Press Release No. 23/370

IMF Executive Board Concludes 2023 Article IV Consultation with Mexico

October 31, 2023

Washington, DC: On October 30, The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Mexico.

The Mexican economy is in the midst of a broad-based expansion. Growth is expected to be 3.2 percent in 2023, led by robust private consumption and investment, with notable strength in services and construction sector, and in auto production. The unemployment rate has fallen to 2.7 percent. Proactive monetary policy and a decline in global commodity prices are facilitating disinflation. Economic activity is projected to slow to 2.1 percent in 2024. Although fiscal policy is expected to loosen next year, its impact on growth will be blunted by binding capacity constraints, a continuation of tight monetary policy, and slowing growth in the U.S.

The authorities are projected to meet their 2023 fiscal targets. More restrained capital spending is expected to more than offset the lower tax revenue, especially on the VAT, yielding an overall deficit of 3.9 percent of GDP. This should result in a decline of gross public sector debt (by staff’s definition) to 52.7 percent of GDP in 2023. Banxico has held its policy rate at 11.25 percent since March 2023 and stated it will keep rate on hold for an extended period. With inflation and long-run inflation expectations in check, the real rate is now firmly in contractionary territory.

The banking sector has strong capital positions and, as of May 2023, nonperforming loans are close to record lows at 2.2 percent of total loans. Higher freight costs, strong domestic demand, and adverse price developments increased the current account deficit slightly in 2022 to 1.2 percent of GDP. Higher demand-driven imports are expected to widen the deficit further in 2023 to 1.5 percent of GDP. International reserves remain at comfortable levels.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They noted that the authorities’ very strong policies and policy frameworks were instrumental in restraining public debt and containing inflation, while achieving a broad-based economic expansion supported by robust private consumption and investment. Recognizing the opportunities for Mexico over the medium term, Directors noted that securing sustainable and inclusive growth will require continuing with a sound macroeconomic policy mix, accompanied by a broad set of structural reforms to address the existing bottlenecks and make the economy more climate resilient.

Directors generally cautioned against an overly procyclical near-term fiscal stance and underscored that decisive measures will be needed in 2025 and beyond to preserve fiscal sustainability over the medium term, while highlighting Mexico’s strong track record of meeting fiscal targets. Going forward, Directors emphasized the need to boost non-oil revenues, which remain below Latin American and OECD peers, noting that higher fiscal space will create room for targeted social and infrastructure spending. They also saw scope to reform the medium-term fiscal framework to increase its flexibility and credibility. Directors agreed that greater transparency in fiscal reporting will improve accountability and welcomed the transparent recording of support to Pemex in 2024 budget, while emphasizing the importance of ensuring the company’s commercial viability.

Directors agreed that the proactive approach of Banco de México to monetary policy has been instrumental in containing inflationary pressures and ensuring that inflation expectations remain well-anchored. In the face of upside risks to inflation, they recommended caution in reducing the policy rate before inflation is on a clearer downward path toward the target. Directors also underscored the importance of continuing to enhance communication practices. They agreed that the flexible exchange rate should continue to be the key tool to facilitate adjustment to external and domestic shocks.

Directors agreed that the financial system remains resilient, with high capital and liquidity buffers. They looked forward to continued implementation of key policy recommendations of the 2022 Financial Sector Assessment Program. Directors emphasized the need to address outstanding gaps in the AML/CFT framework and enhance collaboration between various AML/CFT agencies and anti-corruption bodies. They also welcomed Mexico volunteering for an assessment of the transnational aspects of corruption.

Directors underscored the importance of supply side reforms to improve potential growth and raise living standards, including by taking advantage of the diversification of global supply chains. Given the significant gender gaps, they emphasized that these reforms should comprise policies to further boost female labor force participation and remove legal impediments to female economic empowerment. Better tackling corruption and crime, expanding financial inclusion, as well as improving infrastructure and streamlining regulations will also be key.

Directors agreed that a comprehensive and well-sequenced climate change strategy can provide more durable sources of energy. Given the long-term risk of a reduction in global demand for hydrocarbons, they encouraged switching to low carbon and renewable sources of generation, including by considering increasing the price of carbon.

It is expected that the next Article IV Consultation with Mexico will be held on the standard 12-month cycle.