivity-enhancing reforms could provide considerable upside.

### Key policy issues
- Focus of policy discussions:
  - Appropriate cyclical policy stance and policy mix to restore fiscal buffers.
  - Contingent policy responses if global downside risks materialize, with emphasis on exchange rate flexibility.
- Baseline scenario policy priorities:
  - Continue consolidation efforts to restore fiscal buffers to pre-crisis levels.
  - Monetary policy to assess and steer course accounting for domestic and global conditions.
- If downside risks materialize:
  - Use of exchange rate flexibility and contingent measures to contain fallout from a significant U.S. slowdown or intensification of global financial crisis.

### Fiscal policy
- Authorities committed to maintaining prudent policies within current frameworks; monetary policy guided by inflation targeting and floating exchange regime; fiscal policy anchored by the balanced budget rule.
- Fiscal consolidation in 2013 would help turn the primary balance into a slight surplus and return to a balanced budget under the fiscal rule; consolidation supported by sustained oil revenues and containment of investment expenditure.
- Public debt stabilization:
  - Staff projection: stabilize public debt at about 43 percent of GDP (Table 2 referenced).
- Recommendations and considerations:
  - Step up fiscal consolidation to return to the primary surplus prevailing before the global crisis to put the debt ratio on a more sustained downward path.
  - Consider revenue-enhancing reforms with frontloaded elements (example referenced: re-establishment of a positive excise tax on gasoline prices), broadening the VAT base, and income tax reform including elimination of loopholes and special regimes.
- Subnational government finances:
  - Over 90 percent of states’ revenues come from central government transfers.
  - Subnational governments’ (SNG) debt has doubled since 2008 but remains moderate at about 3 percent of GDP.
  - Increase in budget price of oil since 2008 reached 70 percent; actual market prices above the budget price by about 30 percent on average each year.
  - New reporting requirements for SNGs seen as vital to strengthening subnational finances.

### Monetary and financial policies
- Monetary policy:
  - Banxico maintained a stimulative monetary policy with the policy rate at 4½ percent since 2009.
  - Authorities view inflation breaches as primarily due to temporary supply shocks; medium-term inflation expectations remain firmly anchored.
  - Vigilance warranted; communication challenge to emphasize preventing second-round effects and maintaining anchored inflation expectations.
- Exchange rate and reserves:
  - Floating exchange rate plays a key buffering role; FX intervention limited to smoothing disorderly market conditions.
  - Authorities consider international reserves adequate for normal times; FCL remains a key insurance complement against global tail risks.
  - Reserve build-up to continue primarily through acquisition of PEMEX’s net FX balance.
  - Projected rule-based accumulation of international reserves consistent with increase in foreign portfolio liabilities and monetary aggregates.
- Financial sector resilience and regulatory priorities:
  - Banking system remains sound with good levels of liquidity, capital and profitability.
  - FSAP Update identified issues: limitations to consolidated supervision of financial conglomerates and portfolio concentration.
  - Rapid growth in lending to subnational governments and in consumer credit (particularly payroll lending) not currently systemic but warrants close monitoring.
  - Recommended enhancements: tighten concentration limits, implement Pillar 2 of Basel II, refine pension fund investment guidelines to focus on long-term returns, enhance supervisory independence and CNBV powers to mitigate concentration and conglomeration risks.
  - Mexico’s high capitalization levels will allow for an early adoption of most elements of the Basel III capital requirements.
  - Mexico’s FCL has supported the macroeconomic strategy and bolstered market confidence; studies show a significant reduction in Mexico’s EMBI spreads around the time of the FCL announcement.

*Source: IMF staff estimates based on data from Economatica.*

### 19.      The authorities reiterated that the international financial regulatory reforms could

### _cr12316 - 19.      The authorities reiterated that the international financial regulatory reforms could

### International financial regulatory reforms: authorities' concerns
- The authorities reiterated that the international financial regulatory reforms could have unintended consequences for Mexico’s banking system.
- Concerns highlighted:
  - New capital surcharges for systemic and trading risks could negatively impact Mexican financial markets.
  - The introduction of the Volcker rule, which would prohibit banks with presence in the U.S. to engage in proprietary trading, could negatively impact Mexican financial markets.
  - These concerns arise from effects on the cost of capital and liquidity of domestic sovereign debt markets, in which domestic affiliates of global banks are active participants, as it is difficult to distinguish between market making and proprietary trading.
- Actions taken by the authorities:
  - Asked the FSB to study the unintended consequences of the agreed regulatory reforms on emerging and developing economies.
  - Sent formal comments on the Volcker rule to U.S. agencies, requesting an exemption for Mexican government securities (similar to that granted to U.S. government securities).

### Financial sector exposures and supervisory measures
- Banks total exposures to subnational borrowers are less than 10 percent of total loans and related NPLs (plus write-offs) are less than 1 percent of exposure.
- The Financial System Stability Council has been monitoring these risks, as highlighted in its recent financial stability report, and the Bank and Securities Commission (CNBV) tightened provisioning requirements in 2011.
- Currently, lending to sub nationals that is guaranteed by federal transfers are not subject to limits or capital requirements.

### FSAP Update: status and key recommendations (Box 3)
- Overall FSAP Update finding:
  - Mexico’s banking system was profitable, liquid and well capitalized, and able to withstand severe shocks.
- Main recommendations and progress:
  - Increase budget autonomy, independence and accountability of financial sector supervision (CNBV and CNSF), including authority to amend organizational structures, make key staffing decisions, or modify budgets; recommend fixed-term appointment for the President of the Banking and Securities Commission, defined appointment periods and clear grounds for dismissal of senior officers, and adequate legal protection for staff.
  - Over the medium term, review supervisory architecture to reduce overlap of responsibilities for effective supervision of a more integrated financial sector.
  - Mitigate risks from portfolio concentration and conglomeration:
    - Implement Pillar 2 of Basel II (including introducing a capital charge for concentration risk and requiring buffers above regulatory minima), and tighten concentration limits.
    - Amend law to transfer group regulatory powers from the SHCP to CNBV and extend prudential requirements and governance and risk management standards to the holding company level.
  - Improve financial sector safety net:
    - Strengthen the deposit guarantee fund by gradual transfer of IPAB’s legacy debt to the government, set up an emergency contingency funding mechanism with a government guarantee, and establish a program to address weak and not yet regulated cooperatives.
    - Disclose broad features of emergency liquidity assistance, consult the Financial Stability Committee on systemic importance of institutions requesting ELA access, add liquidity triggers in the prompt corrective action regime, shorten delays in revoking a bank license, and channel bank liquidation through an administrative process.
    - Consider market-discipline measures for deposit insurance, such as a reduction in coverage and charging of risk-based premiums.
  - Enhance competition and capital market development:
    - Review structure of retail banking fees, strengthen consumer financial protection, encourage pension funds to focus more on long-term returns, increase pension replacement rates, improve legal framework for derivatives, strengthen competition in the mutual fund sector, and promote regional capital market integration.
- Authorities’ implementation progress:
  - CONSAR revised guidelines and is proposing changes to increase pension funds’ focus on asset allocation and long-term strategies, and cut down on excessive switching of contributors across funds.
  - CNBV established working groups to assess changes to fully implement Pillar 2 and a pilot program using pillar 2-type requirements to address concentration risks at some banks.
  - CNBV proposed concentration limits on bank loans to subnational governments that are guaranteed by federal transfers.
  - Banxico tightened the rule on relevant related-party transactions.
  - Authorities continue to monitor consumer lending risks, corporates’ use of derivatives, and effective home-host cooperation through supervisory colleges.
- Legal reforms:
  - Most recommendations require legal reforms; authorities are working on a number of legal reforms needed to address FSAP Update recommendations.

### Global spillovers and policy response
- Authorities concurred that Mexico’s policy response to materialization of global risks would depend on the nature of the external shock.
- Specific scenarios and policy implications:
  - A slowdown in the U.S. would be a material drag on growth in Mexico.
    - The flexible exchange rate would be expected to continue playing a key role.
    - There remains room to reduce the policy rate (currently at 4½ percent) to help contain the fallout provided that global financial conditions remain benign.
    - On the fiscal side, automatic stabilizers could be allowed to operate.
    - The authorities and staff concurred that the room for effective discretionary fiscal stimulus would be limited, given that Mexico is still rebuilding its policy buffers.
  - A surge in global risk aversion from unsettled conditions in Europe and a generalized pullback from the emerging market asset class could have a significant impact on Mexico, given the large stock of foreign portfolio investment.
    - Exchange rate flexibility would be expected to remain the first line of defense.
    - Tight financing conditions and acute currency pressures would constrain the room for monetary and fiscal policy to limit the fallout.
    - Mexico has significant foreign exchange buffers to deploy if necessary to limit overshooting and dysfunctional market conditions, including the FCL in case tail risks materialize.
- Risk Assessment Matrix (selected entries preserved in content):
  - Significant deceleration in the United States: Risk Up/Downside M; Risk Impact H; Policy Response: Exchange rate flexibility as a first line of defense, coupled with monetary easing and automatic stabilizers.
  - Intensification of the euro area crisis and surge in global risk aversion: Risk Up/Downside M; Risk Impact H; Policy Response: Exchange rate flexibility, together with provision of FX liquidity.
  - Surge in portfolio inflows as investors differentiate across EMs: Risk Up/Downside L; Risk Impact L; Policy Response: Exchange rate flexibility.
  - Oil price supply shock (with negative effect on U.S. and global growth): Risk Impact M; Policy Response: Exchange rate flexibility as a first line of defense, coupled with monetary easing and automatic stabilizers.
  - U.S. fiscal cliff (fiscal withdrawal of over 4% of GDP in 2013): Risk Up/Downside L; Risk Impact H; Policy Response: Exchange rate flexibility as a first line of defense, coupled with monetary easing and automatic stabilizers.
- Note: If the shock in the U.S. also affects global risk aversion and financial conditions, the policy room will be more limited.

### Longer-term challenges and structural reforms
- Unleashing Mexico’s growth potential requires comprehensive structural reforms amid subdued global growth prospects.
- Structural reform areas identified:
  - Energy reform:
    - Reforms should address impediments to private investment and to efficiency in the public sector (including cost over-runs, subsidies, the deficit in refining operations, and pension liabilities).
    - The new administration is considering opening the hydrocarbon sector to private investment, by providing the legal basis for private sector participation in these sectors.
  - Boosting competition:
    - Recent anti-trust reforms have strengthened regulatory powers, but concentration remains high in key sectors (e.g., telecommunications, transportation, energy).
    - The incoming administration has indicated boosting competition will be crucial; recent initiatives to reduce lengthy resolution of disputes of Federal Competition Commission rulings and to improve consumer protection and price setting are welcome.
  - Broadening access to credit, especially for SMEs:
    - Bank intermediation remains relatively low compared with other emerging economies, with limited access to credit for SMEs.
    - Improving information about borrowers and strengthening the legal framework for the use of collateral would support expansion of bank credit to SMEs.
  - Improving education:
    - Quality of education in Mexico remains below that of peers according to standardized assessments.
    - The OECD’s Program for International Student Assessment ranked Mexico 47th out of 65 countries assessed, and the lowest among OECD countries. The gap compared to the highest-ranked OECD country was estimated to be equivalent to more than two years of schooling.
  - Reinforcing domestic security:
    - Ongoing efforts to fight organized crime, including through strengthening the AML framework, are important to foster investment and growth.

### Fiscal medium- and long-term pressures
- Oil revenues and aging:
  - Oil revenues currently account for a third of government revenues.
  - In the absence of a significant increase in production volume, oil revenues are projected to fall by 2–3 percent of GDP through 2030.
  - Population aging and transition costs associated with reform of the old pension system are projected to increase health and pension spending by about 2 percent of GDP through 2030.
- Policy prescriptions to cope with pressures:
  - Combination of non-oil revenue mobilization, including at the subnational level, and expenditure rationalization.
  - Staff-recommended revenue measures:
    - Re-establish a positive excise tax on gasoline prices.
    - Broaden the base of the VAT.
    - Overhaul the property tax.
    - Eliminate preferential treatments in the income tax, such as the special regime for maquiladoras.
  - Staff-suggested expenditure measures:
    - Consolidate pension eligibility requirements.
    - Revisit the retirement age in the unreformed system.
    - Reform special regimes.
    - Rationalize fuel and electricity subsidies.
- Fiscal framework and stabilization funds:
  - Enhance fiscal framework to reduce procyclicality; revisit design of stabilization funds given limited effectiveness in saving oil windfalls.
  - Spending has been procyclical, particularly over the prolonged period of high oil prices.
- Fiscal consolidation and policy buffers:
  - Stepping up fiscal consolidation efforts would be important to restore pre-crisis fiscal buffers and support monetary policy.
  - Under the baseline scenario, returning in 2013 to the balanced budget rule would provide a strong signal of commitment to the fiscal framework.
  - Revenue-enhancing reforms to address longer-term fiscal challenges could usefully include some frontloaded elements to make fiscal consolidation feasible without excessive compression of public investment.
- Oil windfalls and expenditure implications:
  - The persistent rise in oil prices allowed the expenditure envelope to expand significantly, given shortcomings in the design of stabilization funds (effectively little of the oil windfalls were saved).
  - Convergence of budgeted and actual oil prices will make windfalls less likely, increase the cost of the oil price hedge, and reduce the scope for spending growth.

### Staff appraisal and policy recommendations (summary)
- Mexico’s resilient economic performance reflects strong fundamentals and sound policy management; FCL arrangements have supported policies by providing a buffer against tail risks.
- Key policy implications going forward:
  - Step up fiscal consolidation to restore fiscal buffers and support monetary policy flexibility.
  - Exchange rate flexibility should continue to be a primary buffer against external shocks.
  - If downside risks materialize, the policy response will depend on the extent of global financial stress and risk aversion spillovers to Mexico.
  - Address longer-term challenges through decisive structural reforms (energy, competition, education) and revenue mobilization and subsidy rationalization (fuels and electricity).
  - Enhance reporting and monitoring of subnational government finances:
    - Although subnational government debt remains moderate, its steep increase in recent years justifies close monitoring.
    - The recent modification of the General Law of Government Accounting should help improve reporting and coverage of subnational government accounts, a prerequisite for assessing fiscal positions and reinforcing fiscal discipline.

*Source: _cr12316 - 19. The authorities reiterated that the international financial regulatory reforms could (IMF staff report content provided).*

### 31.      The monetary authorities remain appropriately vigilant, with the task ahead being to

### _cr12316 - 31.      The monetary authorities remain appropriately vigilant, with the task ahead being to

### Monetary policy, inflation, and communication
- The monetary authorities "remain appropriately vigilant" and must "assess the right policy course taking into account domestic conditions and global headwinds."
- Banxico’s "strong policy track record gives it credibility and margin of action to assess conditions in the current uncertain juncture."
- Underlying inflationary pressures "have been contained so far," but recent supply shocks and cyclical conditions "warrant Banxico’s heightened vigilance."
- Communication priorities:
  - Effectively communicate the appropriate stance of monetary policy vis-à-vis temporary supply shocks.
  - Emphasize the role of preventing second-round effects and maintaining inflation expectations well anchored.

### Exchange rate, reserves, and external shock absorption
- "Mexico’s floating exchange rate should continue to play a key role in buffering external shocks."
- The flexibility of the exchange rate "has been particularly beneficial in light of the persistent global financial uncertainty."
- The absence of significant balance-sheet and pass-through effects implies the exchange rate can continue as "a key pillar of the policy response to external shocks."
- The real exchange rate is "consistent with underlying fundamentals and desirable policy settings."
- Reserves: "The level of reserves appears adequate for normal times" but in light of heightened global uncertainty and Mexico’s high integration into international capital markets, the "FCL remains a key insurance complement against potential global tail risks."

### Financial sector resilience and regulatory/supervisory reforms
- The financial sector "remains sound, showing resilience to the recurrent bouts of global risk aversion," but "further efforts are needed to enhance the regulatory and supervisory framework."
- FSAP Update findings and implications:
  - Need to "enhance supervisory independence, including to ensure budgetary autonomy of the CNBV."
  - Potential issues from limitations to "the consolidated supervision of financial conglomerates" and from "portfolio concentration."
  - Concentration in a few large financial conglomerates creates potential conflicts of interest and may hinder competition.
  - Implementation of FSAP recommendations "has been limited so far, as many of them require legislative changes," but progress is being made on groundwork for legal reforms, which "should be taken up by the incoming administration."
- Authorities' ongoing monitoring is welcomed for:
  - Operations of local subsidiaries of foreign banks.
  - Lending to subnational governments.
  - Consumer credit (particularly payroll loans).

### Global spillovers and policy scenarios
- "Potential global spillovers warrant close monitoring."
- Authorities' careful assessment of external conditions, including in the Financial System Stability Council report and Central Bank publications, is commended.
- Policy response depends on the nature of the external shock; the flexible exchange rate is expected to "continue playing a key role in all circumstances."
- Key scenarios and constraints:
  - Mexico cannot be expected to decouple from a significant U.S. slowdown; "monetary policy and automatic stabilizers could help contain the impact, provided that global financial conditions remain benign."
  - Room for discretionary fiscal stimulus "would remain limited given that Mexico is still rebuilding its policy buffers."
  - A surge in global risk aversion and a generalized pullback from emerging markets is "a material risk for Mexico given the large stock of foreign portfolio investment."
  - In such a case, "tight financing conditions and acute currency pressures would tend to constrain the policy room to contain the fallout."
  - Mexico has significant foreign exchange buffers to deploy if necessary, "including access to the FCL in case tail risks materialize."

### Structural reform agenda and medium/long-term fiscal policy
- A "broad structural reform agenda is needed to unleash Mexico’s growth potential," including inter alia:
  - Reforming the energy sector.
  - Enhancing competition.
  - Improving the quality of education.
  - Facilitating access to credit for SMEs.
  - Strengthening the rule of law.
- Structural reforms should adopt "a broad-spectrum approach to ensure that productivity gains accrue to all sectors."
- Longer-term fiscal challenges from "population aging and declining oil revenues" require additional revenue mobilization and expenditure rationalization.
- Revenue-side recommendations:
  - Re-establishing "a positive excise tax on gasoline."
  - Broadening "the base of the VAT."
  - Eliminating preferential treatments in the income tax.
  - Increasing subnational property taxes.
- Expenditure-side recommendations:
  - Consolidating pension eligibility requirements.
  - Revisiting the retirement age in the unreformed system.
  - Reforming special regimes (notably PEMEX’s).
- Medium-term fiscal framework enhancements:
  - Add mechanisms to help save oil windfalls and reduce fiscal procyclicality, while maintaining the framework's key role of ensuring debt sustainability.

*Source: _cr12316 - 31.      The monetary authorities remain appropriately vigilant, with the task ahead being to*

### 37.      It is proposed that the next Article IV consultation with Mexico take place on the

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

### Recommendation
- Next Article IV consultation timing: standard 12-month cycle.

### Key economic, financial, and social indicators (selected)
- GDP per capita (U.S. dollars, 2011): 10,161.1
- Poverty headcount ratio (% of population, 2010) 1/: 51.3
- Population (millions, 2011): 113.7
- Income share of highest 20 percent / lowest 20 percent: 11.3
- Life expectancy at birth (years, 2012): 75.6
- Adult illiteracy rate (2011-2012): 6.4
- Infant mortality rate (per thousand, 2012): 13.2
- Gross primary education enrollment rate (2010): 114.1

### Real economy (annual percentage change unless otherwise indicated)
- Real GDP: 2008: 1.2; 2009: -6.0; 2010: 5.6; 2011: 3.9; 2012: 3.8; 2013 (Proj.): 3.5
- Net exports (contribution): 2008: -0.7; 2009: 2.1; 2010: 0.0; 2011: -0.1; 2012: 0.1; 2013 (Proj.): 0.2
- Total domestic demand: 2008: 1.8; 2009: -7.8; 2010: 5.4; 2011: 3.9; 2012: 3.6; 2013 (Proj.): 3.4
  - Consumption: 2008: 1.6; 2009: -5.8; 2010: 4.6; 2011: 3.9; 2012: 3.5; 2013 (Proj.): 3.7
  - Gross fixed investment: 2008: 5.5; 2009: -11.8; 2010: 6.2; 2011: 8.9; 2012: 5.0; 2013 (Proj.): 5.0
- Exports of goods, f.o.b.: 2008: 7.2; 2009: -21.2; 2010: 29.9; 2011: 17.1; 2012: 7.4; 2013 (Proj.): 5.8
  - Export volume: -2.4; -7.7; 15.8; 2.2; 7.4; 6.2
- Imports of goods, f.o.b.: 2008: 9.5; 2009: -24.0; 2010: 28.6; 2011: 16.4; 2012: 7.0; 2013 (Proj.): 6.4
  - Import volume: 1.0; -21.0; 23.3; 8.5; 7.2; 7.1
- Petroleum exports (percent of total exports of goods): 2008: 17.4; 2009: 13.4; 2010: 14.0; 2011: 16.1; 2012: 15.2; 2013 (Proj.): 14.2
- Terms of trade (deterioration -): 2008: 1.3; 2009: -11.2; 2010: 7.6; 2011: 6.8; 2012: 0.1; 2013 (Proj.): 0.2

### Prices, employment, money
- Nominal exchange rate (US$/Mex$) (average, depreciation -): 2008: -1.8; 2009: -17.6; 2010: 6.9; 2011: 1.7; 2012: -7.9
- Real effective exchange rate (CPI based) (average, depreciation -): 2008: -1.6; 2009: -12.4; 2010: 8.6; 2011: 0.4; 2012: -5.1; 2013 (Proj.): -0.7
- Consumer prices (annual average): 2008: 5.1; 2009: 5.3; 2010: 4.2; 2011: 3.4; 2012: 4.1; 2013 (Proj.): 3.5
- Formal sector employment, IMSS-insured workers (annual average) 2/: 2008: 2.1; 2009: -3.1; 2010: 3.8; 2011: 4.3; 2012: 3.3
- National unemployment rate (annual average): 2008: 4.0; 2009: 5.5; 2010: 5.4; 2011: 5.2; 2012: 4.8

### Money and credit
- Bank credit to non-financial private sector (percent growth): 2008: 13.5; 2009: -1.0; 2010: 10.0; 2011: 17.2; 2012: 15.9; 2013 (Proj.): 14.5
- Broad money (M4a): 2008: 16.8; 2009: 6.1; 2010: 12.0; 2011: 15.7; 2012: 15.3; 2013 (Proj.): 10.7
- Treasury bill rate (28-day cetes, in percent, annual average): 2008: 7.7; 2009: 5.4; 2010: 4.4; 2011: 4.2; 2012: 4.4

### Nonfinancial public sector (selected fiscal indicators, percent of GDP)
- Government revenue: 2008: 23.5; 2009: 23.6; 2010: 22.6; 2011: 22.8; 2012: 23.1; 2013 (Proj.): 23.2
- Government expenditure: 2008: 23.6; 2009: 25.9; 2010: 25.5; 2011: 25.3; 2012: 25.4; 2013 (Proj.): 25.1
- Traditional balance 3/: 2008: -0.1; 2009: -2.3; 2010: -2.8; 2011: -2.5; 2012: -2.4; 2013 (Proj.): -1.9
- Augmented balance 4/: 2008: -1.1; 2009: -4.7; 2010: -4.3; 2011: -3.4; 2012: -2.6; 2013 (Proj.): -2.1
- Gross public sector debt: 2008: 43.1; 2009: 44.5; 2010: 42.9; 2011: 43.8; 2012: 43.1; 2013 (Proj.): 43.2
- Net public sector debt: 2008: 33.4; 2009: 36.7; 2010: 36.8; 2011: 38.0; 2012: 37.8; 2013 (Proj.): 37.7

### Savings and investment (percent of GDP)
- Gross domestic investment: 2008: 26.9; 2009: 23.7; 2010: 24.0; 2011: 25.1; 2012: 24.9; 2013 (Proj.): 25.3
  - Public: 2008: 5.6; 2009: 6.1; 2010: 6.1; 2011: 5.9; 2012: 5.5; 2013 (Proj.): 5.2
  - Private: 2008: 16.5; 2009: 15.2; 2010: 14.5; 2011: 15.2; 2012: 16.3; 2013 (Proj.): 16.9
- Gross domestic saving: 2008: 25.3; 2009: 23.2; 2010: 23.6; 2011: 24.1; 2012: 24.0; 2013 (Proj.): 24.2
  - Public 5/: 2008: 4.1; 2009: 0.9; 2010: 1.3; 2011: 2.0; 2012: 2.5; 2013 (Proj.): 2.6
  - Private: 2008: 21.3; 2009: 22.3; 2010: 22.3; 2011: 22.1; 2012: 21.5; 2013 (Proj.): 21.7

### External sector and balance of payments (selected)
- External current account balance (in percent of GDP): 2008: -1.6; 2009: -0.6; 2010: -0.4; 2011: -1.0; 2012: -1.0; 2013 (Proj.): -1.1
- Non-oil external current account balance: 2008: -2.9; 2009: -1.7; 2010: -1.5; 2011: -2.1; 2012: -1.9; 2013 (Proj.): -1.9
- Net foreign direct investment: 2008: 2.4; 2009: 0.9; 2010: 0.4; 2011: 0.8; 2012: 1.1; 2013 (Proj.): 1.1
- Net portfolio investment: 2008: 0.4; 2009: 1.7; 2010: 3.6; 2011: 3.5; 2012: 3.6; 2013 (Proj.): 2.3
- Gross external debt (in percent of GDP, end of period): 2008: 18.6; 2009: 22.0; 2010: 23.9; 2011: 24.3; 2012: 27.4; 2013 (Proj.): 28.1
- Total external debt service (in percent of exports and other FX income): 2008: 6.8; 2009: 6.7; 2010: 4.8; 2011: 6.5; 2012: 5.9; 2013 (Proj.): 5.5
- Crude oil export price, Mexican mix (US$/bbl): 2008: 84.4; 2009: 57.4; 2010: 72.3; 2011: 101.0; 2012: 103.1; 2013 (Proj.): 102.1

### Summary balance of payments (selected annual figures, in billions of U.S. dollars and percent of GDP where noted)
- Current account (US$ billions): 2008: -17.9; 2009: -5.3; 2010: -4.8; 2011: -11.6; 2012: -11.1; 2013 (Proj.): -13.5
- Merchandise trade balance, f.o.b. (US$ billions): 2008: -18.2; 2009: -5.2; 2010: -3.3; 2011: -1.7; 2012: -0.7; 2013 (Proj.): -3.2
  - Exports (US$ billions): 2008: 291.3; 2009: 229.7; 2010: 298.5; 2011: 349.4; 2012: 375.1; 2013 (Proj.): 396.8
  - Imports (US$ billions): 2008: -309.5; 2009: -234.9; 2010: -301.7; 2011: -351.1; 2012: -375.8; 2013 (Proj.): -400.0
- Net services (US$ billions): 2008: -7.1; 2009: -8.5; 2010: -10.1; 2011: -14.2; 2012: -14.4; 2013 (Proj.): -14.5
- Net transfers (US$ billions): 2008: 25.5; 2009: 21.6; 2010: 21.5; 2011: 23.0; 2012: 23.4; 2013 (Proj.): 23.9
  - Remittances (US$ billions): 2008: 25.1; 2009: 21.3; 2010: 21.3; 2011: 22.8; 2012: 23.2; 2013 (Proj.): 23.7
- Financial account (US$ billions): 2008: 24.5; 2009: 26.9; 2010: 44.9; 2011: 42.0; 2012: 47.1; 2013 (Proj.): 29.5
  - Public sector (US$ billions) 1/: 2008: 14.9; 2009: 11.9; 2010: 33.3; 2011: 37.0; 2012: 39.0; 2013 (Proj.): 24.3
  - Private sector (US$ billions): 2008: 9.6; 2009: 15.0; 2010: 11.6; 2011: 5.0; 2012: 8.1; 2013 (Proj.): 5.2
    - Direct investment, net (US$ billions): 2008: 26.1; 2009: 7.9; 2010: 4.7; 2011: 9.7; 2012: 13.2; 2013 (Proj.): 12.9
- Net international reserves (increase -) (US$ billions): 2008: -7.4; 2009: -5.4; 2010: -22.8; 2011: -28.9; 2012: -21.0; 2013 (Proj.): -16.0
- Gross international reserves end-year (US$ billions): 2008: 95.3; 2009: 99.9; 2010: 120.6; 2011: 149.2; 2012: 170.2; 2013 (Proj.): 186.2
- Months of imports of goods and services: 2008: 3.1; 2009: 4.4; 2010: 3.7; 2011: 3.8; 2012: 4.4; 2013 (Proj.): 4.7

### Financial soundness indicators (selected, in percent)
- Regulatory capital to risk-weighted assets: 2008: 15.3; 2009: 16.5; 2010: 16.9; 2011: 15.7; 2012 1/: 15.7
- Regulatory Tier 1 capital to risk-weighted assets: 2008: 13.3; 2009: 14.6; 2010: 14.9; 2011: 13.6; 2012 1/: 13.8
- Capital to assets: 2008: 9.2; 2009: 10.7; 2010: 10.4; 2011: 9.9; 2012 1/: 10.1
- Nonperforming loans to total gross loans: 2008: 3.0; 2009: 2.8; 2010: 2.0; 2011: 2.1; 2012 1/: 2.2
- Return on assets: 2008: 1.4; 2009: 1.5; 2010: 1.8; 2011: 1.5; 2012 1/: 1.8

### Indicators of external vulnerability (selected)
- Exchange rate (per U.S. dollar, end-period): 2008: 13.5; 2009: 13.1; 2010: 12.4; 2011: 14.0; 2012: 12.9
  - Year-to-date percent change (+ depreciation): 2008: 24.6; 2009: -3.5; 2010: -5.4; 2011: 13.2; 2012: -3.8
- 28-day treasury auction rate (percent; period average): 2008: 7.7; 2009: 5.4; 2010: 4.4; 2011: 4.2; 2012: 4.2
- EMBIG Mexico (basis points; period average): 2008: 254; 2009: 301; 2010: 186; 2011: 186; 2012: 166
- Bank of Mexico net international reserves (US$ billion): 2008: 85.4; 2009: 90.8; 2010: 113.6; 2011: 142.5; 2012: 161.3
- Real credit to the non-financial private sector (12-month percent change): 2008: 8.0; 2009: -6.0; 2010: 5.6; 2011: 13.3; 2012: 11.4
- Commercial banks' nonperforming loans (percent of loans granted to non-financial private sector): 2008: 3.0; 2009: 2.8; 2010: 2.0; 2011: 2.1; 2012: 2.2

### Baseline medium-term projections (Table 6, staff projections)
- Real GDP (annual percent change): 2012: 3.8; 2013: 3.5; 2014: 3.5; 2015: 3.3; 2016: 3.3; 2017: 3.3
- Consumer prices (end of year): 2012: 4.2; 2013: 3.2; 2014: 3.0; 2015: 3.0; 2016: 3.0; 2017: 3.0
- Consumer prices (average): 2012: 4.1; 2013: 3.5; 2014: 3.0; 2015: 3.0; 2016: 3.0; 2017: 3.0
- Non-oil current account balance (as a share of GDP) 1/: 2008: -2.9; 2009: -1.7; 2010: -1.5; 2011: -2.1; 2012: -2.0; 2013 (Proj.): -2.0
- Exports, f.o.b. (annual percent change): 2008: 7.2; 2009: -21.2; 2010: 29.9; 2011: 17.1; 2012: 7.4; 2013 (Proj.): 5.8
- Imports, f.o.b. (annual percent change): 2008: 9.5; 2009: -24.0; 2010: 28.6; 2011: 16.4; 2012: 7.0; 2013 (Proj.): 6.4
- Oil export price (US$ / bbl): 2008: 84.4; 2009: 57.4; 2010: 72.3; 2011: 101.0; 2012: 103.1; 2013 (Proj.): 102.1
- Augmented fiscal balance (percent of GDP): 2008: -1.1; 2009: -6.0; 2010: -4.8; 2011: -3.4; 2012: -2.6; 2013 (Proj.): -2.1
- Augmented primary balance (percent of GDP): 2008: 1.4; 2009: -3.3; 2010: -2.2; 2011: -1.0; 2012: 0.0; 2013 (Proj.): 0.5
- Gross domestic investment (percent of GDP): 2008: 26.9; 2009: 23.7; 2010: 24.0; 2011: 25.1; 2012: 24.9; 2013 (Proj.): 25.3
- Gross domestic saving (percent of GDP): 2008: 25.3; 2009: 23.2; 2010: 23.6; 2011: 24.1; 2012: 24.0; 2013 (Proj.): 24.2
- Current account balance (percent of GDP): 2008: -1.6; 2009: -0.6; 2010: -0.4; 2011: -1.0; 2012: -1.0; 2013 (Proj.): -1.1

### Public finances and fiscal operations (selected, Table 2, Table 7, Table 8)
- Budgetary revenue, by type (percent of GDP): 2009: 23.5; 2010: 23.6; 2011: 22.6; 2013: 23.1; 2014 (Proj.): 23.2; 2015 (Proj.): 23.2
  - Oil revenue: 2009: 8.6; 2010: 7.7; 2011: 7.3; 2013: 7.5; 2014 (Proj.): 7.9; 2015 (Proj.): 8.2
  - Non-oil tax revenue 1/: 2009: 10.0; 2010: 9.6; 2011: 10.2; 2013: 10.2; 2014 (Proj.): 10.1; 2015 (Proj.): 10.0
- Federal government revenue (percent of GDP): 2009: 16.8; 2010: 16.8; 2011: 15.9; 2013: 16.2; 2014 (Proj.): 16.7; 2015 (Proj.): 17.2
- Budgetary expenditure (percent of GDP): 2009: 23.6; 2010: 25.9; 2011: 25.5; 2013: 25.3; 2014 (Proj.): 25.4; 2015 (Proj.): 25.1
- Primary expenditure (percent of GDP): 2009: 21.7; 2010: 23.7; 2011: 23.5; 2013: 23.4; 2014 (Proj.): 23.4; 2015 (Proj.): 23.0
- Capital (percent of GDP): 2009: 4.4; 2010: 5.1; 2011: 5.0; 2013: 4.9; 2014 (Proj.): 4.7; 2015 (Proj.): 4.3
- Traditional balance (percent of GDP) (Table 2): 2009: -0.1; 2010: -2.3; 2011: -2.8; 2013 (Proj.): -2.5; 2014 (Proj.): -2.4; 2015 (Proj.): -1.9
- Augmented balance (percent of GDP) 5/: 2009: -1.1; 2010: -4.7; 2011: -4.3; 2013 (Proj.): -3.4; 2014 (Proj.): -2.6; 2015 (Proj.): -2.1
- Structural Primary Fiscal Balance (percent of GDP): 2008: 0.3; 2009: -1.6; 2010: -1.9; 2011: -1.5; 2012: -0.5; 2013 (Proj.): 0.2
- Gross public sector debt (percent of GDP): 2008: 43.1; 2009: 44.5; 2010: 42.9; 2011: 43.8; 2012: 43.1; 2013 (Proj.): 43.2
- Nominal GDP (billions of Mexican pesos): 2009: 11,930; 2010: 13,084; 2011: 14,336; 2012: 15,667; 2013 (Proj.): 16,713; 2014 (Proj.): 17,819; 2015 (Proj.): 18,968; 2016 (Proj.): 20,204; 2017 (Proj.): 21,503

### Memoranda and additional fiscal items
- Crude oil export price, Mexican mix (US$/bbl) (Table 2 memorandum): 2009: 57; 2010: 72; 2011: 101; 2012: 103; 2013 (Proj.): 102; 2014 (Proj.): 98; 2015 (Proj.): 94; 2016 (Proj.): 90; 2017 (Proj.): 86
- Non-oil augmented balance (percent of GDP): 2009: -9.0; 2010: -9.5; 2011: -9.1; 2013 (Proj.): -9.2; 2014 (Proj.): -8.7; 2015 (Proj.): -8.1

*Source: IMF staff report tables and projections as contained in the provided content.*

### ANNEX I. MEXICO: EXTERNAL SECTOR ASSESSMENT

### ANNEX I. MEXICO: EXTERNAL SECTOR ASSESSMENT

### Overview
- Mexico’s current account deficit and exchange rate level appear broadly in line with fundamentals and desirable policy settings.
- The floating exchange rate has been a key shock absorber, with large and symmetric fluctuations since the global crisis.
- Rule-based intervention in the foreign exchange market has been minimal and aimed at limiting excess volatility and disorderly market conditions.
- Foreign investment in peso-denominated government debt has increased significantly since 2010.
- Reserve accumulation (mainly from PEMEX’s foreign exchange balance) has allowed Mexico to maintain adequate reserve buffers for normal times.
- Mexico’s FCL arrangement is an important complement to reserve buffers against global tail risks.

### Current Account
- Mexico’s current account deficit has remained relatively stable at about 1 percent of GDP over the past few years.
- Manufacturing constitutes about 80 percent of total exports.
- About 80 percent of Mexico’s exports are destined for the U.S.
- The v-shaped recovery in exports after the global crisis was accompanied by a strong recovery of imports, reflecting high integration into the U.S. manufacturing supply chain and heavy reliance on imported inputs.
- Export performance supported by: strong U.S. demand, increased market share from significant past FDI (particularly into the automobile industry), improved relative ULCs (from increased productivity, contained wage growth from lower migration and increased labor market participation, and depreciation of the exchange rate).
- Recovery of Mexico’s terms of trade to pre-crisis levels helped underpin export values.
- Large and steady remittance flows, particularly from the U.S., were partly offset by the net factor income balance (primarily interest payments to foreign holders of Mexican debt) and the non-factor services balance (linked to trade-related freight and insurance services).
- Over the medium term, the current account deficit is expected to remain stable at about 1 percent of GDP (at constant real exchange rate and given current medium-term assumptions in the World Economic Outlook).
- Projected deterioration in the oil trade balance (in line with the constant volume of production and projected decline in oil prices) is expected to be offset by an improvement in the non-oil trade balance, led by continued strong growth in manufactured exports.
- Mexico is expected to continue to attract FDI into the manufacturing sector; macro policy continuity and growth-promoting structural reforms introduce upside potential for exports in manufacturing and energy.

### Exchange Rate
- Mexico’s flexible exchange rate has served as an important buffer against heightened external risks and uncertainties.
- The nominal exchange rate has shown significant volatility during recurrent periods of global risk aversion, but without posing major difficulties for balance sheets of households, corporates and financial institutions.
- Part of the peso’s volatility reflects global sentiments rather than country-specific factors, given the peso market’s high liquidity and around-the-clock openness and that a bulk of currency trading is conducted outside Mexico.
- The real effective exchange rate depreciated by about 25 percent from peak to trough during the 2008–09 global crisis; since the crisis the REER has both strengthened and weakened, including in the second half of 2011.
- The nominal exchange rate depreciated by about 50 percent against the U.S. dollar during the 2008–09 crisis in a period of seven months.
- Upsurges in global risk aversion have not led to foreign divestment from government debt, with interest rates remaining remarkably stable.

### Capital Account, International Reserves, and International Investment Position
- Large capital inflows in recent years driven by lax global monetary conditions and bouts of global risk aversion (external factors) and by Mexico’s strong macroeconomic fundamentals, WGBI inclusion in 2010, and opening to new institutional investors (domestic factors).
- Investor base has diversified beyond the U.S., including investors from the Asia-Pacific region.
- Stock of foreign portfolio investment in Mexico increased by almost 80 percent during the last three years, from about US$200 billion at end-2009 to US$355 billion in mid 2012.
- Stock of foreign portfolio holdings in domestic sovereign debt markets increased from about US$30 billion in 2009 to US$100 billion in mid-2012.
- A significant part of portfolio inflows has been from institutional investors into the long-end of the yield curve; more recently flows to short-term government paper (CETES) have increased considerably, driven in part by carry trade operations.
- The large portfolio exposure of foreign market participants represents significant risks if global risk aversion surges.

### Reserve Coverage and Metrics
- Reserve coverage vis-à-vis foreign portfolio liabilities appears low at 48 percent compared with the median for a group of emerging markets of 147 percent.
- Coverage of monetary aggregates increased from 16 percent to 21 percent of broad money; the emerging markets median is 33 percent.
- Mexico is below the median for emerging markets in reserves to GDP, and above the median for coverage of short-term debt at residual maturity plus the current account deficit.
- ARA metric and reserves as months of imports show Mexico in line with the median for emerging markets, but low short-term debt and current account deficits, and high correlation between exports and imports, suggest less weight can be given to these metrics as indicators of potential external drains.
- Specific charted metrics (as presented):
  - Reserves to Broad Money: Mexico: 21.2% plus 10.3% of FCL
  - Reserves to STD at remaining maturity plus current account: Mexico: 167.5% plus 81.5% of FCL
  - Reserves to Foreign Portfolio Investment: Mexico: 48.2% plus 23.5% of FCL
  - Reserves to months of imports: Mexico: 4.7 plus 2.3 of FCL
  - Reserves to ARA Metric: Mexico: 130% plus 64% of FCL
  - Reserves to GDP: Mexico: 12.9% plus 6.3% of FCL

### Net Foreign Assets
- Mexico’s net foreign asset (NFA) position narrowed slightly below pre-crisis levels.
- As of end-2Q 2012, Mexico’s NFA stood at about negative 31 percent of GDP (from negative 36 percent at end-2007).
- Over the medium term, the NFA is expected to remain broadly stable as the current account is projected to be in line with the NFA-stabilizing level of 1.1 percent.

*Source: ANNEX I. MEXICO: EXTERNAL SECTOR ASSESSMENT (staff report excerpts).*

### 2. External Debt Sustainability Framework, 2007–2017 ____________________________________ 5

### 2. External Debt Sustainability Framework, 2007–2017

### Fiscal Debt Sustainability: main findings
- Mexico’s public debt is moderate and is projected to remain stable under the baseline scenario at around 43 percent of GDP.
- Standard DSA bound tests suggest public debt would remain at moderate levels under standard shocks.
- Mexico’s balanced-budget framework is identified as a strong fiscal anchor against materialization of adverse scenarios.
- Public sector debt (baseline, percent of GDP) — selected years:
  - 2007: 37.8
  - 2008: 43.1
  - 2009: 44.5
  - 2010: 42.9
  - 2011: 43.8
  - 2012: 43.1
  - 2013: 43.2
  - 2014: 43.2
  - 2015: 43.1
  - 2016: 43.0
  - 2017: 42.9
- Foreign-currency denominated public sector debt (percent of GDP) — selected years:
  - 2007: 10.2
  - 2008: 12.8
  - 2009: 12.0
  - 2010: 10.0
  - 2011: 10.8
  - 2012: 9.9
  - 2013: 9.4
  - 2014: 8.8
  - 2015: 8.3
  - 2016: 7.8
  - 2017: 7.0
- Change in public sector debt (percent of GDP) — 2007 to 2017:
  - 2007: -0.5
  - 2008: 5.3
  - 2009: 1.4
  - 2010: -1.7
  - 2011: 1.0
  - 2012: -0.7
  - 2013: 0.1
  - 2014: 0.0
  - 2015: -0.1
  - 2016: -0.1
  - 2017: -0.1
- Identified debt-creating flows (4+7+12, percent of GDP) — 2007 to 2017:
  - 2007: -2.4
  - 2008: -0.1
  - 2009: 7.1
  - 2010: 0.7
  - 2011: 0.9
  - 2012: -1.6
  - 2013: -1.0
  - 2014: -1.0
  - 2015: -0.9
  - 2016: -0.9
  - 2017: -0.8
- Primary deficit (percent of GDP) — 2007 to 2017:
  - 2007: -1.5
  - 2008: -1.4
  - 2009: 3.3
  - 2010: 2.2
  - 2011: 1.0
  - 2012: 0.0
  - 2013: -0.5
  - 2014: -0.7
  - 2015: -0.8
  - 2016: -0.9
  - 2017: -0.9
- Revenue and grants (percent of GDP) — 2007 to 2017:
  - 2007: 21.4
  - 2008: 23.0
  - 2009: 22.3
  - 2010: 22.2
  - 2011: 22.1
  - 2012: 22.8
  - 2013: 22.9
  - 2014: 22.9
  - 2015: 23.2
  - 2016: 22.7
  - 2017: 22.3
- Primary (noninterest) expenditure (percent of GDP) — 2007 to 2017:
  - 2007: 19.9
  - 2008: 21.6
  - 2009: 25.5
  - 2010: 24.4
  - 2011: 23.0
  - 2012: 22.8
  - 2013: 22.4
  - 2014: 22.2
  - 2015: 22.3
  - 2016: 21.9
  - 2017: 21.4
- Automatic debt dynamics (percent of GDP) — 2007 to 2017:
  - 2007: -0.6
  - 2008: 2.4
  - 2009: 3.1
  - 2010: -2.0
  - 2011: 0.0
  - 2012: -1.2
  - 2013: -0.1
  - 2014: 0.1
  - 2015: 0.2
  - 2016: 0.2
  - 2017: 0.3
- Contribution from interest rate/growth differential (percent of GDP) — 2007 to 2017:
  - 2007: -0.5
  - 2008: -0.2
  - 2009: 3.6
  - 2010: -1.4
  - 2011: -1.3
  - 2012: -1.2
  - 2013: -0.1
  - 2014: 0.1
  - 2015: 0.2
  - 2016: 0.2
  - 2017: 0.3
- Of which contribution from real interest rate (percent of GDP) — 2007 to 2017:
  - 2007: 0.6
  - 2008: 0.3
  - 2009: 1.0
  - 2010: 0.9
  - 2011: 0.2
  - 2012: 0.4
  - 2013: 1.4
  - 2014: 1.5
  - 2015: 1.5
  - 2016: 1.6
  - 2017: 1.7
- Of which contribution from real GDP growth (percent of GDP) — 2007 to 2017:
  - 2007: -1.1
  - 2008: -0.4
  - 2009: 2.6
  - 2010: -2.3
  - 2011: -1.5
  - 2012: -1.5
  - 2013: -1.4
  - 2014: -1.4
  - 2015: -1.3
  - 2016: -1.3
  - 2017: -1.3
- Residual, including asset changes (2-3, percent of GDP) — 2007 to 2017:
  - 2007: 1.9
  - 2008: 5.4
  - 2009: -5.7
  - 2010: -2.3
  - 2011: 0.1
  - 2012: 0.8
  - 2013: 1.0
  - 2014: 1.0
  - 2015: 0.9
  - 2016: 0.8
  - 2017: 0.7
- Public sector debt-to-revenue ratio (percent) — 2007 to 2017:
  - 2007: 176.8
  - 2008: 187.6
  - 2009: 199.7
  - 2010: 193.2
  - 2011: 198.5
  - 2012: 189.2
  - 2013: 188.6
  - 2014: 188.7
  - 2015: 186.2
  - 2016: 189.4
  - 2017: 192.3
- Gross financing need under baseline (percent of GDP) — selected:
  - 2007: 8.2
  - 2008: 8.8
  - 2009: 16.6
  - 2010: 13.3
  - 2011: 10.7
  - 2012: 10.8
  - 2013: 10.6
  - 2014: 10.6
  - 2015: 10.2
  - 2016: 10.2
  - 2017: 10.4
- Gross financing need under baseline (in billions of U.S. dollars) — selected:
  - 2007: 84.8
  - 2008: 96.7
  - 2009: 147.0
  - 2010: 138.0
  - 2011: 123.7
  - 2012: 125.4
  - 2013: 128.3
  - 2014: 135.3
  - 2015: 137.0
  - 2016: 143.7
  - 2017: 154.0
- Scenario with no policy change (constant primary balance) — public sector debt (percent of GDP) — 2012–2017:
  - 2012: 43.1
  - 2013: 43.7
  - 2014: 44.4
  - 2015: 45.1
  - 2016: 45.9
  - 2017: 46.7

### External Debt Sustainability: main findings
- Mexico’s external-debt-to-GDP ratio is low and sustainable and is expected to remain stable over the medium-term.
- In the most extreme shock—a 30 percent real exchange rate depreciation—the external debt-to-GDP ratio would increase to 37 percent, which is characterized as a moderate level.
- Mitigating factors cited:
  - A larger share of Mexico’s public debt is now denominated in pesos.
  - Mexico has lengthened the maturity structure of its external debt by taking advantage of low interest rates and strong macroeconomic fundamentals.
- Other shocks (interest rates, current account, growth) have only marginal impact on Mexico’s external debt-to-GDP ratio.
- Baseline external debt (percent of GDP) — selected years:
  - 2007: 19.0
  - 2008: 18.8
  - 2009: 22.1
  - 2010: 23.9
  - 2011: 24.3
  - 2012: 27.4
  - 2013: 28.1
  - 2014: 28.0
  - 2015: 27.6
  - 2016: 27.1
  - 2017: 25.7
- Change in external debt (percent of GDP) — 2007 to 2017:
  - 2007: 1.0
  - 2008: -0.2
  - 2009: 3.3
  - 2010: 1.8
  - 2011: 0.4
  - 2012: 3.1
  - 2013: 0.7
  - 2014: -0.1
  - 2015: -0.3
  - 2016: -0.5
  - 2017: -1.4
- Identified external debt-creating flows (4+8+9, percent of GDP) — 2007 to 2017:
  - 2007: -2.8
  - 2008: -0.9
  - 2009: 3.2
  - 2010: -4.5
  - 2011: -2.5
  - 2012: -1.4
  - 2013: -1.2
  - 2014: -1.3
  - 2015: -1.3
  - 2016: -1.4
  - 2017: -1.3
- Current account deficit, excluding interest payments (percent of GDP) — 2007 to 2017:
  - 2007: -0.5
  - 2008: 0.1
  - 2009: -0.8
  - 2010: -0.9
  - 2011: -0.6
  - 2012: -0.7
  - 2013: -0.5
  - 2014: -0.3
  - 2015: -0.3
  - 2016: -0.4
  - 2017: -0.6
- Exports and imports (percent of GDP) — selected years:
  - Exports:
    - 2007: 27.9
    - 2008: 28.2
    - 2009: 27.7
    - 2010: 30.3
    - 2011: 31.6
    - 2012: 33.7
    - 2017: 36.0
  - Imports:
    - 2007: 29.5
    - 2008: 30.5
    - 2009: 29.2
    - 2010: 31.6
    - 2011: 33.0
    - 2012: 34.9
    - 2017: 37.4
- Net non-debt creating capital inflows (negative, percent of GDP) — 2007 to 2017:
  - 2007: -2.4
  - 2008: -1.5
  - 2009: -1.8
  - 2010: -1.7
  - 2011: -1.0
  - 2012: -1.4
  - 2013: -1.4
  - 2014: -1.5
  - 2015: -1.6
  - 2016: -1.6
  - 2017: -1.6
- Automatic debt dynamics (percent of GDP) — 2007 to 2017:
  - 2007: 0.1
  - 2008: 0.5
  - 2009: 5.9
  - 2010: -1.9
  - 2011: -0.9
  - 2012: 0.7
  - 2013: 0.6
  - 2014: 0.5
  - 2015: 0.6
  - 2016: 0.7
  - 2017: 0.8
- Contribution from nominal interest rate (percent of GDP) — 2007 to 2017:
  - 2007: 1.6
  - 2008: 1.5
  - 2009: 1.4
  - 2010: 1.3
  - 2011: 1.5
  - 2012: 1.6
  - 2013: 1.5
  - 2014: 1.4
  - 2015: 1.5
  - 2016: 1.5
  - 2017: 1.7
- Contribution from real GDP growth (percent of GDP) — 2007 to 2017:
  - 2007: -0.5
  - 2008: -0.2
  - 2009: 1.4
  - 2010: -1.0
  - 2011: -0.8
  - 2012: -0.9
  - 2013: -0.9
  - 2014: -0.9
  - 2015: -0.9
  - 2016: -0.9
  - 2017: -0.8
- Residual, including change in gross foreign assets (2-3, percent of GDP) — 2007 to 2017:
  - 2007: 3.8
  - 2008: 0.7
  - 2009: 0.1
  - 2010: 6.4
  - 2011: 3.0
  - 2012: 4.5
  - 2013: 1.9
  - 2014: 1.2
  - 2015: 1.0
  - 2016: 0.9
  - 2017: -0.1
- External debt-to-exports ratio (percent) — 2007 to 2017:
  - 2007: 68.1
  - 2008: 66.5
  - 2009: 79.8
  - 2010: 78.9
  - 2011: 77.0
  - 2012: 81.4
  - 2013: 82.1
  - 2017: 71.4
- Gross external financing need (in billions of US dollars) — selected:
  - 2007: 89.2
  - 2008: 107.2
  - 2009: 103.0
  - 2010: 97.0
  - 2011: 106.5
  - 2012: 127.6
  - 2017: 142.1
- Gross external financing need (percent of GDP) — selected:
  - 2007: 8.6
  - 2008: 9.8
  - 2009: 11.7
  - 2010: 9.4
  - 2011: 9.2
  - 2012: 11.0
  - 2017: 9.5
- Scenario with key variables at their historical averages — external debt (percent of GDP) — selected:
  - 2012: 27.4
  - 2013: 27.6
  - 2014: 27.4
  - 2015: 27.1
  - 2016: 26.7
  - 2017: 25.3

### Key macroeconomic and fiscal assumptions underlying baselines
- Real GDP growth (in percent) — 2007 to 2017:
  - 2007: 3.2
  - 2008: 1.2
  - 2009: -6.0
  - 2010: 5.6
  - 2011: 3.9
  - 2012: 3.8
  - 2013: 3.5
  - 2014: 3.5
  - 2015: 3.3
  - 2016: 3.3
  - 2017: 3.3
- Average nominal interest rate on public debt (in percent) — 2007 to 2017:
  - 2007: 7.5
  - 2008: 7.2
  - 2009: 6.2
  - 2010: 6.3
  - 2011: 6.2
  - 2012: 6.4
  - 2013: 6.5
  - 2014: 6.7
  - 2015: 6.9
  - 2016: 7.1
  - 2017: 7.2
- Average real interest rate (nominal rate minus change in GDP deflator, in percent) — 2007 to 2017:
  - 2007: 1.9
  - 2008: 0.8
  - 2009: 2.0
  - 2010: 2.4
  - 2011: 0.8
  - 2012: 1.1
  - 2013: 3.5
  - 2014: 3.7
  - 2015: 3.9
  - 2016: 4.0
  - 2017: 4.2
- Nominal appreciation (increase in US dollar value of local currency, in percent) — selected:
  - 2007: 0.1
  - 2008: -19.7
  - 2009: 3.7
  - 2010: 5.7
  - 2011: -11.7
  - 2012: ... (data truncated in source)
- Inflation rate (GDP deflator, in percent) — selected:
  - 2007: 5.6
  - 2008: 6.4
  - 2009: 4.2
  - 2010: 3.9
  - 2011: 5.4
  - 2012: 5.3
  - 2013: 3.0
  - 2014: 3.0
  - 2015: 3.1
  - 2016: 3.1
  - 2017: 3.0
- Growth of real primary spending (deflated by GDP deflator, in percent) — 2007 to 2017:
  - 2007: 4.3
  - 2008: 9.4
  - 2009: 11.4
  - 2010: 0.8
  - 2011: -1.8
  - 2012: 2.6
  - 2013: 1.8
  - 2014: 2.6
  - 2015: 3.9
  - 2016: 1.1
  - 2017: 1.2

### Scenarios, shocks, and stress tests (selected)
- Public debt bound tests: individual shocks are permanent one-half standard deviation shocks; shaded areas represent actual data.
- Historical scenarios use ten-year historical averages to project debt dynamics five years ahead.
- No policy change scenario: assumes the budget rule does not hold (constant primary balance).
- Combined shock (for public debt): permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.
- Real depreciation and contingent liabilities shocks for public sector: one-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010 (real depreciation defined as nominal depreciation minus domestic inflation).
- External debt bound tests: individual shocks are permanent one-half standard deviation shocks; permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance; one-time real depreciation of 30 percent occurs in 2012.
- Most extreme external shock outcome reported: combined shock with 30% depreciation raises external debt-to-GDP ratio to 37 (percent).

### Policy implications and mitigating factors highlighted
- Balanced-budget framework provides a strong fiscal anchor that reduces the risk of debt deteriorating under shocks.
- Denominational shift toward peso-denominated public debt reduces external vulnerability.
- Lengthening of external debt maturities and taking advantage of low interest rates are cited as factors that mitigate rollover and interest-rate risks.
- Non-interest current account shocks, interest-rate shocks, and growth shocks produce only marginal impacts on external debt-to-GDP under baseline assumptions.

*Prepared by the Staff of the International Monetary Fund, November 1, 2012.*

### ANNEX 3. STATISTICAL ISSUES

### ANNEX 3. STATISTICAL ISSUES

### Data provision and dissemination
- 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.
- A data ROSC update was completed on October 8, 2010 and was published as IMF Country Report No. 10/330.
- The authorities are aware of areas for improvement and are continuing work in this regard.
- Mexico is reporting Financial Soundness Indicators (FSIs) for Deposit Takers on a monthly basis.

### Balance of payments and external debt statistics
- Although some items of the balance of payments statistics conform to the Fifth edition of the Balance of Payments Manual, 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 Mexico has been publishing a new format that follows the guidelines of the Fifth edition of the Balance of Payments Manual.
- Several measures to improve external debt statistics have been carried out, including compilation of data on external liabilities of the private sector and publicly traded companies registered with the Mexican stock exchange:
  - external debt outstanding,
  - annual amortization schedule for the next four years broken down by maturity, and
  - type of instrument.

### National accounts
- National accounts statistics generally follow the recommendations of the System of National Accounts, 1993 (1993 SNA).
- Source data and statistical techniques are sound and most statistical outputs sufficiently portray reality.
- A broad range of source data are available, with economic censuses every five years and a vast program of monthly and annual surveys.
- For most surveys, scientific sampling techniques are used; however, most samples exclude a random sample of small enterprises.
- Changes in inventories are obtained as residuals, so there is no independent verification between the production and expenditure measures of GDP.
- Some statistical techniques need enhancement; for example, taxes and subsidies on products at constant prices are estimated by applying the GDP growth rate, described as a deviation from best practice.

### Prices: CPI and PPI
- Concepts and definitions for both the CPI and PPI meet international standards.
- The PPI is only compiled by product and not by economic activity.
- A ROSC mission on prices will be conducted in November 2012.

### Fiscal statistics
- The authorities compile fiscal statistics following national concepts, definitions, and classifications that make international comparison difficult.
- The 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 that take into account 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.
- Recent legislation to improve the reporting of sub national government accounts was welcomed as key to reinforcing fiscal discipline.

### Monetary and financial statistics
- The methodological foundations of monetary statistics are generally sound.
- Recording of financial derivative and, to a lesser extent, repurchase agreements transactions are overstating the aggregated other depository corporations (ODC) balance sheet and survey.
- Availability of data on other financial intermediaries such as insurance companies and pension funds allows for the construction of a financial corporations survey with full coverage of the Mexican financial system, published on a monthly basis in International Financial Statistics.
- Mexico has continued to publish a consolidated balance sheet of the banking system and central bank balance sheet series with regular periodicity (see table for dates and frequencies).

### Key data quality and frequency indicators (as of October 10, 2012)
- Exchange Rates: Date of latest observation — September 2012; Frequency of Data — Daily (D).
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation — August 2012; Frequency of Data — Monthly (M).
- Reserve/Base Money: Date of latest observation — August 2012; Frequency of Data — Monthly (M).
- Broad Money: Date of latest observation — August 2012; Frequency of Data — Monthly (M).
- Central Bank Balance Sheet: Date of latest observation — September 2012; Frequency of Data — Weekly (W).
- Consolidated Balance Sheet of the Banking System: Date of latest observation — August 2012; Frequency of Data — Monthly (M).
- Interest Rates: Date of latest observation — September 2012; Frequency of Data — Daily (D).
- Consumer Price Index: Date of latest observation — September 2012; Frequency of Data — Bi-Weekly (Bi-W).
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation — August 2012.
- External Current Account Balance: Date of latest observation — Q2 2012; Date received — June 2012; Frequency — Quarterly (Q).
- International Investment Position: Date of latest observation — Q2 2012; Date received — October 2012; Frequency — Quarterly (Q).

### Selected statistical findings and indicators (annual unless otherwise indicated)
- Real GDP: 2008 — 1.2; 2009 — -6.0; 2010 — 5.6; 2011 — 3.9; 2012 — 3.8.
- Real GDP per capita: 2008 — -0.4; 2009 — -7.5; 2010 — 4.0; 2011 — 2.5; 2012 — 2.9.
- Gross domestic investment (in percent of GDP): 2008 — 26.8; 2009 — 23.8; 2010 — 24.0; 2011 — 25.0; 2012 — 24.9.
- Gross domestic savings (in percent of GDP): 2008 — 25.3; 2009 — 23.2; 2010 — 23.6; 2011 — 24.2; 2012 — 24.0.
- Consumer price index (period average): 2008 — 5.1; 2009 — 5.3; 2010 — 4.2; 2011 — 3.4; 2012 — 4.1.
- Exports, f.o.b.: 2008 — 7.2; 2009 — -21.2; 2010 — 29.9; 2011 — 17.1; 2012 — 7.4.
- Imports, f.o.b.: 2008 — 9.5; 2009 — -24.0; 2010 — 28.6; 2011 — 16.4; 2012 — 7.0.
- External current account balance (in percent of GDP): 2008 — -1.6; 2009 — -0.6; 2010 — -0.4; 2011 — -1.0; 2012 — -1.0.
- Change in net international reserves (end of period, billions of U.S. dollars): 2008 — 7.5; 2009 — 5.4; 2010 — 22.8; 2011 — 28.9; 2012 — 21.0.
- Outstanding external debt (in percent of GDP): 2008 — 18.6; 2009 — 22.0; 2010 — 23.9; 2011 — 24.3; 2012 — 27.4.
- Government Revenue (in percent of GDP): 2008 — 23.5; 2009 — 23.6; 2010 — 22.6; 2011 — 22.8; 2012 — 23.1.
- Government Expenditure (in percent of GDP): 2008 — 23.6; 2009 — 25.9; 2010 — 25.5; 2011 — 25.3; 2012 — 25.4.
- Augmented overall balance (in percent of GDP): 2008 — -1.1; 2009 — -4.7; 2010 — -4.3; 2011 — -3.4; 2012 — -2.6.
- Bank credit to the non-financial private sector (percent growth): 2008 — 13.5; 2009 — -1.0; 2010 — 10.0; 2011 — 17.2; 2012 — 15.9.
- Broad money (M4a): 2008 — 16.8; 2009 — 6.1; 2010 — 12.0; 2011 — 15.7; 2012 — 15.3.

*Source: ANNEX 3. STATISTICAL ISSUES, _cr12316 - ANNEX 3. STATISTICAL ISSUES_*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12316.pdf_