IMF Completes 2024 Review, Credit Line Talks With Mexico

• The IMF Executive Board concluded the 2024 Article IV consultation and approved the review of Mexico's qualification under the Flexible Credit Line with an access level of about US$35 billion.
• Economic activity is moderating due to binding capacity constraints and restrictive monetary policy. Inflation pressures are receding, with inflation expected to reach its 3-percent target by 2025.
• A frontloaded fiscal consolidation, underpinned by well-identified measures, is needed to preserve fiscal sustainability. Monetary restraint should be removed gradually. Securing sustainable and inclusive growth will require a broad set of reforms.
• Mexico continues to qualify for the FCL by virtue of its very strong fundamentals and institutional policy frameworks and track record of economic performance and policy implementation. The authorities intend to continue to treat the arrangement as precautionary.

Washington, DC: On October 30, The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] and the mid-term review under the Flexible Credit Line Arrangement with Mexico. The current two-year FCL arrangement for Mexico in an amount equivalent to 26.7381 SDR billion (300 percent of quota, about US$35 billion) was approved by the IMF's Executive Board on November 15, 2023 (see Press Release No. 23/398). The Mexican authorities stated their intention to continue to treat the arrangement as precautionary.

Economic activity is moderating, with private consumption and investment decelerating, and employment growth is slowing. Despite an expansionary fiscal stance, growth is expected to slow to around 1½ percent this year, due to binding capacity constraints and restrictive monetary policy. Growth is expected to moderate further in 2025, reflecting a withdrawal of fiscal stimulus and a slowdown in the U.S. Inflation pressures are receding and continued monetary restraint and slowing activity are expected to lower inflation to Banxico's 3-percent target by 2025.

The fiscal deficit is expected to register a substantial increase in 2024, which is projected to increase gross public sector debt to about 58 percent of GDP at end-year. The authorities, however, plan to initiate a fiscal consolidation in 2025 to lower the deficit to below 3 percent of GDP over the medium term. After timely tightening, Banxico has started to remove monetary restraint gradually this year, signaling that future rate decisions would be conditioned on achieving an orderly and sustained convergence of inflation to the target.

Mexico maintains sizable buffers, a sustainable external position, and effective financial oversight. The financial system has high capital and liquidity buffers, low private sector leverage, and little sign of stretched asset prices. The current account deficit shrank in 2023 as terms of trade improved but is expected to widen slightly in 2024 as investment- and consumption-related imports outpace exports. International reserves remain at comfortable levels.

At the conclusion of the Executive Board's discussion, Ms. Gopinath, First Deputy Managing Director and Chair stated:

The Mexican economy is decelerating and inflation pressures are receding. Notwithstanding the procyclical fiscal expansion in 2024, monetary policy has been successfully calibrated to reverse the upswing in inflation and the authorities are planning a sizeable front-loaded fiscal consolidation for 2025. Mexico's macroeconomic policies and institutional policy frameworks remain very strong, with a flexible exchange rate regime, a credible inflation targeting framework, a fiscal responsibility law, and a well-regulated financial sector.

Nevertheless, Mexico continues to be exposed to sizable external risks amid lingering uncertainty. These remain broadly unchanged from last year and include risks stemming from the dynamics of the U.S. economy and changes in global financial market conditions associated with risk aversion towards emerging market economies. In this context, the arrangement under the Flexible Credit Line will continue to provide the authorities with valuable insurance against tail risks.

The authorities intend to treat the arrangement as precautionary and are firmly committed to maintaining their track record of very strong macroeconomic policies and institutional policy frameworks going forward. They consider the current access to remain appropriate to ensure a timely and adequate buffer to mitigate external risks should they materialize.

Executive Board Assessment [2]

Executive Directors noted Mexico's continued track record of very strong policies and policy frameworks that has contributed to an easing in inflation pressures, sizeable buffers and a strong external position. Noting a deceleration in economic activity and downside risks, Directors underscored the need to implement a sound macroeconomic policy mix and a broad set of reforms to secure high and sustained growth, while ensuring the sustainability of public finances and the return of inflation to its target.

Directors welcomed the authorities' commitment to fiscal sustainability and generally agreed that a sizeable, front-loaded fiscal consolidation is needed in 2025 to stabilize debt and safeguard fiscal sustainability. Directors stressed the importance of a comprehensive and ambitious tax reform that boosts non-oil revenues and encouraged the authorities to improve tax administration and cut tax expenditures to support near-term consolidation while protecting needed investments in infrastructure, health, and social assistance. Enacting a more comprehensive medium-term budget framework and ambitious pension reforms would also be important. Noting that the fiscal costs from Pemex's operations are sizeable, Directors emphasized that further support should be conditional on the development of a viable business strategy and improved corporate governance.

Directors commended Banxico's monetary policy response which enabled disinflation and anchoring of inflation expectations. They stressed that the pace of monetary easing should be gradual and data dependent. Enhancements in Banxico's communication could also be considered to further improve the effectiveness of monetary policy. Directors agreed that the flexible exchange rate should continue to be the key tool to facilitate adjustment to external and domestic shocks.

Directors welcomed the resilience of the financial system with high capital and liquidity buffers. They emphasized the need for continued supervisory attention on loan concentration and sovereign debt exposure and highlighted the importance of completing the recommendations from the 2022 FSAP and enhancing financial inclusion. Noting recent improvements in the AML/CFT framework, Directors emphasized the need for continued efforts in this area, particularly to tackle illicit flows related to organized crime.

Directors agreed that Mexico is well positioned to seize the opportunities arising from the reshaping of global supply chains. In that context, they underscored the importance of pursuing structural reforms to strengthen governance, tackle corruption and crime, and improve physical infrastructure. Directors urged continued commitment to open trade policies and strong safeguards on judicial professionalism and independence in the implementation of recent constitutional amendments.

Directors agreed that Mexico continues to meet the qualification criteria for the FCL arrangement, given its very strong macroeconomic policies and institutional policy frameworks. They positively noted the authorities' plan to treat the arrangement as precautionary and concurred that maintaining the current access level is warranted given continued high external risks. Directors also acknowledged the authorities' state-contingent exit strategy.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chair of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .