Mexico: Staff Concluding Statement of the 2019 Article IV Mission
IMF News, October 11, 2019
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- Published: October 11, 2019
Context, outlook, and risks
- Findings
- Strong fundamentals: commitment to fiscal prudence; monetary policy has brought inflation to target; robust financial sector supervision and regulation; flexible exchange rate aiding adjustment.
- Growth has declined sharply; fiscal pressures mounting amid new policy priorities and commitment not to raise taxes during the first half of the administration’s term.
- Productivity-enhancing reforms have largely stalled.
- Projections
- Growth: 0.4 percent in 2019; 1.3 percent in 2020.
- Inflation: headline inflation at Banxico’s 3-percent target; core inflation expected to converge to it by mid-2020.
- Risks
- External downside risks: weaker-than-projected global growth; volatility in global financial markets; continued uncertainty about Mexico’s trade relations with the U.S.
- Domestic downside risks: lower medium-term growth and investor reassessment of credit quality if commitment to fiscal prudence, strong institutions, and a favorable business environment weakens.
- Specific corporate risk: a downgrade of Pemex to non-investment status by a second major rating agency could raise financing costs and cause spillovers to other corporations.
- Upside: concrete steps to enhance good governance, rule of law, and structural reforms would boost growth.
Fiscal policy and structural fiscal reforms
- Overall recommendation
- Pursue a more growth-friendly and inclusive fiscal policy mix that puts debt on a downward path, notably by raising non-oil revenues and improving the efficiency of spending.
- Fiscal stance and targets
- Keeping the PSBR at 2.2-2.4 percent of GDP over the medium term would keep debt broadly stable at around 55 percent of GDP.
- Staff view: while sustainable, more ambitious medium-term fiscal targets are needed to rebuild buffers and insure against downside risks and demographics-related spending pressures.
- Fiscal gap and actions needed
- Meeting announced fiscal targets requires closing an emerging fiscal gap of 0.5-1.5 percent of GDP during 2020-24 with concrete actions to safeguard fiscal credibility.
- Revenue measures (priority: raise non-oil tax revenues and increase progressivity)
- VAT: taxing (non-export related) food items at the standard 16 percent rate alone would boost revenues by some 1 percent of GDP; targeted benefits could offset the impact on the poor; an initially reduced rate could smooth transition.
- Income taxes: rationalize inefficient and regressive tax expenditures and widen the PIT top bracket.
- Excises: abolish the zero-floor reduction mechanism for excise rates that disproportionately benefits the rich.
- Local taxes: reform property and vehicle registration taxes to allow reduction in central government transfers and encourage fiscal responsibility.
- Border tax regime: abolish immediately or at least do not extend the temporary (for 2019 and 2020) special policy regime.
- Tax administration: welcome abolition of the right to offset excess VAT credits against other taxes and strengthened sanctions; recommend a comprehensive strategy to tackle VAT non-compliance, address lack of a high-coverage audit process for VAT returns, and consider integrating income tax and social security administrations.
- Expenditure efficiency (shift toward growth-friendly and inclusive mix)
- Public investment: increase non-energy public investment in context of sustainable fiscal position and comprehensive infrastructure plan; strengthen public investment management consistent with the Public Investment Management Assessment.
- Social protection: rationalize programs, improve targeting, reduce errors of inclusion/exclusion, reduce overlaps and duplications.
- Wage bill: stricter standards and transparency in temporary personnel use; merit-based recruitment; centralized payroll system while maintaining pay competitiveness.
- Education: audits to identify ghost workers and curb absenteeism; rebalance spending toward investment in equipment and facilities; improve early-childhood education and access in low-coverage regions.
- Pension system: welcome reduction in management fees; consider increasing contribution rate for defined-contribution system (potentially by reducing Infonavit contributions); consider increasing effective retirement age; consolidate federal and local non-contributory pension pillars.
- Health sector: seek efficiency gains by reducing administrative and insurance costs; target investment to rural and impoverished areas; improve portability of insurance and build compatible information infrastructure across sub-systems.
- Public procurement: centralize procurement further and adopt a digital platform to yield savings and reduce corruption and bid rigging.
- Pemex
- Findings: Pemex’s financial situation is weak, debt is elevated, oil production had been dropping until very recently.
- Concerns with current business plan: limits cooperation with private firms in upstream to service contracts; heavy investment in loss-making downstream business; lacks concrete ways to reduce operating costs.
- Recommendation: reconsider business plan to improve profitability and provide budgetary relief; favor joint ventures with private sector as most promising way to replace reserves and increase production given fiscal pressures.
- Fiscal framework
- Recommended reforms:
- Adopt a well-calibrated debt anchor.
- Broaden coverage of the structural spending rule.
- Define an adjustment path to return to target after a shock.
- Significantly tighten triggers for the use of escape clause.
- Create a non-partisan, adequately-sourced fiscal council with formal mandate to provide independent evaluation of fiscal policy.
- Additional steps: put in place a modern medium-term budget framework and implement recommendations of the 2018 Fiscal Transparency Evaluation.
- Note: new administration shares these views and intends to revamp the fiscal framework; mission stands ready to support.
Monetary policy
- Findings and recommendations
- Recent easing welcomed; scope to continue easing while inflation remains close to target and inflation expectations remain anchored, mindful of risks.
- Banxico’s tight stance succeeded in bringing headline inflation back to the 3-percent target.
- Recommendation: continue lowering the policy rate given a large negative output gap.
- Communication and exchange rate
- Communications: improvements have helped guide market expectations; urge concise communication and focus on external developments only as relevant to inflation trajectory.
- Exchange rate flexibility: should remain key shock absorber; foreign exchange intervention should be limited to incidences of disorderly market conditions.
- The FCL provides an additional buffer should downside risks materialize.
Financial stability
- Regulatory and supervisory enhancements
- Close gaps in framework in line with 2016 FSAP: increase operational independence, budget autonomy, and legal protection of banking and securities supervisor; integrate prudential supervision functions under one authority; enhance definitions of “common risk” and “related party”; expand resolution regime to cover financial holding companies and strengthen powers to require banks to improve resolvability.
- Competition and inclusion
- Continue efforts to boost financial competition and inclusion; multi-pronged strategic approach should be a priority amid weakening activity.
- Priorities: boost competition and transparency in financial products; reduce cash usage; improve financial infrastructure particularly for SMEs.
- Upcoming fintech secondary regulations should promote competition while preserving financial stability.
Structural reforms
- Need to raise potential growth by reinvigorating reforms to boost growth, reduce poverty and inequality, and narrow regional disparities.
- Key areas and recommendations
- Combating corruption and money laundering: more effective enforcement and inter-agency cooperation; implement 2014 National Anti-Corruption Strategy; improve UIF follow-up by FGR; address lack of transparency of beneficial ownership via an inter-agency task force; concern about reduced budget allocations to sector regulators and autonomous entities such as the judicial branch, COFECE and CONEVAL.
- Labor informality: strengthen enforcement; reinvigorate efforts to replace hiring and firing restrictions with an unemployment insurance scheme; reduce entry costs for formal firms by cutting procedural costs and time burdens.
- Security: enhance effectiveness of law enforcement and judicial institutions to strengthen rule of law.
- Gender gaps: lower participation barriers for mothers; expand child care and maternity/paternity benefits (current benefits well below OECD peers); concern over cancellation of subsidies for child care facilities replaced with direct transfers; promote financial inclusion of women as a pillar of upcoming initiatives.
- Competition and product market regulation: remove barriers to trade in services, especially transportation and logistics; restart energy auctions and risk-sharing arrangements between Pemex and private firms.
- Minimum wage: further adjustments should be very gradual to avoid short-term disruptions and adverse formal employment effects; recommend caution despite potential inequality-reducing benefits of increasing minimum-to-median wage ratio.
Mission facts
- Team leader: Costas Christou.
- Visit: Mexico City during September 19–30, 2019.
- Meetings: Bank of Mexico Governor Diaz de Leon; Secretary of Finance and Public Credit Herrera; Energy Secretary Nahle; other senior officials; representatives of the business community; other IFIs; academics.
IMF staff concluding statement, October 11, 2019.