Mexico Recovering, But Crisis Spotlights Challenges, says IMF

In issuing its report, known as an Article IV consultation, on March 16, the IMF said Mexico was nonetheless hit harder by the crisis than most countries in the region reflecting its close links to the United States, the crisis epicenter.

In addition to strong policies, external confidence in Mexico has also been supported by a precautionary credit line from the IMF of $48 billion, which the authorities have indicated they do not plan to draw.

Reforms helped Mexico get through the crisis

Reforms over the past decade, including in reducing public debt levels, introducing a balanced budget rule and an inflation targeting framework, and the clear commitment to the free float of the peso, helped Mexico weather the global crisis.

As a result, for the first time in years, Mexico’s government was able to use fiscal policy in order to help offset the downturn in the economy. The sizable interest rate cut by the central bank and targeted support by the government in various parts of the financial market also cushioned the global shocks.

The IMF said signs of a recovery in the Mexican economy have begun to strengthen, and growth is expected to climb to 4 percent in 2010, rising to 4.5 percent in 2011.

The pace of Mexico’s recovery will in part also depend on how both the U.S. and global economic situations fare in the coming year. The IMF said foreign direct investment and other inflows of capital are expected to resume, but risks to demand in the U.S. and global financing conditions could continue to weigh on Mexico’s economy.

Assuring fiscal sustainability presents an important challenge

A key challenge facing Mexico in the next few years is replacing the declining share of oil revenues-which make up one-third of federal revenue-with tax revenues. This challenge has been highlighted in recent years by the sharper than expected drop in oil production.

However, production levels appear to have stabilized and the authorities have taken important steps to increase tax revenues with the reform packages put in place in 2008 and 2010-including difficult measures approved in the 2010 budget, such as the increase in the VAT rate.

"We very much support the macro policy stance of the authorities. We believe the 2010...