Shoppers in Mexico City, Mexico, where domestic demand has been supporting the country’s economic recovery (photo: Henry Romero/Reuters/Newscom)
Mexico's Economy
The two-year credit line will support Mexico’s economic policies by providing a buffer against global risks. The FCL was created in 2009 for the IMF’s strongest performing members with a solid policy track record.
“The FCL will continue to support the authorities’ overall macroeconomic strategy, providing insurance against tail risks and bolstering market confidence,” said IMF First Deputy Managing Director David Lipton in a statement after the Board decision on November 30.
Resilient growth, but global risks remain
In its regular assessment of Latin America’s second largest economy, which was discussed by the IMF’s 24-member Executive Board on November 19, the IMF said that Mexico’s strong economic performance, despite the sluggish U.S. recovery and the persistent global uncertainty associated with Europe, attests to its strong fundamentals and sound policy management.
The report said Mexico’s growth has been resilient, supported by both external and domestic demand. Growth in 2011 and 2012 remained above potential—at nearly 4 percent. The country’s growth rate is expected to converge to 3½ percent in 2013—close to Mexico’s long-term potential growth rate. External demand is expected to contribute moderately while domestic demand is envisaged to maintain its momentum.
However, important risks to the global economic outlook remain, particularly from unsettled international financial markets, which pose continuing challenges even for strong emerging markets like Mexico. According to the report, the key short-term risks for Mexico are associated with unsettled external conditions, and longer-term risks from domestic structural challenges.
A significant U.S. slowdown or renewed global financial turmoil from Europe would affect Mexico, given its close integration with the U.S. economy and international capital markets. Longer-term issues include the need to advance reforms to boost growth and to address fiscal challenges associated with a decline in oil revenues and spending pressures from health and pensions.
Policy priorities
The IMF said that the ongoing fiscal consolidation is welcome, and that stepping up consolidation efforts would be important to help restore Mexico’s fiscal buffers to precrisis levels, and put the debt ratio on a more sustained downward path.
At the same time, the possible end of oil windfalls that Mexico has enjoyed in recent years would pose new challenges for fiscal policy, underscoring the need for further enhancing the fiscal framework.
The monetary authorities remain appropriately vigilant, with the task ahead being to assess the right policy response to domestic and external developments.
Boosting growth
According to the IMF’s assessment, a broad structural reform agenda would be needed to unleash Mexico’s growth potential.
Tax and subsidy reforms, including revenue mobilization efforts would be essential to address future pressures from declining oil revenues and population aging. In addition, reforms in the energy sector should be accompanied by competition, labor, and education reforms to ensure that productivity gains accrue to other sectors as well.
