Transcript of a Conference Call on Mexico's 2007 Article IV Consultation

December 13, 2007

Washington, D.C.
Thursday, December 13, 2007

MS. LOTZE: Good afternoon, everyone, and welcome to this conference call on the Article IV Consultation with Mexico. I'm Conny Lotze of the External Relations Department, and I'm joined in this call by David Robinson, Deputy Director of the Western Hemisphere Department and Steven Phillips, Advisor, also in the Western Hemisphere Department. This call is on the record. You have already had access under embargo the documents and opening remarks through our Media Briefing Center.

Now, Mr. Robinson will make some opening remarks which you should also have in English and Spanish and, to save a little time, he will only make his remarks in English and then we will open the floor to questions. The question and answer period will be interpreted into English and Spanish, but we are happy to take your questions in English and Spanish.

Thank you very much. Mr. Robinson?

MR. ROBINSON: Good afternoon and buenas tardes. As you know, the IMF Board met last week to discuss Mexico, which is an annual process for all IMF member countries, which we call the Article IV Consultation, and today we are making public the reports from this consultation which include our team's annual Staff Report on Mexico and a set of Selected Iissues papers that look at some very specific topics related to Mexico. We also have in your package today a Public Information Notice which gives the IMF Executive Board's-which consists of all the representatives of all the member countries-overall assessment of Mexico.

Now, since you have all these documents in front of you, I would just like today to emphasize three messages that come from our 2007 consultation.

The first of these is that we found the Mexican economy and financial system remain strong and resilient and indeed better placed than most emerging markets to cope with external shocks. Obviously, this is especially important now because the global financial environment and outlook have deteriorated since the middle of this year.

Fortunately, strong economic and financial fundamentals mean that Mexico is in good shape to deal with this less favorable global financial environment, and indeed we've seen Mexico weather the recent global volatility very well.

That said, strong trade links to the U.S. economy do meant that a slowdown in the U.S. will be felt in Mexico, and that's why we expect Mexico's growth to be a little below its potential in 2008, at about 3 percent, and that's consistent with our U.S. growth forecast of a little less than 2 percent. But when we go beyond 2008, we expect growth in Mexico to pick up as the global situation improves, the economy returns to capacity, and new reforms and investments begin to raise Mexico's potential growth rate.

Now, the second message I want to underline today is that 2007, we believe, was a breakthrough year for Mexico in which the government was able to move ahead with several very important reforms, steps that are essential for the country to meet the challenges of raising economic growth and reducing poverty. Here, I especially want to highlight the package of public sector reforms that were approved in September which we believe will improve the effectiveness and accountability of public expenditure while also securing the tax resources to pay for essential government investments and social expenditures. It's very important to note, we think, that this reform is based on a medium-term plan which looks ahead and is therefore designed to fully offset the decline in oil revenue that's expected over the next five years.

My third message today is that while this year's reforms are indeed important steps towards meeting the challenges Mexico faces, it's also clear that much more needs to be done for the country to achieve its full economic potential.

I think one of the key themes in our staff report is that the public sector remains too reliant on an uncertain flow of revenue from oil production and, indeed when we look beyond the next six years or so, there is a serious question of the sustainability of this production unless major reforms can be implemented to allow Mexico to efficiently develop its large untapped resources. In the meantime, we are recommending a policy focus on steadily reducing the government's non-oil fiscal deficit.

Now, many other important reforms are also needed, and I think these are well recognized in the government's National Development Plan which emphasizes building a more inclusive society that bridges the gap with fast-growing economies and creates more and better job opportunities. We certainly hope that Mexico will be able to keep moving forward to continue the progress over the last year, building the consensus needed to implement further reforms as soon as possible.

So, with these brief remarks, we would now be very happy to take your questions.

QUESTIONER: Thank you. I have a question regarding the oil production. At some point in the staff report, it is said that there is the risk of a sharp reduction in production, and so I wonder if you can comment on this. What are your forecasts for production? When that sharp reduction in production comes, assuming that it is in the current framework, when could that sharp reduction happen?

MR. ROBINSON: In terms of the outlook for oil production over the next few years, we expect it to decline a little bit. If you look in Box 5 of our staff report, you will see what I would call an illustrative scenario of the production profile for PEMEX, and you can see that the output from the Cantarell field is declining noticeably over the next few years, and there's a pickup in some other existing developed fields.

But the real challenge comes after, I think, 2012, when both Cantarell and the other fields start to decline more sharply, and so the issue is replacing that production with production from fields that are presently undeveloped. And, clearly, one of the challenges here is to develop the deepwater fields which presently PEMEX does not have the technology to do. I think one of the most important elements of the energy reform that the government is now considering will be to remove obstacles to develop precisely those oil resources, and that will be a key thing both for the fiscal situation looking forward and also for Mexico's balance of payments.

QUESTIONER: It is also a related question because the report says that basically Mexico will lose its status as an exporter of hydrocarbons. Does that mean are you foreseeing that Mexico will actually become a net importer?

And, if you can, be more specific about what specific elements you think that energy reforms should have to include in order for Mexico to get more investment in that sector.

MR. PHILLIPS: Thank you. On the question of whether Mexico could become a net importer, that's not our forecast. Our central view is that probably reforms will be undertaken, beginning as soon as possible, we hope, that will allow the kind of sharp decline in oil production that we were just talking about as a risk scenario, will allow that to be prevented.

And, if those reforms kick in, they take some time. It takes some years after you invest in any oil field, for example, to realize the benefits. They could kick in and start paying their benefits off by about the time, five or seven years from now, enough to prevent Mexico from getting into the situation of becoming a net importer.

The other part of the question was what could be the elements of the PEMEX reform. Well, I think this has been discussed for many years inside Mexico, and it's known very well by many people. The most important thing is that Mexican society, the people in Mexico, choose the kind of reforms that they feel comfortable with-that they believe, that the Mexican authorities believe, and the experts in PEMEX believe-will be effective in assuring an efficient and adequate exploitation of oil resources.

I'd just like to highlight that looking around the world, there are obviously many oil companies and there are also many other state-owned oil companies such as PEMEX, and these companies find various ways to invest effectively in the developing oil resources.

Without being experts in the oil industry, we have noticed one thing, and that is when it comes to exploitation of difficult deepwater oil deposits, it's nearly always or, I believe, actually always done by groups of companies together who are sharing risk and sharing investment funds. So, perhaps Mexico will want to look at that international experience and make its own judgment about the best way to move forward.

QUESTIONER: Actually, on the same subject of the oil reform, you've answered a lot of the questions, but I'm wondering, when you discuss this in Mexico, what is the reaction of the officials that you speak with and how optimistic are you and are they that they can get some sort of reform implemented in the medium-term or I mean in 2008?

MR. ROBINSON: Let me respond briefly on that. I think the Mexican authorities are well aware and strongly committed to moving forward with an energy sector reform. This is an issue that they have been discussing among themselves. I think the Senate's Energy Committee has begun discussions just a few days ago, and I am confident that progress will be made.

I mean, while we do not know the precise details of the discussions that are going on at this stage, I think the authorities have been very effective in being able to develop the consensus for difficult reforms as we have seen over the last year. And, as I say, I think that there is a consensus that this is an area where it is particularly important to move forward.

QUESTIONER: Would you be more specific about why it's important to strengthen competition in energy and telecommunications in Mexico? Why do you say that these are equally important sectors?

MR. PHILLIPS: What we mean by that is simply that those are two sectors that affect many other sectors or actually all Mexicans in one way or another. Clearly, energy and oil are inputs that consumers use and that firms use and the same for telecommunications. It's an important obstacle to business, for example, if telecommunications or electricity service or any other of these types of these services are not delivered effectively or not delivered at a price that is internationally competitive.

I'll just add that we do not assess the level of competition in any particular sector except, of course, we can observe that in the energy sector, essentially there is no competition. In the telecommunications sector, we understand that many analysts are discussing and considering, all the time, what is the degree of competition in that sector.

Well, finally, just to wrap up, the point is that in these very important sectors, if the services and goods they provide can be delivered more reliably, more effectively and at a lower price, that will open the room or the space or the possibility to have faster growth throughout the economy which would mean faster employment and wage growth, consistent with a higher level of productivity, and also improved equity across society.

QUESTIONER [interpreted]: Regarding the reforms about PEMEX and also the reform of our telecommunications, in your contact with the Mexican authorities, did you think about their commitment or did you address their commitment to put an end to some of the problems with the trade unions in the oil sector?

Regarding telecommunications, is there indeed a commitment to solve the problems there again with the trade unions, and on the other hand, also in the telecommunications sector, is there a will to put an end to the monopoly in the telephony area so that services are more efficient and cheaper?

MR. ROBINSON: I think I would say in answer to this that these are areas which are not fundamentally areas of the Fund's expertise. So we did not, in our discussions, get into details about the precise elements of the reform of, let us say, PEMEX because we are not experts, as Steve said, on how to run an oil industry.

So I think our focus in these discussions on PEMEX, for example, was very much in terms of the medium-term implications for the budget and for the balance of payments. I think that the broad areas where reforms might be needed, we've already covered, but we did not go into very precise details on the individual elements, as I said.

Now, in terms of the issue of competition, I think that there is broad agreement that there is room to strengthen competition in Mexico, and indeed Governor Ortiz, as I'm sure you know, has in many public speeches made this point very strongly. I think that there are several areas where competition can be improved. One such, of course, is telecommunications as you have mentioned, but there are also a number of others. Lack of competition leads to high prices for consumers and high prices for the enterprises that use those services and so, as Steve says, it is bad for growth.

Certainly, in our discussion, I think we came away with the strong impression that the Mexican authorities are committed to strengthening competition. I'm not going to go into, again, precise details because these, again, are areas which are presently being discussed, and I do not have the details to give you. For similar reasons, as I mentioned to you earlier, I am optimistic that progress will be made, but we will have to wait a little to see what those proposals are.

QUESTIONER: I want to know something about the report. You make one special link to the expenditures for the public sector, saying that the fiscal reforms presently approved must not be sufficient to contain the decline in oil income, and it must be rethought or caution the government of not increasing its expenditure. Would you please comment about it?

MR. PHILLIPS: I want to be very clear on this. Our analysis, and it's shown in our projections, is that the tax reform and tax administration measures that have been approved are sufficient to replace the oil income that we think will be lost in some measure over the next five years. So, the point that David was making earlier is that the fiscal reform was done in a very forward-looking way. It looks at the remainder of the administration of President Calderon, through the year 2012, and makes sure that Mexico will be able to meet the balanced budget target, under the Fiscal Responsibility Law.

In fact, the tax reform will actually generate more revenue than the amount that will be lost from the decline in oil production or the decline in fiscal oil revenues, and that will open up room for different kinds of expenditures. So, that's the first answer to your question. For the next five years, everything balances out.

The second part of the answer is that if we look further ahead, so in the next sexenio, as David was mentioning earlier, there is a risk, not a certainty, but there is a possibility of a very steep decline in oil production. As he mentioned, in this chart on our Box 5, it's a little bit after the year 2014, where the existing fields' production could decline steeply.

So, the question is whether reforms will be implemented this year or very soon that will allow that oil production losses to be offset by gains in oil production from other fields, from other areas, from other methods. If that oil production cannot be replaced, then the tax reform that we saw this last year would not be sufficient to compensate for that, and Mexico would have to look at other options in order to avoid a large fiscal deficit and a rising public debt.

There's actually a final part to the answer which is illustrated by the chart that we show on page 27 of our report, around paragraph 25, and that has to do with the fact that the tax reform yields a pretty large increase in revenue in its very first year and then gradual further increases after that whereas, on the other hand, the oil revenue that we're expecting to decline will decline sort of gradually and continuously over the next five years. So that's what we mean in the report where we talk about the fiscal situation progressively tightening over the next five years.

And so, it will be important to be cautious, as you said, to be cautious--you weren't quoting our report, but that's the right word--about how the immediate gain in tax revenue is spent, and we're sure the authorities will be cautious. They understand those projections and the situation as well as we do.

QUESTIONER: Thanks again, and there is another question about the spending in Mexico. Recently, it has been approved, the constitution and an amendment to the budgetary system, and we are now going to have a new law that all the states, municipalities, and the national government have the same national account systems. Did you talk about this with the Mexican authorities as to how the same kind of accountability or accountability systems that you have all over the world like in the United States and Europe and will progress to bettering the fiscal accounts? Transparency, I think.

MR. PHILLIPS: I want to say that we think that these kinds of reforms that have recently been approved in Mexico are very important, and they really are a welcome step in the right direction. As you said, the issue is transparency and having better information. That's important for performance and for accountability. I think everyone agrees with that.

Our understanding is that the fiscal reporting at what we call the subnational government level, so for example, the state governments, has been very uneven. So some states were quite good at it; other states were not reporting, in a very consistent or clear way, their activities.

What's most important is that each government-whether it's a state government or a municipal government or the national government or any government in the world-what's important is that they provide information and statistics in a manner that's clear, that people can analyze and interpret in a rational way.

That doesn't mean there's only one way to present the numbers. There are sometimes, in certain questions, there's more than one way to transparently present information and have it be analyzed correctly. While there can be more than one good way to present information, there of course are many, many bad or inaccurate or incomplete ways to present information, and so what's important is that the reform is designed to raise the overall level of reporting across all the levels of the Mexican government.

MS. LOTZE: If there are no further questions at this time, then we will complete the conference call here. We thank you very much for your participation. Until the next time, goodbye.

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