Category: KB

Source: IMF – News in Russian

October 15, 2024

Key Messages

Activity is decelerating. Despite an expansionary fiscal stance, growth is slowing to around 1½ percent this year, due to binding capacity constraints and tight monetary policy. Continuing monetary restraint and slowing activity are expected to lower inflation to Banxico’s 3-percent target by 2025. The current account deficit is expected to widen slightly in 2024 as investment- and consumption-related imports outpace exports. Risks to growth are tilted to the downside while inflation risks remain on the upside. Weaker-than-expected growth in the U.S., an increase in global risk aversion, and unforeseen effects from recent institutional reforms could weigh on output. On the other hand, better-than-expected import demand from the U.S. or the ongoing reshaping of global value chains could boost activity and inward investment.

A medium-term fiscal strategy is needed to reduce deficits and debt, raise tax revenues, and create fiscal space for investments in human and physical capital. This would require putting in place a comprehensive tax reform early in the new administration, durably reducing the fiscal deficit while carefully prioritizing public spending, and reducing inequities in the pension system. Addressing the imbalances between the federal budget and Pemex, and enhancing corporate governance of the latter, are also important priorities.

The ongoing reshaping of global value chains offers the incoming administration an important opportunity to deepen the already-strong economic links with the U.S. Taking advantage of these prospects, however, requires a wide-ranging set of supply-side reforms to complement the well-established, very strong institutional framework for macroeconomic policies. Regulatory reforms, better-targeted public investment that further relieves infrastructure bottlenecks, broader access to financial services, and a more predictable supply of energy and water would all support private sector-led growth. Other priority measures include governance reforms that address corruption and tackle organized crime.

Recent judicial reforms create important uncertainties about the effectiveness of contract enforcement and the predictability of the rule of law. The replacement of judges at various levels of the judiciary in the coming year creates a new source of uncertainty that may impinge upon private investment decisions. It is critical that this reform be implemented in a clear and predictable way that ensures the independence and professionalism of the judiciary and strengthens the rule of law. Staff’s current baseline does not incorporate potential headwinds from these uncertainties.

Fiscal Policy

The authorities are committed to achieving their 2024 fiscal target. The overall deficit for the year is currently projected to be 5.9 percent of GDP, a fiscal impulse of around 2 percent of GDP that is expected to bring gross public sector debt close to 58 percent of GDP by end-2024. Increased spending on large infrastructure projects, wages, pensions, and social spending are all adding to fiscal support for the economy. There is, however, a risk that additional support for Pemex and/or greater-than-expected spending on infrastructure projects could lead to a modest fiscal overrun by end-year.

Mexico needs to put in place a credible medium-term fiscal consolidation underpinned by well-identified policy measures. The incoming authorities’ plan to initiate an important fiscal consolidation in 2025 that should lower the deficit to below 3 percent of GDP over the medium term, underscoring Mexico’s commitment to fiscal prudence. This will require the identification and implementation of additional fiscal measures, preferably including an overarching tax reform. In particular, the 2025 budget should focus on reducing tax expenditures and reassessing both tax rates and thresholds, particularly for the personal income tax. Further expenditure rationalization, including tax exceptions, and improved tax administration would contribute to this needed adjustment and help bolster market confidence.

A review of policies regarding support for Pemex, and the energy sector more generally, would enhance the credibility of the government’s fiscal plans. Federal government support for Pemex in the form of various tax reliefs, investments, and transfers have cost 1 percent of GDP in 2024. Further support should be conditioned on Pemex developing a viable business strategy and improving its corporate governance. This could include focusing Pemex activities on profitable fields, selling non-core assets, developing a new strategy for unprofitable refinery operations, and incentivizing public-private partnerships (including via equity participation). The strategy should also examine the implications for, and linkages with, the federal electricity company.

More is needed to address structural inequities in the pension system. Public pension spending has increased by 0.6 percent of GDP over the past three years and will continue to rise over the medium term. While the recent reform to raise the replacement rate,aimed to equalize treatment across workers, inequities remain between and within cohorts. A broader review is therefore needed of the benefit structure and the minimum contribution requirement.

Further deepening of financial intermediation would make growth more inclusive. The recent development of fintech products and digital payments have expanded access to financial products. In addition, financial regulations that lower loan-loss provisioning for female borrowers have increased women’s access to credit. These efforts could be complemented by expanding the adoption of digital payment systems and eliminating institutional barriers to entry for new products and entities that are deemed to be financially sound.

The IMF staff team would like to thank the Mexican authorities and other counterparts for their support, hospitality, and constructive discussions.

 

	Table 1. Mexico: Selected Economic, Financial, and Social Indicators
	I. Social and Demographic Indicators
	GDP per capita (U.S. dollars, 2023)				13,643.3		Poverty headcount ratio (% of population, 2023) 1/					37.0
	Population (millions, 2023)				131.1		Income share of highest 20 perc. / lowest 20 perc. (2022)					8.4
	Life expectancy at birth (years, 2024)				75.5		Adult literacy rate (2020)					95.2
	Infant mortality rate (per thousand, 2023)				13.6		Gross primary education enrollment rate (2022) 2/					102.0
	II. Economic Indicators
											Proj.
							2020	2021	2022	2023	2024	2025
	(Annual percentage change, unless otherwise indicated)
	National accounts (in real terms)
	GDP						-8.4	6.0	3.7	3.2	1.5	1.3
	Consumption						-8.6	7.1	4.5	4.6	1.0	0.9
	Private						-9.8	8.4	4.9	5.0	1.0	0.9
	Public						-0.7	-0.5	1.7	2.1	1.2	1.1
	Investment						-18.3	11.4	7.4	17.8	4.0	3.8
	Fixed						-17.2	10.5	7.5	18.0	5.0	3.0
	Private						-18.6	12.6	7.7	17.6	5.3	3.2
	Public						-5.7	-3.5	5.8	20.9	3.8	1.2
	Inventories 3/						-0.3	0.2	0.0	0.0	-0.2	0.2
	Exports of goods and services						-7.0	7.1	8.9	-7.4	-0.6	3.3
	Imports of goods and services						-12.0	15.7	7.6	5.0	1.1	2.3
	GDP per capita						-9.1	5.4	2.9	2.3	0.6	0.5
	External sector
	External current account balance (in percent of GDP)						2.4	-0.3	-1.2	-0.3	-0.7	-0.9
	Exports of goods, f.o.b.  4/						-9.4	18.6	16.7	2.6	1.4	3.6
	Imports of goods, f.o.b. 4/						-15.9	32.0	19.6	-1.0	3.0	4.6
	Net capital inflows (in percent of GDP) 5/						0.8	-1.0	-0.9	-0.9	-1.9	-1.4
	Terms of trade (goods, improvement +)						0.8	-1.0	-3.1	16.9	-1.7	-0.3
	Gross international reserves (in billions of U.S. dollars)						199.1	207.7	201.1	214.4	235.0	244.8
	Exchange rates
	Real effective exchange rate (avg, appreciation +) 6/						-7.7	5.9	5.3	16.4	…	…
	Nominal exchange rate (MXN/USD) (eop, appreciation +)						-5.9	-3.2	5.7	12.8	…	…
	Inflation, Employment and Population
	Consumer prices (end-of-period)						3.2	7.4	7.8	4.7	4.5	3.2
	Core consumer prices (end-of-period)						3.8	5.9	8.3	5.1	4.0	3.1
	Formal sector employment, IMSS-insured workers (average)						-2.5	1.9	4.3	3.6	…	…
	National unemployment rate (annual average)						4.4	4.1	3.3	2.8	3.0	3.3
	Unit labor costs: manufacturing (real terms, average)						10.4	4.4	11.8	-1.3	…	…
	Total population 7/						0.8	0.6	0.8	0.9	0.9	0.8
	Working-age population 7/						1.1	1.0	1.1	1.2	1.1	1.0
	Money and credit
	Financial system credit to non-financial private sector 8/						0.9	4.2	10.9	8.7	8.0	7.5
	Broad money						13.4	9.5	7.3	11.0	7.8	7.3
	Public sector finances (in percent of GDP) 9/
	General government revenue						23.5	22.9	24.3	24.4	24.2	23.8
	General government expenditure						27.8	26.6	28.6	28.7	30.1	27.3
	Overall fiscal balance 10/						-4.3	-3.7	-4.3	-4.3	-5.9	-3.5
	Structural primary balance  11/						0.6	1.2	0.9	1.1	-1.1	0.9
	Fiscal impulse 12/						0.5	-0.5	0.2	-0.2	2.2	-2.0
	Gross public sector debt						58.5	56.7	54.1	53.0	57.6	57.9
	Memorandum items
	Nominal GDP (billions of pesos)						24,087	26,690	29,473	31,772	34,313	36,766
	Output gap (in percent of potential GDP)						-2.8	-2.0	0.0	1.2	0.6	-0.1
	Sources: World Bank Development Indicators, CONEVAL, National Institute of Statistics and Geography, National Council of Population, Bank of Mexico, Secretariat of Finance and Public Credit, and Fund staff estimates.
	1/ CONEVAL uses a multi-dimensional approach to measure poverty based on a “social deprivation index,” which takes into account the level of income; education; access to health services; to social security; to food; and quality, size, and access to basic services in the dwelling.
	2/ Percent of population enrolled in primary school regardless of age as a share of the population of official primary education age.
	3/ Contribution to growth. Excludes statistical discrepancy.
	4/ Excludes goods procured in ports by carriers.
	5/ Excludes reserve assets
	6/ Based on IMF staff calculations.
	7/ Based on CONAPO population projections.
	8/ Includes domestic credit by banks, nonbank intermediaries, and social housing funds.
	9/ Data exclude state and local governments and include state-owned enterprises and public development banks.
	10/ The 2020 PSBR is adjusted for some statistical discrepancies between above-the-line and below-the-line numbers.
	11/ Adjusting revenues for the economic and oil-price cycles and excluding one-off items, in percent of potential GDP.
	12/ Negative of the change in the structural primary fiscal balance.

https://www.imf.org/en/News/Articles/2024/10/15/cs-mexico-staff-concluding-statement-of-the-2024-article-iv-mission

MIL OSI