Mexico - Marking the Retirement of its Brady Bonds, address by Horst Köhler, Managing Director of the IMF
IMF News, June 12, 2003
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- Published: June 12, 2003
Introduction
- Speech delivered at a Celebration at Los Pinos, Mexico City, June 12, 2003.
- Purpose: celebrate Mexico's early repurchase of its Brady bonds and broader political and economic transformation.
- Highlights:
- Political transition to a vibrant multi-party democracy.
- Economic move from deep debt and recurrent financial crisis to growing leadership among emerging market countries.
- Credit attributed to the Mexican people and their leaders for sustained political and economic reform.
Achievements
- Macroeconomic stabilization and performance:
- Inflation had reached 100 percent during the 1980s; now "firmly in the single-digit range."
- Current account deficit reduced from an average of more than 7 percent of GDP pre-1994-95 crisis to a sustainable 2-3 percent of GDP.
- International reserves 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.
- Growth and social indicators:
- Real GDP growth has averaged 4 percent since the mid-1990s—nearly twice as fast as during the 1980s.
- Exports now comprise 30 percent of GDP—nearly double the share in 1985.
- Improvements in key social indicators: life expectancy, infant mortality, and adult literacy.
- Structural and policy reforms contributing to recovery:
- Fiscal policy and debt management: improved efficiency and transparency; quasi-fiscal activities controlled; targeted transfers to the poor; leadership in developing domestic debt market and investor relations.
- Monetary and exchange rate policy: close to a decade of experience with a flexible exchange rate and movement toward a full inflation-targeting regime supported by an independent central bank.
- Financial sector: restored stability after 1994-95 liquidity and solvency problems; regulation and supervision moving toward international best practice; increased competitiveness through foreign investment.
- Trade openness and NAFTA (entry in 1994): fostered a strong traded sector, matching high financial market integration and spurring innovation and competition.
- Institutional reforms: privatization and deregulation in key industries; stronger domestic bankruptcy framework; initiatives to strengthen transparency in fiscal and financial areas.
Forward-looking challenges
- Primary challenges: raising growth and reducing poverty—interconnected goals.
- Recent trends and sources of weakness:
- Growth has recently slowed after acceleration in the late 1990s.
- Poverty remains high with significant regional disparities.
- Slowdown reflects cyclical weakness in the United States and weakening stimuli from contributors to 1990s growth, such as NAFTA.
- Policy agenda (National Development Plan) priorities and recommended reforms:
- Fiscal reform:
- Further reform and strengthening of the fiscal position within a prudent medium-term framework.
- Sustained further reductions in the broad fiscal deficit (the PSBR) are essential to address remaining financial vulnerabilities and improve public debt dynamics.
- Tax reform emphasized due to considerable infrastructure financing needs, relatively low share of non-oil revenues, and scope to broaden the tax base and reduce evasion.
- Labor-market reform:
- Increase labor-market flexibility toward levels of Mexico's main trading partners to boost employment, productivity, and integration of marginalized workers.
- Business and labor groups have collaborated on draft legislation to move in this direction; passage would improve competitiveness.
- Institutional and business environment reforms:
- Create an open and supportive environment for private business in infrastructure to attract needed investment and exploit energy resources.
- Improve governance of public enterprises via robust, market-based structures to achieve greater efficiencies.
- Social policy and governance:
- Prioritize education and human capital development, with responsibilities increasingly at decentralized government levels; require consensus across regions for clear reform frameworks.
- Efforts to combat corruption seen as important for social equity, as corruption disproportionately burdens smaller businesses and the poor.
Role of the IMF and regional outlook
- IMF objectives in international financial architecture:
- Two-fold challenge: prevent crises and improve crisis resolution when they occur; intensified efforts to learn from recent crises.
- Crisis prevention and surveillance:
- Emphasis areas: more flexible exchange rates; stronger fiscal positions, institutions, and debt management; efficient and diversified financial sectors; operational autonomy for central banks; increased transparency.
- Mexico cited as an example of correcting macroeconomic and financial weaknesses to reduce vulnerability.
- Crisis resolution and sovereign debt restructuring:
- Promotion of collective action clauses (CACs) in emerging market bond issues as a key step.
- Mexico led by issuing government bonds under New York law with CACs earlier in the year; others have followed and CACs look likely to become standard.
- Latin America outlook:
- Six months prior, the region experienced negative growth—the worst in at least a decade.
- Since then, some downside risks receded; Latin America expected to recover in 2003, with growth rising to over 4 percent in 2004.
- Recovery driven by rising political consensus for stronger economic policies; Fund has supported sustainable macroeconomic frameworks and strengthened social safety nets.
- Markets have responded; macroeconomic and financing pressures have begun to ease.
- Challenge: transition from emerging recovery to sustained growth with improved equity over the medium term.
- Mexico accounts for fully a quarter of regional GDP; its continued success is crucial to regional prosperity.
- IMF personnel note:
- Agustin Carstens has agreed to become Deputy Managing Director at the IMF—the first from Mexico; anticipated to be a valuable resource for the IMF membership.