Monetary and financial issues

Economic Survey of Mexico 2009: Overcoming the financial crisis and the macroeconomic downturn


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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Mexico  published on 30 July 2009.




Despite improved macroeconomic fundamentals, Mexico is being hit hard by the financial crisis and world economic downturn

Mexico is affected severely by the global recession, like many other OECD countries, with negative economic, budgetary and social consequences. Although the banking sector has so far weathered the financial crisis rather well, manufacturing industries are being severely affected by the downturn of global demand, particularly in high-value added industries. Shipments of goods to US markets have plummeted at a fast pace, following a global readjustment of industrial inventories and leading to a sharp contraction of industrial production. Like other emerging markets, Mexico has suffered from reduced net capital inflows, as investments returned to safer havens, contributing to a decline in equity prices, rising interest rate spreads and a large depreciation of the peso. In addition, several country-specific shocks have had adverse consequences, such as the outbreak of influenza A H1N1. Also, the budget has been put under pressure by the sharp decline in energy prices, as oil exports provide a large share of tax revenues, although temporary relief comes from a price hedge and weaker peso. The rise in uncertainty has depressed business and consumer confidence to record lows, which, coupled with tightening credit conditions at home and abroad, is bearing on consumption and investment. Despite the slowdown in activity and declining commodity prices, inflation has remained persistently high as prices of tradables and food are adjusting with a lag.

Contribution to growth¹

1. As a percentage of real GDP in same quarter of previous year.
2. Including stockbuilding.
Source: OECD, National Accounts.

In this environment, it is likely that growth will be sharply negative in 2009 with only a moderate recovery in 2010. The sharp and broad-based drop in activity is set to increase unemployment, which is projected to reach levels last seen during the financial crisis of 1994-1995. As pressures from high commodity prices wear off and the output gap widens, inflation is likely to recede and reach its target by the end of 2010. With monetary and fiscal stimulus taking hold and world activity picking up, demand should stabilize with quarterly growth rates becoming positive towards end 2009 and reaching about 4% in annualised terms by end 2010. Risks to the outlook remain on the downside, driven by continued uncertainties with world financial markets and growth. Risks can also arise from foreign financing needs, if conditions for emerging markets worsen further.

Macroeconomic stability and increased policy credibility has helped to deflect severe financial stress

Since the Tequila crisis in 1994-95, which caused a dramatic output contraction, much progress has been made in improving macroeconomic policies, reducing economic imbalances and restoring policy credibility. The inflation-targeting framework has been successful in better anchoring price expectations. The fiscal rule has been instrumental in achieving balanced federal budgets and reducing public indebtedness. The development of domestic bond markets and a pro-active debt management strategy have increased maturities and substituted foreign for domestic debt, thereby reducing exposure to currency and rollover risks. The low current account deficits, in turn, have lowered foreign financing needs. The build-up of foreign reserves, facilitated by the rise in oil prices, the swap with the US Federal Reserve and the IMF’s Flexible Credit Line, provided another cushion to face economic shocks. Reflecting this better policy environment, Mexico has avoided the type of full-blown financial stress currently experienced by some other emerging markets, although it could not totally protect the real sector from the global downturn.

Monetary policy has become more supportive, but interest rates might be lowered further

Although there was a cycle of global monetary easing that, in general, started in the third quarter for industrialized economies and in the fourth quarter for some emerging markets, Mexico’s central bank kept its policy rates unchanged so as to contain inflation expectations at a time when inflation was increasing. Monetary policy loosening took place later than in other OECD countries, reflecting risks of additional capital outflows and further exchange rate pressure. With price pressures showing signs of levelling off in early 2009 and activity on a clear downward trend, policy rates were lowered in several rapid steps. The deterioration of economic activity in Mexico might provide room for a further lowering of policy rates, so as to sustain demand and improve financial conditions, while keeping an eye on the evolution of actual and expected inflation. Quantitative estimates suggest that exchange rate pass through has become more limited, reflecting strengthened policy credibility and better anchored inflation expectations, so it will be important to preserve this hard-won credibility. In an environment of tight credit supply and weak market prospects, lower interest rates may not have a large direct effect on consumption and investment, but it could have some beneficial effects on confidence.

The authorities should remain vigilant in monitoring overall financial stability, including corporate balance sheets

The financial sector looked relatively sound at the onset of the crisis and its limited exposure to foreign assets and liabilities reduced vulnerability to shocks. Conservative lending policies helped contain credit demand and avoided housing bubbles. The sector remains well capitalised and profitable, which partly reflects strict prudential regulations that limited banks’ asset exposure to currency risk and risky products. High net interest margins and operating costs also provide some cushion for absorbing losses. However, the financial indicators tend to be backward looking and can change rapidly as the economy worsens. The weakening economy and declining asset prices may lead to second round effects on Mexican banks with a feedback to the real economy. Both consumers and enterprises may find it difficult to service their debts, thus affecting the quality of bank portfolios. Vulnerabilities might also arise from the enterprise sector, which relies on foreign sources for close to half of its credit needs, if maturing foreign debt cannot be rolled over. These risks should be monitored closely by the authorities.

A welcome fiscal stimulus package in 2009

Fiscal policy has been prudently guided by a framework aiming at balanced budgets and saving part of oil revenues in a stabilization fund. The framework has contributed to securing long term sustainability and improved policy credibility. The fiscal stimulus measures in the 2009 budget and the January 2009 package to stimulate demand, which account for 1.6% of GDP, are broadly welcome. In particular, the increase in infrastructure spending, subsidies to employment and increased social transfers with sunset clauses should smooth the downturn. However, the fiscal package contained provision to freeze nominal energy prices, which is a socially-regressive form of support and an inefficient type of economic stimulus. Shifting more of the stimulus to support employment and incomes would enhance its impact on demand and protect workers from falling into poverty.

Fiscal policy should remain supportive in 2010

Budget revenues are projected to fall in 2010, reflecting the depressing effect of low world energy prices on oil revenue and the negative influence of the downswing on non-oil tax revenue. While oil revenue has been protected in 2009 by a hedge on oil export prices, this advantage will disappear in 2010. Thus, the OECD’s Economic Outlook projects that the government deficit (in terms of net lending or public sector net borrowing requirement) will increase from some 3% of GDP in 2009 to about 5% of GDP in 2010, assuming no corrective measures to cut expenditure or raise taxes. Mexico would be able to cover this level of borrowing, including by drawing down oil stabilization funds that were accumulated during the past period of high energy prices. To help meet external financing requirements, the government has secured large sources of foreign lending from the capital market, multilateral agencies and the US Federal Reserve. The stance of fiscal policy should not turn restrictive in 2010, as ongoing support to domestic demand will remain necessary to combat the economic downturn; thus the deficit should be allowed to increase by the amount of automatic stabilizers, considering the use of the stabilization funds for the financing of this deficit while at the same time not imperilling long-term fiscal sustainability. The preliminary budgetary projections for 2010 submitted by the government go in this direction: the expected fall in oil-related revenues is financed by drawing down oil stabilization funds.


How to obtain this publication


The complete edition of the Economic Survey of Mexico is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.


Additional information

For further information please contact the Mexico Desk at the OECD Economics Department at

The OECD Secretariat's report was prepared by Nicola Brandt, Cyrille Schwellnus and Tonje Lauritzen under the supervision of Patrick Lenain and Piritta Sorsa. Research assistance was provided by Roselyne Jamin.




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