Mexico: 2016 IMF ARTICLE IV CONSULTATION Wilson Center, January 9, 2017 Western Hemisphere Department International Monetary Fund
BACKGROUND
Growth in Economic Activity and Employment Have Remained Stable 10 8 6 4 2 0-2 Real GDP Growth and Contributions (In percent, NSA) Services Commerce Mining Other Construction Manufacturing 2010 2010 2011 2012 2013 2013 2014 2015 2016 8 7 6 5 4 3 2 1 0 Employment (Y/Y growth, NSA) Unemployment (percent, SA; RHS) Formal employment Total employment (3QMA) 2010 2011 2012 2013 2014 2015 2016 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 Source: National Authorities.
Inflation Has Remained Close to the Target 7 5 3 Inflation (In percent) Headline Core Target 1-year ahead expected inflation 7 5 3 22 20 18 16 14 12 10 Exchange Rate Nominal (MXN/USD) Real effective exchange rate (Index 2010=100, RHS) 140 130 120 110 100 90 1 2008 2009 2010 2011 2012 2013 2014 2015 2016 1 8 2008 2009 2010 2011 2012 2013 2014 2015 2016 80 Source: National Authorities.
Public Debt has Steadily Increased, but Fiscal Consolidation Has Begun 60 55 50 45 40 Gross Public Sector Debt (In percent of GDP) Mexico LA-6 (excl. Mexico) 1/ EM comparator group 2/ Sovereign credit rating peer group 3/ 0-1 -2-3 -4-5 Fiscal Balance (In percent of GDP) 35 2005 2007 2009 2011 2013 2015-6 2012 2013 2014 2015 2016 Source: National authorities; World Economic Outlook; Fitch Ratings; and IMF staff calculations. 1/ LA-6 excluding Mexico is comprised of Brazil, Chile, Colombia, Peru, and Uruguay. 2/ EM comparator group is comprised of India, Indonesia, Poland, Russia, Thailand, and Turkey. 3/ Fitch sovereign credit rating peer group includes Brazil, Chile, Colombia, India, Poland, Russia, South Africa, Thailand, and Turkey.
Argentina India Hungary Poland Philippines Brazil Indonesia Mexico Peru South Africa Russia Bulgaria Thailand Turkey China Malaysia Chile Low Financial Vulnerabilities 6 5 4 3 Commercial and Development Banking Sector 1/ (In percent) Return on assets Return on equity (RHS) Capital to risk-weighted assets (RHS) 35 105 30 85 25 65 20 Total Nonfinancial Corporate Debt in 2015 (In percent of GDP) External Debt Domestic Capital Market Debt Bank Loans Total Corporate Debt in 2010 2 15 45 1 10 25 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 5 5 Source: National Authorities, Bloomberg. 1/ as of July 2016
Solid Appetite for Mexico s Financial Assets 14 12 10 Non-Residents' Holdings of Local Sovereign Debt (In percent of GDP: as of December 2016) Short-term (CETES) Long-term 45 40 35 30 600 500 400 Sovereign Risk Spreads (5 year CDS spread, in basis points as of Jan. 6, 2017) Brazil Colombia Poland Turkey 8 6 Foreign Holdings, percent of total debt (RHS) 25 20 300 Mexico 4 2 15 10 5 200 100 0 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: National Authorities, Bloomberg.
OUTLOOK AND RISKS
Downside Risks are Mostly External Outlook (as of October, 2016): Growth expected to pick up on the back of stronger US growth in the near term and the effect of structural reforms in the medium term. Main downside risks: Rise in protectionism. Weaker-than-expected global growth, and particularly U.S. growth. Renewed volatility in global financial markets. A lower-than-expected path for oil prices or domestic oil production.
Downside risks have increased 3.5 Consensus Forecast for 2017 Real GDP growth (In percent) 20.0% Change between Nov. 8, 2016 and Jan. 6, 2017 (In percent and bps) 40 3.0 15.0% 30 2.5 2.0 1.5 1.0 10.0% 5.0% 0.0% 20 10 0 0.5-5.0% -10 0.0 Oct-16 Source: Bloomberg. Dec-16-10.0% Exchange Rate Sovereign risk spreads (bps, RHS) Stock Market -20
POLICY PRIORITIES
Fiscal Policy: Rebuild Buffers and Strengthen Fiscal Framework Adhere to plan of reducing fiscal deficit (PSBR) to 2.5 percent of GDP by 2018. If revenue surprises materialize, reduce PSBR faster. Consider more ambitious target beyond 2018 to reduce public debt faster. PEMEX reform critical for market confidence. Credibility enhancements to the fiscal framework: Creation of a non-partisan fiscal council Tighter link between the desired level of public debt and PSBR targets Tighter triggers for exceptional circumstances clause Explicit rules to return to targets following a deviation
Monetary Policy: Anchored Expectations Reduce the Need for Tightening Policy Rate and Inflation Expectations (In percent) 6.0 5.5 5.0 Policy rate 12-months ahead (from surveys) 5-8 years ahead (from surveys) 4.5 4.0 3.5 3.0 2.5 2.0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Source: National Authorities.
Exchange Rate Policies Flexible exchange rate key shock absorber Interventions to address disorderly market conditions Shift from rules-based to (sparing) discretionary intervention (in line with 2015 AIV advice) FX interventions (USD, billions) Total Rules based Other 2014 0.2 0.2 0.0 2015 24.5 24.5 0.0 2016 5.6 3.6 2.0 Source: Banxico. Going forward, discretionary intervention remains a tool. Point: ensure functional markets, prevent build-up of one-sided bets, no specific exchange rate target.
Financial Sector Assessment Program Balance sheets of financial and non-financial institutions resilient to severe shocks Financial sector prudential oversight has been strengthened, but further enhancement are recommended: Strengthen the independence of supervisors. Financial soundness should be primary mandate. Consolidate supervisors. Strengthen the role of the Financial System Stability Council (CESF) in the assessment of financial stability risks. Develop formal contingency plans and simulation exercises. Strengthen deposit insurance (remove legacy debt). Align incentives of development banks more closely with developmental objectives (and eliminate credit targets).
Structural Issues Impressive set of reforms in 2013/14 energy, telecommunications, financial, labor, education Impact: telecom reform reduced prices, energy reform coincided with falling oil prices, but nevertheless proceeding. Expected to boost potential growth over the medium term. Continued implementation crucial Major structural bottlenecks remain: Security and rule of law need to be strengthened (with particularly severe problems in some parts of the country) Efficiency and quality of judicial institutions should be further strengthened Female labor supply weak compared to peers High rates of poverty and inequality
Western Hemisphere Department International Monetary Fund Mexico: 2016 IMF ARTICLE IV CONSULTATION Wilson Center, January 9, 2017