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Sharp decline in growth is putting pressure on finances, IMF warns

Pessimistic assessment accompanied by another reduction to growth forecast

The International Monetary Fund (IMF) has warned that fiscal pressures are mounting in Mexico while economic growth “has declined sharply.”

It said in a statement Friday that the government’s “commitment to fiscal prudence is strong, monetary policy has succeeded in bringing inflation to target, and financial sector supervision and regulation remain robust.”

But it warned that the government’s new policy priorities and commitment not to raise taxes during the first three years of its six-year term have contributed to the emergence of “fiscal pressures.”

The statement described the preliminary findings of IMF staff who took part in an official visit to Mexico City in September, meeting with central bank Governor Alejandro Díaz de León, senior government officials, members of the business community and academics.

The IMF also said that President López Obrador’s austerity measures could be problematic.

“Drastic budget cuts raise concerns about their sustainability and their potential impact on human capital, while productivity-enhancing reforms have largely stalled,” the statement said.

With regard to fiscal policy, the IMF said the government’s top priority should be to raise non-oil tax revenue while making the tax system more progressive.

It noted that tax collection in Mexico “significantly lags that of  regional and international peers” and that value-added tax revenue is “strikingly weak.”

The IMF urged the government to carry out a comprehensive review of the tax system with a view to rationalizing tax expenditures and broadening the tax base.

Secretary Herrera said on Monday that a debate about possible changes to Mexico’s tax system will come after the finance department has improved its revenue collection practices to minimize tax evasion and avoidance.

The IMF also cut its growth forecast, saying it anticipates that the economy will “pick up only slowly” in the near term.

Growth of just 0.4% is predicted for 2019 – a 0.5% cut compared to the previous IMF forecast – but economic expansion of 1.3% is anticipated in 2020 “on the back of a modest recovery in domestic demand.”

The IMF noted that the balance of risks for Mexico “is tilted to the downside.”

Weak global growth, volatility in global financial markets and continued uncertainty in the trade relationship with the United States are the main external risks.

United States President Donald Trump threatened to impose blanket tariffs on Mexican imports earlier this year if the government didn’t do more to stem illegal immigration to the northern border. Some analysts believe that Trump could renew his threat to slap new tariffs on Mexican goods in the lead-up to the United States presidential election in November 2020.

The IMF warned that domestic risks for the economy include the possibility that the government could weaken its commitment to fiscal prudence, strong institutions and a favorable business environment.

“Reinvigorating productivity-enhancing reforms” is central to boosting growth as well as reducing poverty and regional income disparities, the IMF said.

Another risk to the economy is “a downgrade of Pemex to non-investment status by a second major rating agency,” the monetary fund said, explaining that such a move could lead to higher financing costs and spillovers to other corporations.

Fitch downgraded the state oil company to junk status in June.

The IMF recommended a reconsideration of Pemex’s business plan in order to improve the company’s profitability and provide relief for the federal budget.

It noted that the current plan limits cooperation with private firms in Pemex’s upstream business to service contracts, envisages investing heavily in its loss-making downstream business, and lacks concrete ways to reduce operating costs.

The IMF recommended reconsidering those decisions “as they place the onus of stabilizing Pemex squarely on the government.”

It said joint ventures with the private sector remain the most promising way to replace reserves and increase production given fiscal pressures.

A media report in August said that President López Obrador was poised to reverse his position and allow Pemex to resume joint ventures with the private sector in 2020. However, the government has not confirmed that will happen.

Mexico News Daily 

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