MEXICO CITY (Reuters) – Mexico’s growth is projected to slow in the next few quarters, despite the country’s fiscal and monetary policy putting it in a good position to navigate global turmoil, the International Monetary Fund said in a statement Friday.
Impacts from the coronavirus pandemic and a turbulent global environment could exacerbate long-standing inequality and low growth in Mexico, the IMF said after a mission to the country.
Mexico’s interest rate hikes, combined with its neutral fiscal stance in 2022 and 2023, are the appropriate policy steps to disinflate the economy, the IMF said.
The country is vulnerable to a slowdown in U.S. economic growth, the IMF said, which could be offset by speeding up nearshoring, or bringing production from overseas closer to its final sale point.
Mexico’s central bank, known as Banxico, has taken a proactive approach to broad-based inflation by raising interest rates, the IMF said. The bank hiked its key rate last week by 75 basis points to a historic 9.25%.
However, the Fund added that taming annual inflation – which steadied at an estimated 8.7% in September – will likely require further interest rate hikes. Banxico targets inflation at 3%, plus or minus one percentage point.
“There is significant uncertainty about the timing, speed, and durability of the downward path for inflation in 2023,” the IMF said.
The Fund also judged fiscal measures implemented to mitigate the cost of living as “untargeted.”
It estimated that Mexico’s fuel subsidy has cost around 1.4% of the country’s 2022 gross domestic product (GDP). Mexican President Andrew Manuel Lopez Obrador has argued that inflation would have reached 14% without the subsidies to keep fuel prices down.
To strengthen Mexico’s fiscal policy, the IMF argued for passing on some fuel costs to consumers to create space in the budget for social safety net programs.
It also suggested an adjustment to the business strategy of state-run oil company Petroleos Mexicanos, one of the most heavily indebted state companies in the world.
Meanwhile, strategies to cushion the blow of higher food prices have so far been “difficult to assess,” the IMF said.
Lopez Obrador on Monday rolled out an anti-inflation plan, waiving some regulatory requirements.
(Reporting by Mexico City Newsroom; editing by Cassandra Garrison and Alistair Bell)
