Transcript

Washington, D.C.
Wednesday, November 12, 2014

Participants:
Robert Rennhack, Deputy Director, Western Hemisphere Department
Raphael Anspach, Communications Department

MR. ANSPACH: Hello everybody. Welcome to this conference call on Mexico's 2014 Article IV Report. I trust you've had the opportunity to access the embargoed report. With us to discuss the report and answer your questions is my colleague Robert Rennhack who's the Deputy Director of our Western Hemisphere Department and who oversees the work the IMF does on Mexico.

This call is embargoed until 1:00 pm today. Just like the documents that we released earlier to you are also embargoed until 1:00 p.m. Washington Time, that is. I believe Robert has some introductory remarks, and then we'll be happy to take your questions. So with that let me turn to Robert.

MR. RENNHACK: Thank you for joining us. Let me open this up with a few introductory remarks. We concluded the Article IV Consultation for Mexico last Friday. The overall sense of Mexico's economic policies and situation is that things are looking pretty good. Growth is recovering in the economy. We're expecting growth of 2.4 this year, and rising to 3.5 percent next year. So that's a nice turnaround from the very slow growth that they experienced last year.

Inflation is high, a bit above target, but it remains under control. I think the inflation rates they're receiving right now could be explained by the one-off effects of the tax increase adopted in January. And also the fact that they're eliminating the subsidies on gasoline prices, so the regulated prices are rising much faster than other prices. But core inflation remains well under control.

The external situation remains well in hand. The current account deficit is still around 2 percent of GDP, a little bit more. Financing through FDI and other forms of capital flows seem to be doing fine. The currency has depreciated a little bit this year, but it's still trading within normal ranges and not showing signs of undue volatility.

So overall the prospects for the economy are quite good. And, the structural reforms are proceeding well. As of end of August they'd approve all of the secondary legislation for the reforms. It's been a very impressive array of reforms that does hold the potential to really improve economic growth quite a bit in the coming years.

So I think the outlook for Mexico's economy is reasonably good. The key challenge going forward is to implement the reforms and stay the course on that. Potential risks could come from the global economy.

The main one that everyone is worried about is what would happen during the process of normalization of U.S. monetary policy. I think everybody thinks that in a baseline scenario that will go smoothly. But there's always a risk that things don't go according to plan. So that's our overview of the economy in a nutshell.

MR. ANSPACH: All right. Thank you very much, Robert. At this time we're ready to take questions.

Questioner: Yes, good morning, and thanks for doing this. I have a question, and that is I wonder if the IMF shares the assessment of the Mexican authorities regarding the impact of the structural reforms? You said that you expect that because of the structural reforms Mexico will have a chance to grow its economy because these reforms will attract more investment. It will improve technology, reduce costs of doing business, and it will elevate the productivity.

The Mexican Authorities have an idea about the impact of these reforms. I think that they put it between something like 4 or 5 percent of the GDP increase as a result of these reforms. I wonder if the IMF shares this assessment of? How much do you expect that the economy will growth following these reforms?

MR. RENNHACK: We take a little more conservative view than the government. But let me emphasize that at the beginning of a process of structural reforms it's very hard to know what the impacts of the reforms will be. There's no simple model that gives you the answer. The reforms that one country does are different than the reforms in another country, so, the way Mexico would do a labor market reform might be very different than the way another country would do its labor market reform because the details and the institutions are different.

So we did our best to come up with estimates of the impact, and the government did the same thing. And we're expecting growth to range between 3 1/2 to 4 percent between 2015 and 2019. That's compares with our estimates of potential growth of 2 3/4 to 3 percent. So you can look at, maybe, another 3/4 of a point in growth stemming from the reforms which, if you sustain over many years, is a very important effect.

The government takes a somewhat more optimistic view than we do. I'm not saying they're wrong. I'm not saying the IMF is wrong. I mean, these are just honest differences of opinion that people can have. You know, it could be that some of the reforms, say the benefit of the energy reform is stronger than we think, the government thinks it does.

The government also thinks that the effects of the anti-trust reform and the gains from improving competition would be very important. Those things are very hard to measure. Then there are synergies among the reforms. These interactions are also very hard to estimate.

So we differ a bit from the government, but we're taking a little bit more of a conservative approach. You have to see over time. But just let me emphasize again that at the beginning of the process it's very difficult to come up with firm estimates.

Questioner: I'm wondering if you could speak a little bit more to the monetary policy stance? You say in the report that it's the appropriate stance, in particular, in the face of policy normalization in the U.S. Although Mexico, did some adjustment during the taper tantrum.

What do you think will be the impact? Even with a smooth adjustment of policy? Are you expecting more currency volatility? More capital outflows? Or where do you see the impact, and how do you think the monetary policy should respond to that?

MR. RENNHACK: I think the monetary policy in Mexico's geared toward keeping inflation at 3 percent over a 24 month horizon. So all of their decisions are consistent with that goal. So right now with the interest rate in Mexico at 3 percent they can do that because there's a bit of slack in the economy right now.

And that the current rates of inflation reflects temporary factors that will go away next year. So they do think that at the current interest rate that it's consistent with having inflation come down to 3 percent sometimes towards the end of next year.

Now, they will adjust the interest rate as needed to keep inflation at the 3 percent target. That is really their focus; to look at domestic demand growth, other factors that drive inflation, the currency depreciation would have a little bit of an effect, because there's some pass through, but the pass through isn't huge. They would do that with a view to keep the inflation expectation's well anchored, and they have a good track record in doing that.

So the question is how would they respond of the U.S. begins to raise interest rates. I mean, the question would be what would that mean for their ability to meet their inflation target in Mexico, and they would raise and adjust the interest rate as needed. So I think you'd have to wait and see what would happen.

You know, it could be the case that as the Fed begins to raise its interest rate that that would give Banxico scope to raise his interest rate. But that's a decision that they would make at the time, and once again, with a view to achieving their inflation target.

Questioner: Just briefly, I wonder if you can expand a little bit on the employment situation. The report noted that the employment has fallen a little bit so far. But I wonder -- I mean, in looking at the next year and a half what is the assessment from the Fund about how the employment situation will develop in the coming years?

MR. RENNHACK: Well, I think that it starts from growth, and we expect growth to pick up to 3 1/2 percent next year. We're a bit below consensus, but I think it's a sensible projection because the Mexican economy is recovering. This is partly because the U.S. economy is recovering and, as you know, there's a close relationship between those two economies.

The construction sector seems to be picking up as well. The recent data show that at least that sector's bottomed out, and there are signs of renewed growth in the sector. And that demand policies in Mexico are also supportive of growth. But also at the same time with keeping inflation within target.

Then starting next year we would also expect there to be some initial effects of the structural reforms. Probably we'll see some investment in the telecommunications sector, and probably some beginning investment in the energy sector. That will give some boost to growth next year. Also this year, capacity is underutilized, so you can always expect some extra growth as capacity utilization goes back to normal levels.

I think all of these things are good for employment. So I think we should see a continued, steady growth in employment which has been reasonable so far. The unemployment rate continues to trend down. So I think, once again, good growth will be a favorable thing for the labor market.

Questioner: On the oil stabilization fund you mentioned too, in the report, that it's a positive development, but can you explain what you see as the impact? What is the benefit on the economy of having a fund, and how it differs from the structure that they had before?

MR. RENNHACK: I think the fund is a positive development because it more carefully isolates the oil income going to the government, so all the oil proceeds going to the government will first go to the Sovereign Wealth Fund. Then they'll transfer 4.75 of GDP to the Central Government, and then what remains would be accumulated up to a ceiling of 3 percent of GDP. Once it goes above the 3 percent of GDP ceiling they can start spending some of that.

It's a much cleaner way of handling the oil money. In the past they had four different stabilization funds with very complex rules for how you would spend the money. Often, you could use extra oil income to compensate for less revenues elsewhere. Because it was much more complicated it was much harder to accumulate money in the fund.

So they've eliminated two of the stabilization funds and simplified the rules of the remaining two. By, sort of, putting all the oil money in one fund it's much easier to manage. So I think they'll end up being able to save more of the oil money when they have windfalls from oil prices.

Questioner: I mean, do you see the benefit just, as a monetary policy tool as well to keep the money out of circulation to keep inflation from rising or would it be better used on big investments like infrastructure investments, roads and highways that they need?

MR. RENNHACK: I think it will help manage public spending better. Because what we saw in, say between 2000 and 2012, was that public spending was very pro-cyclical, and when they had extra oil money the designs of the stabilization funds allowed them to increase spending more than, maybe, they should have.

So this will, help curtail the incentives through pro-cyclical public spending. And also, it will help on demand pressures in the economy, and through that it might help on monetary policy because you'll be controlling the extra demand pressures that might be coming from oil revenues that would have been spent. So yeah, I think it helps with macro-stabilization.

MR. ANSPACH: I think with that we'll conclude this conference call. Thank you all, again, for participating and let me remind you all that the report and this call are embargoed until 1:00 p.m. Washington Time. Thank you very much.