Mexico's financial system has a strong regulatory and supervisory framework, says IMF
Strong fundamentals and skillful policy management have underpinned the rapid recovery of the Mexican economy after the global crisis, according to a report from the International Monetary Fund.
The policy stance has focused on balancing domestic and external conditions, supporting the recovery while rebuilding policy buffers through fiscal consolidation and reserve buildup, says the IMF.
Growth was resilient during the first half of 2011 and it is expected to continue this year, albeit at a more moderate pace.
The IMF points out that downside risks remain high, associated with possibly protracted low growth in the United States and bouts of heightened global risk aversion from unsettled market conditions in Europe.
Mexico’s financial system gets praise. It is described as ‘sound’ and underpinned by a strong regulatory and supervisory framework.
‘Stress tests confirm the banking system resilience, albeit further efforts are needed to address concentration and conglomeration issues. Growth has remained resilient,’ says the report.
Growth is projected at 3.75% for 2011 and predicted to be 3.5% in 2012, slightly above potential growth, but below previous projections of 4.5%.
The report says that external and domestic demands have been driven by the relative resilience of manufacturing in the US and improvements in employment and credit conditions in Mexico, with the recovery in investment particularly strong in recent months.
It points out that the formal sector wage bill has recovered and continues to grow, while unemployment and underemployment have declined, although remaining still somewhat above pre-crisis levels.
Inflation has converged to the 3% target, with both headline and core inflation at 3.1% in September, while inflation expectations remain firmly anchored.
Protracted low growth in the US, particularly in manufacturing, could be a material drag to growth in Mexico, given the integration of the manufacturing sectors as the US accounts for about 80% of Mexico’s manufacturing exports.
The direct impact from Europe is expected to be contained because of limited trade links and the fact that the Mexican subsidiaries of European banks are well ring fenced.
‘However, it is conceivable that a significant and lasting increase in global risk aversion could affect strong and liquid sovereigns like Mexico’s,’ it concludes.
