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IMF: Mexico faces markedly slower growth amid fiscal pressures, tax woes

Mexico faces significantly slower economic growth amid elevated external and domestic risks, the International Monetary Fund warned in a report, adding that the balance of risks is tilted to the downside.

The IMF expressed concern about the country's increasing fiscal pressures as President Andrés Manuel López Obrador gravitates toward new policy priorities and abandons tax increases in the first half of his term. Given that budget projections are based on optimistic outlooks on GDP growth and oil production, the agency recommended employing additional measures to meet the government's fiscal targets.

"Meeting the announced fiscal targets would require closing an emerging fiscal gap of [0.5%-1.5%] of GDP during [2020-2024] with concrete actions; this would be imperative to safeguard the credibility of fiscal policy," the IMF said.

Authorities should prioritize raising non-oil tax revenues and making the tax system more progressive, given Mexico's weak revenue performance compared to regional and international peers, the IMF said. Public expenditure should also be geared toward achieving efficiency, which should shift "spending toward a more growth-friendly and inclusive mix," the agency added.

The IMF also proposed partnerships between troubled state oil company Petróleos Mexicanos SA de CV and the private sector as the former's financial situation remains dire. In particular, the agency criticized the government's decision to invest in Pemex's "loss-making downstream business" and urged it to "[reconsider] these decisions as they place the onus of stabilizing Pemex squarely on the government."

On the global front, risks include overall global economic weakness, volatility in international financial markets and lingering uncertainty on Mexico's trade ties with the U.S., the IMF said.

On the other hand, the IMF noted that strong fundamentals continued to support Mexico's resilience against these risks. "The authorities' commitment to fiscal prudence is strong, monetary policy has succeeded in bringing inflation to target, and financial sector supervision and regulation remain robust," the agency added.

The IMF commended the Mexican central bank's interest rate cuts, which brought back headline inflation to its 3% target, and noted that it "sees scope to continue easing in the period ahead." A flexible exchange rate has also anchored Mexico against shocks, boosting its non-oil balance as the country moved to a net oil importer from a net exporter.

"Exchange rate flexibility will be indispensable to restore equilibrium in response to permanent shocks, while foreign exchange intervention should be limited to incidences of disorderly market conditions," the agency said.

The IMF earlier said Mexico is interested in negotiating extended access to a flexible credit line, which is expiring in November. Mexico's government officials will arrive in Washington next week to discuss the new flexible credit line with the IMF, the Financial Times said.

The IMF extended an $86 billion credit line to Mexico in 2017, although this was later reduced to $74 billion. With a new arrangement, the amount could drop to between $60 billion and $70 billion.