IMF Executive Board Concludes 2022 Article IV Consultation with Mexico
IMF News, November 4, 2022
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- Published: November 4, 2022
Economic outlook and recent developments
- After stagnating unexpectedly in the second half of 2021, the economic recovery picked up pace in the first half of 2022 owing to catch-up momentum, improving labor market conditions, and fiscal policy support.
- Real GDP (% change): 4.8 (2021); 2.1 (2022); 1.2 (2023, projected).
- Economic activity is expected to slow from 2.1 percent in 2022 to 1.2 percent in 2023, given weaker U.S. and global growth and tighter global financial conditions.
- Current account balance (% GDP): -0.4 (2021); -1.2 (2022, projected).
- Foreign direct investment (% GDP): 2.5 (2021); 2.2 (2022, projected).
Inflation and monetary policy
- Headline inflation rose from about 3 percent at the end-2020 to 7.4 percent by end-2021 and to 8.7 percent by August 2022.
- Inflation is projected to plateau in the second half of 2022 and then gradually decline.
- With inflation above target, the central bank has increased the policy rate to 9.25 percent in a series of hikes.
- 1-month Treasury bill yield (in percent): 4.4 (2021); N.A. (2022).
Fiscal policy and public finances
- The government has maintained a broadly neutral fiscal stance in 2022, targeting a fiscal deficit of 3.8 percent of GDP.
- General government finances (% GDP):
- Revenue and grants: 23.3 (2021); 24.3 (2022); 24.1 (2023, projected).
- Expenditure: 27.1 (2021); 28.0 (2022); 28.2 (2023, projected).
- Overall fiscal balance: -3.8 (2021); -4.1 (2022, projected).
- Gross public sector debt (% GDP, by staff’s definition): estimated at about 56 percent of GDP; table shows 57.6 (2021); 56.2 (2022); 57.7 (2023, projected).
- The government has used largely untargeted subsidies to mitigate the rise in the cost of living, offsetting windfall gains from oil revenues.
- Directors noted that retail fuel price smoothing had a sizable cost on the budget and generally encouraged a shift toward more targeted support should oil prices rise again.
Financial sector assessment and stability
- The Mexican banking system remains well-capitalized, and profitability continues to recover from the impact of the pandemic.
- FSAP risk analysis: systemic vulnerabilities and system-wide liquidity risks remain broadly contained, given high capital buffers, low private sector leverage, and no sign of stretched asset prices; however, tail risks bear close monitoring.
- Directors welcomed the favorable assessment of the effectiveness of Mexico’s financial stability framework and broadly supported the key policy recommendations of the 2022 Financial Sector Assessment Program.
- Recommended further measures:
- Update financial sector oversight and crisis management frameworks to keep up with a changing risk and regulatory landscape.
- After aligning legal and regulatory AML/CFT framework with Financial Action Task Force standards, strengthen the effectiveness of the AML/CFT regime, including through adequate resources, ensuring availability of high-quality beneficial ownership information, and monitoring emerging financial risks related to fintech.
Executive Board assessment and policy recommendations
- Directors agreed with the thrust of the staff appraisal and welcomed the authorities’ prudent macroeconomic policies in the face of a surge in inflation.
- On monetary policy:
- Welcomed Banco de México’s proactive approach to addressing the inflation surge.
- With significant uncertainty about the inflation path in 2023 and upside risks, concurred that further increases in the policy rate and maintaining a restrictive policy stance may be needed for some time.
- Underscored the importance of clear policy communication.
- Recommended aligning wage increases more closely with expected inflation and the productivity of lower wage workers.
- On fiscal policy:
- Agreed that the envisaged neutral fiscal stance in 2022 and 2023 is appropriate.
- Recommended preparing contingency plans for a swift policy response should downside risks materialize.
- Recommended increasing fiscal buffers in the short term and reforming the institutional framework for greater flexibility in the longer term.
- On exchange rate and external policy:
- Noted that the floating exchange rate should continue to act as a shock absorber.
- Foreign exchange intervention could be considered if there is a significant worsening of market illiquidity.
- On structural and supply-side policies for growth:
- Urged broadening the supply side policy agenda to raise and make growth more inclusive, including measures to address corruption and crime and strengthen the rule of law, increase human capital investment, tackle infrastructure bottlenecks, reduce labor and product market rigidities, and promote financial deepening and inclusion.
- Recommended a gradual increase in productive spending, financed by tax reforms, to improve human and physical capital.
- Noted the need to take further steps toward reducing greenhouse emissions and that fostering greater private sector participation in the energy sector would help boost competitiveness and investment.
Selected economic indicators (2021–23)
- Population (millions, 2021): 129.0
- GDP per capita (U.S. dollars, 2020): 10,048.8
- Quota (SDR, millions): 8,912.7
- Poverty headcount ratio (% of population, 2020) 1/: 43.9
- Main export products: cars and car parts, electronics, crude oil
- Main import products: cars and car parts, electronics, refined petroleum
- Key export markets: United States, EU and Canada
- Key import markets: United States, China, EU
- Output:
- Real GDP (% change): 4.8 (2021); 2.1 (2022); 1.2 (2023, projected)
- Employment:
- Unemployment rate, period average (%): 4.1 (2021); 3.4 (2022); 3.7 (2023, projected)
- Prices:
- Consumer prices, end of period (%): 7.4 (2021); 8.5 (2022)
- Consumer prices, period average (%): 5.7 (2021); 8.0 (2022); 6.3 (2023, projected)
- General government finances 2/:
- Revenue and grants (% GDP): 23.3 (2021); 24.3 (2022); 24.1 (2023, projected)
- Expenditure (% GDP): 27.1 (2021); 28.0 (2022); 28.2 (2023, projected)
- Overall fiscal balance (% GDP): -3.8 (2021); -4.1 (2022, projected)
- Gross public sector debt (% GDP): 57.6 (2021); 56.2 (2022); 57.7 (2023, projected)
- Monetary and credit:
- Broad money (% change): 9.5 (2021); 11.0 (2022); 7.3 (2023, projected)
- Credit to non-financial private sector (% change) 3/: 10.7 (2021); 8.1 (2022)
- Balance of payments:
- Current account balance (% GDP): -0.4 (2021); -1.2 (2022, projected)
- Foreign direct investment (% GDP): 2.5 (2021); 2.2 (2022)
- Gross international reserves (US$ billions): 207.7 (2021); 205.7 (2022); 207.4 (2023, projected)
- In months of next year's imports of goods and services: 3.9 (2021); 3.8 (2022)
- Total external debt (% GDP): 34.6 (2021); 31.6 (2022)
- Exchange rate:
- REER (% change): 5.9 (2021)
Press Release No. 22/373, IMF, November 4, 2022.