Employees Concluding Assertion of the 2022 Article IV Mission

October 7, 2022

Mexico: Employees Concluding Assertion of the 2022 Article IV Mission

October 7, 2022

A Concluding Assertion describes the preliminary findings of IMF workers on the finish of an official workers go to (or ‘mission’), normally to a member nation. Missions are undertaken as a part of common (often annual) consultations underneath Article IV of the IMF’s Articles of Settlement, within the context of a request to make use of IMF sources (borrow from the IMF), as a part of discussions of workers monitored packages, or as a part of different workers monitoring of financial developments.

The authorities have consented to the publication of this assertion. The views expressed on this assertion are these of the IMF workers and don’t essentially characterize the views of the IMF’s Government Board. Based mostly on the preliminary findings of this mission, workers will put together a report that, topic to administration approval, can be offered to the IMF Government Board for dialogue and choice.

Washington, DC

Mexico faces a difficult setting as international inflation has surged.

Despite the fact that the post-pandemic restoration has been comparatively gradual,
home inflation has accelerated to ranges not noticed in 20 years.
Close to-term progress prospects for the US have weakened, as actual
incomes are eroded by inflation and each fiscal and financial coverage are
tightening. Normally, international monetary circumstances have tightened as
central banks have responded to excessive inflation, growing the dangers of
capital stream reversals in rising market economies.

Mexico is effectively positioned

to navigate this probably turbulent setting, given prudence in
macroeconomic coverage and stable fiscal and financial coverage frameworks

. However, scarring from the pandemic and the tougher international
setting might compound the long-standing issues of low progress and
excessive inequality. In consequence, regardless of robust outturns within the first half of
2022, progress is projected to say no within the subsequent few quarters. Inflation is
anticipated to plateau within the second half of 2022 after which decline regularly,
as larger uncooked meals costs and different cost-push components proceed to feed into
costs. The stability of dangers to the expansion outlook is tilted to the
draw back whereas inflation dangers are skewed to the upside. Extra persistent
international or home inflation, one other spike in worldwide oil or meals
costs, a greater-than-expected tightening of worldwide monetary circumstances,
or a sharper slowdown in U.S. progress are the principle downsides that Mexico might
have to take care of. On the upside, an acceleration in nearshoring of
financial exercise for higher entry to the North American market might
reasonable the affect of decrease U.S. progress.

Tackling Excessive Inflation

Banco de México (Banxico) has taken a proactive strategy to addressing
more and more broad-based inflation.

Successive and regularly bigger will increase within the reference price have
introduced the ex ante actual coverage price (i.e., the nominal price adjusted for
one-year forward inflation expectations) to restrictive ranges. This has been
an appropriately calibrated response to the upward surprises to inflation.
Banxico has additionally rightly indicated its intention to additional improve the
coverage price.

Returning to low and steady inflation will possible require some additional
will increase within the coverage price by the top of the yr and sustaining it
there for a while.

The proactive coverage tightening already put in place, alongside some
additional hikes broadly according to market expectations in addition to
incoming knowledge, ought to result in a decline in inflation. Nonetheless, there may be
vital uncertainty in regards to the timing, velocity, and sturdiness of the
downward path for inflation in 2023. Additional, there are vital upsides
to inflation from commodity costs, provide chain constraints, native meals
costs, a feed by to costs from the rise within the minimal wage,
inertia in wage and worth formation, and will increase in near-term inflation
expectations. As such, a
threat administration strategy would argue for coverage charges to be clearly
restrictive for a while to mitigate these upside dangers

and agency up near-term inflation expectations round Banxico’s 3 %

Notably within the present setting of uncertainty, clear financial
coverage communication will improve coverage effectiveness.

Banxico has begun publishing inflation forecasts and a sign of the
possible path of future price adjustments with every financial coverage choice.
These efforts will assist the general public higher perceive how the Governing
Board sees the present financial setting and the coverage selections they
have taken. To additional strengthen this understanding, Banxico might begin
publishing info on the coverage price path that underpins its macro
forecast, together with the anticipated terminal price within the tightening cycle and
its length. This path must be seen as steerage and never a coverage
dedication. Nonetheless, at the same time as this anticipated path adjustments over time it might
present useful info on the central financial institution’s coverage response
perform. A broader evaluation of the expertise with Banxico’s inflation
concentrating on framework in due time might additionally present helpful solutions for
additional enhancements to the coverage framework and the communications
toolkit, constructing on current enhancements.

Continued giant minimal wage will increase might create upside dangers to

Minimal wages are actually near the formal sector median wage, which creates
dangers of hostile employment results and a rise in informality. The
giant minimal wage will increase envisaged for the subsequent two years might additional
add to inflationary pressures at a time when it’s important to return to
low and steady ranges of inflation.

Most of the fiscal measures put in place to mitigate the affect of the
rising value of residing have been untargeted.

Retail gasoline worth stabilization has diminished value pressures for the economic system,
possible reducing inflation by near 2 share factors across the current
peak of worldwide oil costs peaked. Nonetheless, this has come at a sizeable
budgetary value (estimated at 1.4 % of GDP in 2022) and has additionally
benefited larger revenue households. Moreover, by diluting worth indicators,
the coverage has short-circuited the wanted adjustment in gasoline demand. The
budgetary value of measures to mitigate the affect of upper meals costs
have been smaller, though they’ve sought to handle a number of aims
and their general financial affect is tough to evaluate. As well as, the
giant will increase in social (noncontributory) pensions previously few years
have additionally contributed to cushion the rising value of residing.

Nonetheless, these fiscal measures and the will increase within the minimal
wage—alongside the post-pandemic rebound within the broader economic system—have
helped help actual incomes.

CONEVAL knowledge means that actual per capita labor revenue elevated by 4
% as of mid-2022, whereas labor revenue poverty decreased additional (to
round 40 % of the inhabitants from a peak of 46 % in late
2020). Primarily, these achievements mirror the financial restoration,
enhancing labor market circumstances, and a continued excessive degree of remittance
inflows. Nonetheless, larger minimal wages and untargeted fiscal help have
additionally helped shield the susceptible. With international oil costs falling, the
budgetary prices of the gasoline pricing mechanism must be declining.

The impartial fiscal stance in 2022 and 2023, underpinning the proposed
finances, balances effectively the necessity to help financial coverage in
disinflating the economic system whereas not creating a cloth drag on

With the economic system at present working at near potential and a precedence
to revive low and steady inflation, a restrictive financial stance and
broadly impartial fiscal stance seems to be an acceptable coverage combine.
Nonetheless, contingency plans must be developed in order to have prepared focused
help methods that may very well be deployed within the occasion that draw back dangers
to exercise had been to materialize.

Insurance policies to Handle Draw back Dangers

There may be scope to make the fiscal place extra conscious of demand
circumstances whereas sustaining a prudent general framework

. Mexico’s fiscal framework contains each a balanced finances rule and
constraints on debt issuance, which considerably constrains the power of
fiscal coverage to play a countercyclical position within the occasion of a downturn.
Modest steps might, nonetheless, improve the power of fiscal coverage to
present help within the occasion that draw back dangers materialize:

  • Adjustments to the home gasoline pricing regime would improve fiscal

    Increased oil revenues are sometimes in a position to cowl the upper value of the
    retail gasoline worth stabilization mechanism when international oil costs
    improve. Nonetheless, some better passthrough of worldwide gasoline worth
    adjustments to home retail costs would create fiscal house within the
    finances when oil costs are excessive that may very well be used for elevated
    spending on current social security web packages that would supply
    focused help to these most affected by the rise in retail

  • Additional changes to Pemex’s enterprise technique would insulate the
    finances from the danger of getting to soak up losses if oil costs fell

    It will additionally improve the income when costs are excessive. Changes
    might contain encouraging better personal sector participation or gross sales
    of non-core belongings, which may very well be used to decrease Pemex’s debt burden.


Rebuilding fiscal buffers quickly would enable fiscal coverage to reply
shortly within the occasion of a detrimental shock.

The stabilization fund ( Fondo de Estabilización de los Ingresos Presupuestarios) has much less
than 0.1 % of GDP in sources out there to reply within the occasion that
draw back dangers are realized—rebuilding these reserves to round 0.3 to 0.5
% of GDP would improve the power to reply at a comparatively small
fiscal value.

  • A extra complete evaluation of the institutional framework for
    fiscal coverage might show helpful.

    Such a reform might embody an specific debt anchor with narrowly
    outlined escape clauses and a transparent mechanism to return to the debt path
    following durations of deviation. This might assist improve transparency
    and information market expectations for the medium-term fiscal path, whereas
    offering flexibility to reply to unanticipated shocks.

Within the occasion of an surprising tightening of worldwide monetary circumstances
and bigger capital outflows, peso depreciation would act as a shock

. With deep overseas trade (FX) markets and contained FX mismatches in
stability sheets, the economic system is anticipated to stay resilient if downward
stress on the peso materialized. Coverage price hikes may very well be used to
counter any marked inflation passthrough or an increase in inflation
expectations, whereas FX intervention may very well be thought-about within the case of
disorderly market circumstances.

Mexico has a sturdy monetary system however with low ranges of monetary

Systemic vulnerabilities seem broadly contained and the monetary system
is rising from the pandemic with larger capital buffers, decrease personal
sector leverage, and no signal of stretched asset costs. Nonetheless, the system
gives much less finance to the true economic system than in peer international locations though
digital finance, whereas nonetheless embryonic, holds the promise of accelerating
monetary entry.

The FSAP discovered that the monetary system seems resilient.

Beneath the hostile state of affairs, with low progress and excessive inflation in main
economies and disruptive international monetary tightening, excessive preliminary ranges
of capital and powerful profitability would assist banks soak up most credit score and
market losses. Liquidity dangers for particular person banks and different monetary
establishments are anticipated to be well-contained. Nonetheless, some
areas—contingent credit score strains and focus dangers—advantage supervisory
consideration. System-wide liquidity dangers additionally seem contained, however international
liquidity shocks might generate tail-risks. General liquidity circumstances
ought to proceed to be monitored rigorously and the excessive reliance on
short-term funding by improvement banks deserves a better look, although dangers
are mitigated by the sovereign assure for his or her liabilities. Dangers from
cyber and local weather occasions are vital extra issues. Local weather threat
evaluation, whereas unsure, factors to long-term adaptation wants, as in
different components of the globe.

Further measures would assist Mexico stay resilient in a altering
monetary and regulatory panorama

. Good progress has been made in rolling out important Basel reforms,
enhancing supervisory approaches, constructing cybersecurity capability, and
enhancing restoration and determination planning of business banks. The
evolving threat setting flags the necessity for upgrading the monetary sector
oversight and disaster administration frameworks to shut recognized gaps and
tackle rising challenges. The FSAP highlights the next

(i) Strengthen the autonomy of regulatory authorities companies and the authorized
safety of supervisors. The evolving threat setting (e.g., local weather and
cyber threat) factors to the necessity for growing the sources and abilities in
the regulatory companies;

(ii) The framework for, and utility of, consolidated supervision wants
vital enhancement. CNBV might strengthen supervisory strategies by
simplifying and utilizing extra principle-based methodologies. Consideration
may very well be given to integrating local weather dangers into prudential supervision and
introducing disclosure necessities for companies and traders;

(iii) Plans for finalizing and publishing a tenet for the
countercyclical capital buffer are welcome. Motion on the method to
introduce limits on loan-to-value and debt-service-to-income ratios would
assist to construct resilience to housing dangers within the medium time period as the present
early stage of the monetary cycle evolves;

(iv) Banxico and CNBV have made vital progress in strengthening the
cyber resilience of the monetary system, however additional enhancements are
wanted on technique, oversight, implementation, and data sharing.
Continued cautious consideration within the design phases of Banxico’s central
financial institution digital forex venture can be wanted;

(v) Banxico’s strategy to liquidity administration demonstrated flexibility and
resilience in the course of the pandemic however some refinement of the Emergency
Liquidity Help may very well be thought-about; and

(vi) There’s a have to grant energy to the decision authority to take away
impediments to banks’ resolvability and to get rid of boundaries to the
efficient use of buy and assumption and bridge financial institution instruments.

Insurance policies to encourage monetary inclusion must be deepened so as
to fight inequality and help progress.

Current efforts stay related to advertise entry to monetary companies
together with to broaden entry to digital connectivity; and enhance the
transparency of monetary companies. The authorities ought to proceed to
foster entry and enlargement of latest members, particularly fintech, to
improve competitors within the monetary sector, encourage monetary
establishments to hunt a wider base of shoppers, and cut back intermediation
prices whereas sustaining safeguards to make sure monetary stability.

Enhancing the effectiveness of the AML/CFT framework is the subsequent step
in strengthening the regime.

Mexico has made good progress in aligning its authorized and regulatory
framework with Monetary Motion Process Pressure requirements. The
problem is now to strengthen enforcement of the AML/CFT regime, together with
by enough resourcing. Efforts also needs to proceed to make sure the
availability of high-quality useful possession info, strengthen
consolidated supervision, and monitor rising monetary integrity dangers
associated to fintech.

Insurance policies for Increased and Extra Equitable Development

A broader structural coverage agenda would allow Mexico to boost
prospects for progress and job creation.

Regardless of elevated commerce openness and macroeconomic stability because the
Nineteen Nineties, productiveness progress has been weak with the expansion in output per
employee averaging near zero over the previous 15 years. In response, the
authorities are in search of to advertise commerce (together with in poorer Southern
areas by infrastructure tasks that help commerce integration) and
to scale back inequality (by will increase within the social pension and the
minimal wage). This agenda will tackle some obstacles to larger
productiveness and progress however extra efforts are wanted on: (i)
addressing corruption, crime, and the weak rule of legislation; (ii) fiscal reforms
to boost human capital and tackle infrastructure bottlenecks; and (iii)
lowering labor and product market rigidities.

Decided implementation of the anticorruption framework would improve
its effectiveness.

A brand new legislation treating corruption and fraud as felony offenses is anticipated to
allow extra complete investigations of corruption. With an
anticorruption framework in place, implementation and assessing
effectiveness of the insurance policies are actually the precedence. Strengthening
prevention, facilitating reporting together with whistleblower safety, and
additional empowering establishments answerable for investigation, prosecution,
and oversight can enhance implementation. IMF workers encourages Mexico to
take part within the IMF’s voluntary evaluation of transnational features of
corruption within the subsequent Article IV. Moreover, strengthening the
enforcement of contracts by the judiciary would help enterprise funding
and job creation.

A gradual improve in productive authorities spending, financed by
coverage reforms to boost tax revenues, would promote progress and fairness.

Increased spending on training, well being, public funding,
and social safety is important for enhancing human capital and
infrastructure and narrowing the numerous variation in social outcomes
throughout states. A gradual, everlasting improve in public spending of two to three
% of GDP, can be a possible step in direction of reaching Mexico’s
Sustainable Improvement Targets. To be efficient, this larger spending would
have to be accompanied by elevated program and public funding
effectivity, constructing on current steps taken by the authorities to enhance
spending management and program design. For instance, the effectivity of social
help packages may very well be strengthened by reducing the sizable leakage
of advantages to high-income teams and lowering overlaps and protection gaps
throughout a number of packages (e.g., by making a single beneficiary registry).

There are a selection of choices to boost tax revenues.
Earlier than the pandemic, Mexico’s non-oil revenues had been almost 6 % of GDP
beneath Latin American friends and solely about half the OECD common. Current tax
administration reforms, together with by OECD Base Erosion and Revenue
Shifting actions, have helped buoy revenues. Nonetheless, a reputable and
well-designed medium-term tax coverage reform might generate extra
revenues of three to 4 share factors of GDP with out having a deleterious
progress affect. Reforms might draw on the next menu of choices:

  • Worth added tax (VAT).
    Eliminating zero-ratings (apart from a number of important foodstuffs),
    rationalizing exemptions and variations in charges, and additional lowering
    compliance gaps. This must be accompanied by will increase in focused
    advantages to offset the affect of such adjustments on the poor.
  • Private revenue tax.
    Eliminating exclusions (e.g., of revenue on private enterprise actions
    and unbiased companies), lowering tax expenditures, and widening the
    prime private revenue tax bracket would improve revenues whereas making
    the system extra equitable and progressive.
  • Subnational taxes.
    Property tax collections may very well be elevated by updating the cadaster,
    enhancing coverage coordination between the federal and subnational
    governments, and simplifying and higher imposing the native car
  • Carbon tax.
    The carbon tax launched by Mexico in 2014 stays comparatively slender
    in scope (pure fuel is de facto exempt). The tax price of USD 3 per
    ton of CO2 may very well be raised regularly to USD 50 per ton of CO2 by 2030.
    Doing so can be according to the worldwide carbon tax flooring proposed
    by the IMF for G20 economies. As with adjustments within the VAT, will increase in
    the carbon tax must be mixed with focused compensation to offset
    the affect on poor households.

Collectively, such finances reforms would improve progress and assist to take care of a
sound fiscal place (

IMF Employees Report 2021


Current labor market reforms must be tailored to minimize their detrimental
results on formal sector employment.

Reductions within the variety of qualifying weeks for pension eligibility threat
lowering labor provide incentives for older employees. In the meantime, informality stays excessive at 55 % of the working
inhabitants. Based mostly on present coverage intentions and
adjusted for anticipated inflation, minimal wages might improve to the
present median wage ranges within the formal sector by 2024, growing the
incentives for informality. Adjustments to the present technique might embody:
(i) persevering with to enhance labor dispute decision mechanisms, constructing on
the expertise of the 21 states which have already applied it; (ii)
reducing firing restrictions; (iii) lowering the regulatory prices of
formalizing a enterprise; and (iv) aligning will increase within the minimal wage
extra intently with anticipated inflation plus the rise in productiveness of
decrease wage employees.

The implementation of the USMCA commerce settlement will assist bolster

The settlement with the U.S. and Canada reduces regulatory divergence,
complementing the elimination of many tariffs underneath NAFTA. An vital
problem for Mexico can be to extend the home value-added content material
of exports to satisfy the tighter guidelines of origin included within the USMCA
(notably within the automotive and textile sectors). Strengthening
training and coaching and fostering better competitors amongst suppliers
would assist improve the attractiveness of Mexico as a provide chain
location, elevating the worth added of native manufacturing.

Putting in a extra predictable power coverage that’s extra open to
personal sector participation would enhance competitiveness and

Reestablishing extra market-oriented regulatory frameworks would leverage
Mexico’s giant and various renewable power useful resource base. It will additionally
incentivize investments that might in the end create a less expensive, extra
dependable, sustainable, and aggressive power provide.

Additional steps towards carbon pricing would scale back greenhouse emissions.

The enlargement in 2023 of the emission buying and selling system (ETS), which is
at present in pilot section overlaying a small variety of giant entities, can be
an vital step in direction of comprehensively pricing emissions. However guaranteeing
enough protection, enforcement, and monitoring of polluting exercise,
introducing legally binding emissions caps, and introducing the deliberate
public sale system for allowances are key to creating the ETS absolutely practical.
Additional, sectoral measures, equivalent to feebates, public funding in clear
power infrastructure networks, and regulatory reforms within the power sector
might improve the affect of carbon pricing.

The IMF workers workforce is grateful to the Mexican authorities and different
counterparts for his or her time and constructive discussions.

IMF Communications Division

PRESS OFFICER: Maria Candia Romano

Cellphone: +1 202 623-7100Electronic mail: [email protected]


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