Mexico: IMF Staff Concluding Statement of the 2020 Article IV Mission
IMF News, October 6, 2020
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- Published: October 6, 2020
Human, social, and labor impacts of Covid-19
- Over 75,000 lives have been lost; unofficial estimates are notably higher.
- Of around 12 million workers who lost their jobs, most from the informal sector, over 4 million remain outside the workforce.
- The share of the population in working poverty jumped from 36 to 48 percent.
- The shock has disproportionately burdened the poor and the vulnerable.
Macroeconomic outlook and risks
- Projected output growth: –9 percent in 2020, 3½ percent in 2021, and close to 2 percent thereafter.
- Employment, income, and poverty will take several years to return to pre-pandemic levels.
- Risks tilted to the downside: possible Covid-19 resurgence domestically; prolonged labor market disruption; renewed global financial volatility; lower oil prices; adverse growth in key trading partners.
- Upside scenarios: early vaccine availability; advanced-economy buoyancy from large policy interventions; faster re-absorption of workers into the labor force.
Near-term fiscal support and medium-term fiscal sustainability
- Authorities increased health spending and direct budget support by 0.7 percent of GDP; G20 emerging markets provided over 3 percent of GDP support on average.
- Additional support provided via loans, reallocated spending, front-loaded social pension payments, accelerated procurement, and VAT refunds.
- Draft 2021 budget maintains tight settings aimed at limiting new debt issuance; no concrete medium-term tax reform plans yet.
- Stabilization and trust fund buffers expected to be drawn down substantially.
- Preliminary projections (based on more prudent nominal growth, oil production and tax buoyancy assumptions):
- Primary and overall PSBR of 5.8 percent of GDP in 2020.
- Fiscal gaps of 1¼–2 percent of GDP in 2021 and beyond, relative to authorities’ targets.
- Gross public debt projected to stabilize near 65 percent of GDP, assuming fiscal gaps are closed.
- Recommendation: provide higher temporary near-term fiscal support of 2½–3½ percent of GDP (relative to pre-pandemic policy settings) to stem activity decline and rising poverty.
Priorities for near-term fiscal support (targeted measures)
- Health spending: fully accommodate pandemic-related health care spending so cost and access are not barriers to combating the pandemic.
- Households: increase coverage of social safety net programs to include readily eligible individuals not receiving benefits, those likely to fall into poverty due to the pandemic, and informal workers in hard-hit sectors.
- Businesses: beyond loans for micro and small firms, provide liquidity support (e.g., tax and social security contribution deferrals) and cost-reduction assistance (e.g., wage subsidies) to viable firms.
Medium-term tax reform to expand fiscal space
- A credible medium-term tax reform could raise revenues by 3–4 percent of GDP and narrow the tax collection gap with peers.
- Income taxes: broaden the base by rationalizing inefficient and regressive tax expenditures and reducing the threshold for the top income tax bracket.
- Property taxes: raise subnational property and vehicle registration taxes; consider a federal-level agency to update the cadaster and coordinate subnational policy.
- VAT: eliminate domestic zero-rate items (apart from a few key foodstuffs) and curtail exemptions; strengthen social safety nets to mitigate distributional concerns; improve tax administration (organizational structure, high-coverage VAT audits, electronic means, stronger sanctions). Not renewing the border tax regime (temporary for 2019–20) would limit distortions and raise collections.
- Gasoline excises: reconsider the policy of guaranteeing cumulative retail price growth below inflation, which disproportionately helps the well off.
Reprioritization of public spending
- Social protection: expand safety nets temporarily and target them; medium-term reforms to introduce a nation-wide unemployment benefits system; reduce overlaps, duplications, and leakages to increase coverage cost-effectively.
- Pensions: recent reform proposal can improve adequacy and sustainability; complementary reforms needed to tackle informality and increase contribution densities.
- Public investment: non-Pemex capital spending at about 1½ percent of GDP in 2019 is very low; higher physical and human capital spending needed to improve productivity, inclusion, and meet the Sustainable Development Goal in healthcare.
Pemex and public resources
- Pemex’s widening losses crowd out resources for essential spending.
- Recommendations: focus production on profitable fields; sell non-core assets; curb plans to increase refining output at a loss; postpone new refinery plans until profitable; partner with private firms for capital and know-how.
- Conditional on business strategy and governance changes, procurement and oversight reforms, consideration could be given to fiscal support to ease Pemex’s high financing needs.
Monetary policy and financial sector resilience
- The central bank cut rates totaling 400 basis points in the easing cycle that commenced last year and accelerated after the pandemic; expanded/established facilities with access up to 3.3 percent of GDP to support market functioning and credit.
- Use of facilities has been limited, partly due to lower loan guarantees and delays in making one facility available.
- Flexible exchange rate, comfortable international reserves, access to the U.S. Federal Reserve swap line, and the IMF’s Flexible Credit Line have bolstered external resilience.
- Inflation and expectations: 1-year ahead inflation expectations remain well anchored; recent price pressures reflect transitory factors (peso passthrough and supply shocks) offset by sustained demand weakness.
- Recommendation: consider cutting rates further, given historic drops in output and labor dislocations, while monitoring inflation expectations.
- Lower rates likely to reduce debt servicing pressures, possibly boost investment, and increase attractiveness of central bank credit facilities, though tradeoffs include capital outflow and peso depreciation risks.
- Consider an independent review of the monetary policy framework to explore inflation determinants, measures, and the policy toolkit.
Banking sector soundness and regulatory recommendations
- Banking sector capitalization: 16.5 percent.
- Nonperforming loan ratio: 2.1 percent.
- Recommendations:
- Continue upholding minimum regulatory and supervisory standards and use flexibility within the framework.
- Ensure loan restructuring regulations allow reclassification of distressed loans and recognition of losses.
- Limit capital distributions (e.g., suspend dividends) until recovery is clear.
- Consider closing regulatory and supervisory gaps: enhance definitions of “common risk” and “related party” exposures, improve resolution regime for financial holding companies, strengthen power to request pre-emptive actions, and ensure adequate access to funding for the deposit insurance and resolution authority.
Structural reforms to support recovery and boost investment
- Policy uncertainty from domestic reform reversals can impede recovery; USMCA reduced trade-related uncertainty but domestic reversals (e.g., in energy sector, cancelation of large private investments) continue to weaken investment prospects.
- Recommended reforms to tackle long-standing impediments:
- Comprehensive approach to informality, including passive and active labor market reforms to complement pension reform (see IMF WP/19/257 and SDN/19/04).
- Promote private sector involvement in the energy sector (risk-sharing arrangements, restarting energy auctions) and enhance the electricity grid (including green investments).
- Enhance independence and capacity of regulators to support competition and remove barriers to trade in services (e.g., transportation and logistics).
- Foster financial inclusion to enhance welfare and offset ongoing credit contraction.
- Strengthen governance: focus on swift, effective implementation of anti-corruption measures and enact pending AML/CFT legislation.
Mexico: IMF Staff Concluding Statement of the 2020 Article IV Mission — October 6, 2020