IMF approves smaller flexible credit line for Mexico

On Monday, the International Monetary Fund said its executive board had approved a smaller two-year lending arrangement for Mexico worth USD $61 billion , replacing the current flexible credit line of about USD $74 billion .

It said the new arrangement would bolster market confidence at a time when trade uncertainty, a sharp pullback in capital from emerging markets, and increased risk premiums posed continued external risks to the Mexican economy.

The Mexican government intended to continue to treat the arrangement as “precautionary” and planned to request further reductions in the credit line as external risks receded, IMF Deputy Managing Director David Lipton said in a statement.

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Mexico’s economy has been buffeted by uncertainty over the past three years due to the threat of trade wars with U.S. President Donald Trump , and the credit line is viewed as an important stabilizer for its financial markets.

Mexico’s finance ministry hailed the arrangement.

“The decision of the (IMF’s) executive board underscores that Mexico continues to meet all the qualification criteria needed to access if required and without any conditions, the resources available through this instrument,” it said.

The IMF’s new managing director, Kristalina Georgieva , said last month the organization would remain a “strong partner” of Mexico, following meetings with the heads of Mexico’s Finance Ministry and central bank Banxico .

The IMF has recommended Mexico to reconsider its position of limiting private companies’ cooperation with state-owned oil company Pemex , whose debt is weighing heavily on the government’s finances.

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Mexico’s previous arrangement was approved in 2017 for about USD $86 billion but was scaled back to USD $74 billion in 2018 at the request of Mexican authorities.

In his statement, Lipton lauded the Mexican government’s efforts to set strong fiscal policies that stemmed the rise in the country’s public debt ratio , and a very tight monetary policy that helped reduce inflation.

He said financial supervision and regulation were strong, and the flexible exchange rate of the Mexican peso was playing a key role in the economy’s adjustment to external shocks.

But he warned the economy still faced external risks, including volatility in global financial markets , increased risk premiums, reduced capital inflows, and continued uncertainty about Mexico’s trade relations with the United States .

The U.S. Congress has not yet ratified a new trade agreement to replace the current USD $1 trillion North American Trade Agreement among the United States, Mexico, and Canada, and it appears that ratification may slip to next year.

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Regarding the renovation of the credit line, Banxico’s deputy governor Gerardo Esquivel commented on his Twitter account: “The IMF credit line is not a lease and it does not represent a debt increase.

“It’s a contingent finance that will be used to face future external shocks and risks: the renewal of this credit line is recognition to the country’s macroeconomic solidity,” he explained.

The IMF revealed the letter sent by Mexican authorities to its director manager Kristalina Georgieva, requesting a new agreement for the financial shield, signed by Mexico’s Finance Minister Arturo Herrera Gutiérrez, and Banxico’s governor Alejandro Díaz de León.

For its part, the Changes Commission , presided by the Finance Ministry and with members of the central bank, revealed that once the new agreement has been settled, they will continue with the strategy of reviewing the access level after a year.

It announced that if the situation and the risks scenario for Mexico justify it, an additional reduction will be required.

The Commission highlighted that although there have been periods of high volatility in the past, Mexico has never used resources from the finance shield, which is considered a precautionary instrument for unexpected external risks .

The IMF release also highlighted that Mexican authorities have confirmed their compromise to preserve economic and financial stability , as well as to continue increasing economic resilience.

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