Mexico: Staff Concluding Statement of the 2023 Article IV Mission
IMF News, October 3, 2023
Source details
- Canonical URL
- Mexico: Staff Concluding Statement of the 2023 Article IV Mission
Other formats
Bibliographic details
- Published: October 3, 2023
Broad-based expansion and near-term outlook
- Growth is expected to be 3.2 percent in 2023, led by robust private consumption and investment, with notable strength in service sectors, construction, and auto production.
- Economic growth is expected to moderate to 2.1 percent in 2024.
- Maintaining the policy rate at current levels until around mid-2024 should allow inflation to return to Banxico’s target by 2025.
- Risks to the growth outlook are described as broadly balanced:
- Upside: stronger-than-expected growth in the U.S. or a larger-than-expected fiscal multiplier.
- Downside: an increase in global risk aversion, a higher path for interest rates in advanced economies, or delays in implementing key infrastructure projects in Mexico.
- Risks to inflation are viewed to be modestly skewed to the upside.
Fiscal policy — recent performance and near-term concerns
Findings
- The overall deficit is projected at 3.9 percent of GDP for 2023, an increase of 0.5 percent of GDP in the structural primary balance.
- Gross public sector debt is expected to decline to 52.7 percent of GDP by end-2023 and is projected to be sustainable with high probability over the medium term.
- The planned fiscal path for 2024 is characterized as unduly procyclical.
- The expected increase in the deficit to 5.4 percent of GDP—a fiscal impulse of 2.4 percent of potential GDP—will boost demand while the economy is operating above potential and inflation is not yet back to the central bank’s target.
- Consequences could include a higher path for interest rates, a stronger currency, higher debt-to-GDP ratio, and a slower decline in inflation.
Recommendations / policy implications
- A tighter fiscal stance in 2024 would be more consistent with Banxico’s efforts to bring inflation back to target.
- Continued budgetary support for Pemex should be conditioned on credible plans to improve Pemex’s commercial viability risks.
- The next administration faces a large fiscal consolidation forecast for 2025 requiring substantive fiscal measures of around 2½ percent of GDP, mostly incident on boosting non-oil revenue.
- Potential measures suggested include: (i) eliminating the zero-rating for VAT and rationalizing exemptions; (ii) broadening the personal income tax; and (iii) increasing property taxes.
- Strengthening the medium-term fiscal framework should incorporate:
- (i) a credible medium-term budget framework;
- (ii) building additional fiscal space for more countercyclical fiscal policy;
- (iii) clearer escape clauses limited to specified exceptional circumstances;
- (iv) anchoring policy on a downward path for debt-GDP; and
- (v) improving fiscal forecasting capacity.
Transparency and statistics
- Greater transparency in fiscal statistics is recommended, including more robust reporting of financial transactions undertaken by and between public entities, aligned with international accounting practices.
Monetary policy
Findings
- Banxico’s proactive policy stance—successive policy rate hikes and enhanced forward guidance—has kept long-term inflation expectations anchored and reversed the 2021-2 upswing in inflation.
- Inflation is not yet on a durably downward path; services inflation has proved persistent.
- The expansionary 2024 budget, with a front-loaded increase in spending, represents a near-term challenge to the inflationary outlook.
Recommendations / actions
- Monetary policy should remain restrictive until inflation indicators are decisively heading toward the central bank’s target.
- Based on the current macroeconomic outlook, delaying a reduction in the policy rate until mid-2024 is likely required.
- Banxico could undertake an internal strategic review of its operations and communications, assessing recent innovations (e.g., inflation forecasts and qualitative forward guidance) and whether providing greater information on forecasts and underlying assumptions is warranted.
- The exchange rate should remain flexible; FX intervention should be limited to clear disruptions in the functioning of the currency market.
- The policy rate should remain the primary instrument to anchor inflation expectations and maintain inflation at Banxico’s 3-percent target.
Financial sector resilience and policy gaps
Findings
- The financial system remains resilient to shocks; capital ratios are strong and stress tests show capital levels would remain above regulatory minima even in severe downside scenarios.
- Mexican financial institutions were well insulated from spillovers during strains in some advanced economies earlier this year; the system did not experience meaningful deposit outflows.
- Strains in some non-bank financial institutions are noted but the sector is unlikely to pose systemic risks given its relatively small size.
Progress and remaining actions
- Authorities are making progress implementing FSAP recommendations: reviewing macroprudential tools, updating cyber-attack monitoring and response capabilities, and expanding liquidity stress testing.
- Outstanding areas include enhancing the autonomy of financial regulators and strengthening legal protections for supervisors.
AML/CFT
- Addressing gaps in the AML/CFT framework remains a priority:
- Creation of a beneficial ownership register is recommended to improve corporate transparency.
- CNBV and SAT should align supervisory activities with risks from organized crime, drug trafficking, corruption, tax evasion, and foreign proceeds of crime.
- Greater collaboration among AML/CFT agencies and anti-corruption bodies is recommended.
Structural reforms for sustainable, inclusive growth
Challenges
- Per capita output growth has lagged peers despite trade openness, moderate labor costs, productivity gains from foreign investment, and integration into North American supply chains.
- Mexico’s proximity to the U.S. offers nearshoring opportunities, but capitalizing on them requires addressing long-standing structural challenges.
Priority reform areas and recommendations
- Public investment and governance
- Higher and better-targeted public investment.
- Better governance and coordination among national, state, and municipal levels to implement anti-corruption frameworks.
- Labor force and inclusion
- Raise female labor force participation; the gap between male and female labor participation rate in Mexico is among the highest in the OECD.
- Targeted fiscal policies and legal reforms suggested include:
- (i) ensuring equal pay for equal work;
- (ii) improving maternity, paternity, and parental leave;
- (iii) investing more in maternal healthcare and childcare;
- (iv) curtailing unpaid family care work;
- (v) ensuring women have full recourse to the public pension;
- (vi) addressing inequities in education;
- (vii) strengthening gender budgeting practices and collection of gender-related data.
- Business environment and investment climate
- Streamline customs procedures, ease licensing and permitting (e.g., road transport and customs brokerage), and remove FDI restrictions (e.g., in the transport sector).
- Fill critical infrastructure gaps in transport, water, and energy to attract private capital.
- Financial deepening
- Reduce obstacles to collateral recovery, strengthen judicial functioning, invest in financial literacy, increase transparency of financial products, and expand internet access in remote areas.
- Climate and energy transition
- Incentivize switch to solar and wind energy and ensure electrification is accompanied by low carbon and renewable generation.
- New hydrocarbon investments should internalize changing global demand and Mexico’s relatively high-cost position.
- Authorities have introduced a carbon tax, a strategy to combat deforestation, a target to raise the share of electric vehicle sales to 50 percent of total car sales by 2030, a market for green bonds, and an Emission Trading Scheme.
- Increasing the carbon tax—and/or the shadow price of carbon in the emission trading scheme—to around US$50 per ton would be broadly consistent with the authorities’ emission goals.
Key statistics and selected indicators (highlights)
- GDP growth (annual percentage change): 2019: -0.3; 2020: -8.7; 2021: 5.8; 2022: 3.9; 2023: 3.2 (Proj.); 2024: 2.1 (Proj.); 2025: 1.5 (Proj.).
- Consumption (annual percentage change): 2023: 3.7; 2024: 1.6; 2025: 1.2.
- Investment (annual percentage change): 2023: 14.4; 2024: 0.7; 2025: 1.4.
- Exports of goods and services (annual percentage change): 2023: 2.9; 2024: 2.2.
- Imports of goods and services (annual percentage change): 2023: 6.5; 2024: 1.0.
- Consumer prices (end-of-period): 2019: 2.8; 2020: 7.4; 2021: 7.8; 2022: 4.5; 2023: 3.0; core consumer prices (end-of-period) 2022: 5.0.
- National unemployment rate (annual average): 2019: 3.5; 2020: 4.4; 2021: 4.1; 2022: 3.3.
- Overall fiscal balance (in percent of GDP): 2019: -2.3; 2020: -4.3; 2021: -3.8; 2022: -3.9; 2023: -5.4 (Proj.).
- Structural primary balance (in percent of potential GDP): 2022: 0.5; 2023: 0.4; 2024: -1.0.
- Fiscal impulse: 2024: 2.4.
- Gross public sector debt (in percent of GDP): 2019: 51.9; 2020: 58.5; 2021: 56.9; 2022: 54.1; 2023: 52.7; 2024: 54.7 (Proj.); 2025: 55.1 (Proj.).
- GDP per capita (U.S. dollars, 2022): 11,279.2.
- Poverty headcount ratio (% of population, 2022): 36.3.
- Population (millions, 2022): 130.0.
- Income share of highest 20 perc. / lowest 20 perc. (2022): 8.4.
- Life expectancy at birth (years, 2022): 75.5.
- Infant mortality rate (per thousand, 2021): 11.4.
- Gross international reserves (in billions of U.S. dollars): 2019: 183.0; 2020: 199.1; 2021: 207.7; 2022: 201.1; 2023: 212.3 (Proj.); 2024: 224.5 (Proj.); 2025: 234.4 (Proj.).
- Nominal GDP (billions of pesos): 2019: 25,143; 2020: 24,080; 2021: 26,609; 2022: 29,504; 2023: 32,022 (Proj.); 2024: 34,541 (Proj.); 2025: 36,266 (Proj.).
IMF staff concluding statement of the 2023 Article IV mission to Mexico.
Content in this bundle
- 1mexea2022002 - 2022. The FSAP findings were discussed with the