Source:
IFIs Latin American Monitor
Fri Oct 27 2006
Ahead of Felipe Calderón's oath taking as president of Mexico, the IMF released the last Article IV review. In its reports it highlights the "need" for the new government to open the state-owned oil company, Petróleos Mexicos, to private sector participation. It also recommends a modification of the tax system in order to address the “chronic weakness” of state revenues.
The results of the 2006 review of the Mexican economy and financial system were recently released. This assessment of the IMF’s 184 member countries is carried out on an annual basis by the institution within the framework of Article IV. Consultations launched in September, coincide with president Fox’s last year in office, and arrive on time for the preparations of Calderón’s team as president-elect. In this sense, the IMF Board took the opportunity to make some recommendations and give action guidelines to the new government.
At the present time, Mexico has no agreement in place with the IMF – the last one having been due on November 30, 2000. On June 30, 2006, according to the Ministry of Finance (Report on the Economic Situation, Public Finance and Public Debt, 2006 Second Quarter), the country owed the amount of 13.6 billion dollars to the World Bank and Inter-American Development Bank (IDB), which accounts for 23 per cent of the gross external debt. According to official figures, 54 per cent of this amount is owed to the World Bank while the remaining 46 per cent belongs to the IDB.
Early in August, the Fox administration made early payments to the World Bank and IDB through the issue of public debt bonds in the amount of 9 billion dollars, thus making use of the excess of international reserves resulting from oil exports. Notwithstanding this, the country’s total debt remained unchanged since this operation finally consisted of a swap of external debt for internal debt.
IMF recommendations
Less than two months prior to the change of government, the IMF stressed that "the challenge ahead will be to put in place structural reforms that will remove remaining obstacles to growth while fully entrenching macroeconomic stability".
The IMF encouraged the incoming administration to undertake "ambitious structural reforms", being among them the possibility for the private sector to participate in the investment program of Petróleos Mexicanos (Pemex) and the reform of the current tax system.
It also suggested a governance reform of the state-owned oil company, since – according to the institution – this currently poses a constraint to improving its performance.
At the same time, board members noted that the continued reliance of the Mexican government on oil revenues renders the achievement of fiscal policy objectives - aimed at a balanced budget - potentially vulnerable to a decline in oil prices or production, and therefore suggested containing the non-oil fiscal deficit, that is to say, public revenues without taking into account those resulting from oil exports.
They also pointed out the need to address the "chronic weakness" of tax revenues in order to achieve the new fiscal target over the medium term (to bring deficit to zero), and "encouraged the authorities to give fresh consideration to tax reform proposals".
According to the released information, the IMF Board "commended the authorities for reducing the fiscal deficit and the public debt ratio, and improving the public debt structure", increasingly focused on the domestic market.
The future of oil
While on the domestic front, a debate is taking place over whether to allow the participation of the private sector in the energy sector – of which the new government is in favor, and has even suggested the possibility of doing so without neither changing the Constitution nor privatizing the company – the IMF proposed without ambiguities that which from its point of view could be the best strategy to face what it called as "oil risks".
In its review, the IMF Board noted that in the medium term the "oil risk" is centered on a possible decline in oil international prices, which in the Mexican case have stood at an average 55 dollars per barrel this year. According to Finance Minister Francisco Gil Díaz, it is estimated that prices would range from 41 to 42 dollars per barrel in 2007.
The report also points out: "The mission suggested that oil-related risks could be contained in two ways: strengthening the non-oil fiscal balance (the public budget without taking into account oil export resources), and diversifying financial risk to the state-owned company".
About the second alternative, the IMF considers that from a financial perspective, the risks to the public sector (which gets one-third of its income from oil revenues) could be reduced by allowing some sharing of risk with the private investors in PEMEX investment. According to the IMF, this would allow the public sector balance sheet to have a "safer structure": a lower level of debt, and a lower share of its assets invested in the oil sector.
Thus, the profits and losses resulting from a resource that in recent years allowed the federal government to accumulate a record amount of international reserves – reaching 76.7 billion dollars by mid-July – would be shared with the private sector.
An IMF man in Calderón’s Government
Felipe Calderón will be sworn in as president next December 1 and is already building his government team, where Agustín Carstens, who until last October 16 was acting as IMF Deputy Managing Director, has an outstanding role. Carstens was appointed as economic coordinator of Calderón’s team in charge of the government transition.
The former IMF official will be responsible for drafting a budget package for 2007 and designing economic programs that "would contribute to economic stability and the strenghening of public finance", pointed out the president-elect .
According to local press reports, Carstens is likely to become the next Finance Minister of the Calderón administration. In the past, Carstens held the post of Deputy Minister of Finance and Private Credit. His (likely) appointment clearly marks the line to be followed by the next government in terms of economic model and priorities.
Sources: La Jornada (México) and Secretaría de Hacienda
Related Information:
IMF documents:
* IMF Executive Board concludes 2006 Article IV consultation with Mexico, press release
* México 2006 Article IV consultation
* Mexico: Financial system stability assessment update
* Mexico: Selected issues
* Mexico follows the trend: it makes early payments to the World Bank and IDB, thus increasing its domestic debt, by IFIs Latin American Monitor
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