Mexico - Marking the Retirement of its Brady Bonds, address by Horst Köhler, Managing Director of the IMF

June 12, 2003

Mexico - Marking the Retirement of its Brady Bonds
Horst Köhler
Managing Director of the International Monetary Fund
At a Celebration at Los Pinos
Mexico City, June 12, 2003

Mr. President, Secretary Gil Diaz, Governor Ortiz, Secretary Snow, and distinguished guests:


1. It is a great pleasure to be in Mexico today—my third visit as Managing Director—and celebrate Mexico's early repurchase of its Brady bonds. We celebrate, of course, much more than that today. We celebrate Mexico's political and economic transformation over the past decade. Politically, Mexico has made a smooth transition to a vibrant multi-party democracy. Economically, Mexico has moved from deep debt and recurrent financial crisis to a position of growing economic leadership among emerging market countries. The international community has played a part in this transition, but there can be no doubt that the credit belongs to the Mexican people, and their leaders, who stayed the course of political and economic reform.


2. Mexico's remarkable economic turnaround since its crisis of 1994-95 well illustrates the rewards of sustained sound economic management. Mexico has entered a new era of macroeconomic stability. Inflation, which had reached 100 percent during the 1980s, is now firmly in the single-digit range—a tribute to nearly a decade of central bank independence. The current account deficit, which had averaged more than 7 percent of GDP in the run-up to the 1994-95 crisis, is now down to a sustainable 2-3 percent of GDP. International reserves have increased ten-fold over the past decade to over US$50 billion. Mexico has moved from being a debtor to being a creditor of the Fund.

3. Macroeconomic stability is yielding dividends for Mexico. Mexico has achieved investment grade status and foreign direct investment has risen sharply over the past decade. Most importantly, real GDP growth has averaged 4 percent since the mid-1990s—nearly twice as fast as during the 1980s—and well ahead of most other countries in the region. Public debt has been brought down. Social conditions are improving, especially in key indicators of life expectancy, infant mortality, and adult literacy.

4. These achievements are the results of determined macroeconomic and structural policies that have reduced Mexico's vulnerabilities, increased the flexibility of response to external shocks, and raised productivity:

· Improved fiscal policy and debt management have been critical to the recovery of confidence. Fiscal spending has become more efficient and more transparent, with quasi-fiscal activities being firmly controlled, while transfers to the poor have encouraged human capital development. Mexico has been a leader in Latin America in developing its domestic debt market, and its framework for investor relations is a model for emerging market countries.

· Mexico now has close to a decade of successful experience with a flexible exchange rate system and, over this period, has moved toward a full inflation-targeting regime whose credibility has been ensured by an independent central bank.

· The financial system has made major strides following the liquidity and solvency problems of 1994-95. Stability has been restored, and regulation and supervision have moved toward international best practice. Opening the financial system to foreign investment has greatly transformed its competitiveness.

· Greater trade openness, led by entry into NAFTA in 1994, has fostered the development of a strong traded sector—matching Mexico's high level of financial market integration and spurring innovation and competition. Exports now comprise 30 percent of GDP—nearly double the share in 1985.

· Institutional reforms in Mexico have contributed importantly to growth. Privatization and deregulation are moving forward in key industries. A much stronger domestic bankruptcy framework is now in place. Mexico has also been in the vanguard of key initiatives to strengthen transparency, especially in the fiscal and financial areas.

Forward-looking challenges

5. Let me turn now to the challenges I see facing Mexico. Of these, raising growth and reducing poverty may be the most compelling, and intertwined, challenges. Growth has recently slowed after accelerating during the second half of the 1990s. Poverty remains high, despite its improving trend of recent years, with significant regional disparities. A clear lesson from other country experiences is the importance of maintaining high growth on a consistent basis to reduce poverty.

6. Slowing growth in Mexico reflects cyclical economic weakness in the United States, but also weakening stimuli from some of the contributors to growth in the 1990s—such as from NAFTA. Thus, Mexico faces the tasks of reducing its dependence on the U.S. economy, further strengthening its economic fundamentals, and searching out new investment opportunities, in order to maintain high growth on a consistent basis.

7. President Fox and his team have developed a well-focused medium-term reform agenda—the National Development Plan—to meet the growth challenge while further reducing macroeconomic and financial vulnerabilities. Let me focus on three key aspects of this growth agenda, based on the lessons from other emerging market countries:

· Further reform and strengthening of the fiscal position within a prudent medium-term framework rightly lie at the heart of the agenda. Sustained further reductions in the broad fiscal deficit (the PSBR) are essential to address remaining financial vulnerabilities, and entrench a virtuous cycle of improving public debt dynamics and rising confidence. Given still considerable infrastructure financing needs, tax reform in Mexico assumes high significance, especially in light of the relatively low share of non-oil revenues, and the scope to broaden the tax base and reduce evasion.

· Another key plank is labor-market reform, designed to bring labor-market flexibility closer to that of Mexico's main trading partners. Greater flexibility would have enormous benefits for Mexico—helping increase employment and productivity, and bringing marginalized workers into the mainstream. Business and labor groups in Mexico have collaborated to develop draft legislation to bring about reforms that move in this direction, and its passage will be an important step to improving Mexico's competitiveness.

· A third area for further structural reform is the institutional and business environment. This has several key dimensions also closely related to raising Mexico's competitiveness and growth prospects. In infrastructure, an open and supportive environment for private business would attract the investment needed to meet strong demand growth and efficiently exploit Mexico's abundant energy resources. Another dimension concerns the public enterprises; again, the lessons from other countries point to the potential that exists to achieve greater efficiencies by developing a robust and market-based governance structure for them.

8. A rapidly growing economy will greatly facilitate meeting the social objectives of the government. The next phase of social reforms involves giving even higher priority to education and human capital development, areas where key policy responsibilities increasingly lie with decentralized levels of government. This will require developing a strong consensus across regions for a clear policy framework for the reforms. The government's efforts at combating corruption will also help address social equity issues, as it is typically smaller businesses and the poor who bear the burden of corruption.

Role of the IMF

9. Let me talk briefly about the role of the Fund—what we have been doing to improve the international financial architecture—and conclude with a few remarks on the outlook for Latin America. Mexico's role is key from both perspectives.

10. The Fund's efforts have increasingly aimed at addressing a two-fold challenge in improving the architecture of the international financial system—to prevent crises, and to help resolve them as effectively as possible if they materialize. In doing so, we have intensified our efforts to learn the lessons from recent crises.

11. In crisis prevention, Mexico's policy record provides an excellent example of how to correct macroeconomic and financial weaknesses that leave countries vulnerable to crisis. Thus, in our surveillance of national policies and international markets, we have emphasized the importance of making exchange rates more flexible; strengthening fiscal positions, institutions, and debt management; building efficient and diversified financial sectors with considerable operational autonomy for central banks, and increasing transparency of economic management—all areas where Mexico's record exemplifies better crisis proofing.

12. The Fund has also intensified efforts to strengthen the framework for resolving financial crises, particularly in restructuring sovereign debt. A crucial step in this direction has been the incorporation of collective action clauses (CACs) in emerging market bond issues. Here, too, Mexico has shown leadership. Earlier this year, you were the first major emerging market country to issue government bonds under New York law with CACs. Since then, a number of countries have followed Mexico's lead, and these clauses now look likely to become standard features of emerging market bond issues.

13. Finally, let me say a few words on the Latin American region. Just six months ago, the region was in a year of negative growth—the worst growth outcome in at least a decade. Since then, some of the downside risks in the world economy have receded, and Latin America as a whole is expected to recover in 2003, with growth rising to over 4 percent in 2004. Greater optimism about the region is being driven by rising political consensus for the strengthening of economic policies. The Fund has worked closely and flexibly with many countries in the region to help put in place more sustainable macroeconomic frameworks and strengthened social safety nets. Markets have responded strongly to these stabilizing political and economic policy trends, and macroeconomic and financing pressures have begun to ease everywhere. The challenge now is to make the transition from emerging recovery to sustained growth with improved equity over the medium term. Mexico's economy accounts for fully a quarter of regional GDP, and its continued success will be crucial to increasing prosperity throughout Latin America.

14. Mr. President, I cannot complete my remarks without expressing how delighted I am that Agustin Carstens has agreed to become Deputy Managing Director at the IMF—the first from Mexico. Not only will the IMF in Washington gain enormously from Agustin's appointment, but his wise counsel and vast experience will—I am sure—be a very valuable resource to all of our membership.


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