Mexico: Staff Report for the 2013 Article IV Consultation

KEY ISSUESContext: Over the past year, Mexico has maintained macroeconomic stability and has madesignificant progress in advancing growth-oriented structural reforms. The country's close ties withthe global economy, while a source of strength, heighten the economy's exposure to externalrisks. The transition to a less accommodative monetary policy in the U.S. and other advancedeconomies is a key risk.Recent Developments: In 2013, the economy has begun to operate below capacity, with growthexpected to slow to 1.2 percent and core inflation running at historically low rates. Demandpolicies are consistent with preserving macroeconomic stability, while supporting a recovery ingrowth. The external current account deficit and real effective exchange rate are broadly in linewith fundamentals and desirable policy settings. Mexico's asset markets showed more resiliencethan many other emerging markets after the Fed initiated its discussion of tapering on May 22.Structural reforms: Over the past year, more than a half dozen major reforms have beenapproved to upgrade several areas, including labor markets, telecommunications, and education.Most recently congress approved a comprehensive fiscal reform. It is also considering an energyreform that opens the door for private investment in hydrocarbons and a financial sector reformthat seeks to increase intermediation, promote competition and enhance financial stability. Staffestimates that these reforms will boost potential output growth to 3½ to 4 percent a year,compared with the pre-reform estimate of 3 to 3¼ percent a year, with upside risk to this outlook.Fiscal reform: The recently approved fiscal reform should provide for a more transparent andeffective fiscal anchor, while limiting the procyclicality of spending. In this context, thegovernment defined a path for the public sector borrowing requirement (PSBR) through 2018 thatentails a gradual decline in the PSBR to 2.5 percent of GDP by 2017. The authorities haveintroduced several legal provisions that give assurances that spending growth will fall in line withthis objective, but care will be needed to avoid remaining risks of fiscal slippage.Advice from Previous Article IV Consultation: The ambitious agenda of structural reforms is inline with Fund advice from past consultations and the financial sector reform implements anumber of key recommendations of the 2011 FSAP Update. Staff supports the authorities' plan forthe pace of medium-term fiscal consolidation in light of the economic slowdown in 2013,although this pace is not as rapid as envisaged in the 2012 consultation.