Overview

The Mexican economy continued to expand at a moderate annual rate of growth of 2.5 percent during 2015. Private consumption became the main driving force of economic activity on the back of stronger job creation, real wage growth, and credit expansion.  In contrast, the expansion of investment activity has slowed down, including due to public spending adjustments.

A challenging external environment including lower oil prices, a gradual tightening of monetary policy in the United States, and a slowdown of growth perspectives in emerging market economies (including China), contributed to a significant depreciation of the Mexican peso. The peso lost nearly 30 percent against the US dollar, but the pass-through effect to domestic prices has not yet manifested itself as annual inflation has been moving slightly below the Central Bank’s target of 3 percent. In close coordination, fiscal and monetary policy authorities recently announced additional public expenditure reductions for 2016, an increase in the monetary policy rate and a change from pre-announced, rules-based to discrete currency market interventions.

Despite a decline in oil revenue by about 2 percent of GDP, the public sector managed to hit its fiscal deficit targets for 2015 as planned. Public Sector Borrowing Requirements, totaled 4.1 percent of GDP down from 4.6 percent in 2014. The decline in oil revenue due to a slump in oil prices and a decline in the volume of production was compensated by a significant hike in income tax revenue as a result of a deferred impact of the revenue-enhancing tax reform enacted end-2013, an increase of the excise tax on domestic sales of gasoline and diesel, and significant non-recurrent revenue from the annually contracted oil price hedge.

Economic growth is projected to slow down slightly in 2016 as the monetary and fiscal policy response to adverse external shocks will weigh down on aggregate demand. Sustained macroeconomic, price and financial stability as well as continued investor confidence will contribute to a rebalancing of the sources of growth with increasing (net) exports and private sector investments complementing the steady expansion of private consumption. Further progress in the implementation of structural reforms in the financial, telecommunications and energy sector is expected to strengthen the basis for a more vigorous expansion of economic activity over the medium term.

The Mexican government remains committed to fiscal consolidation, reducing the fiscal deficit gradually to 2.5 percent of GDP by 2018.

The Mexican economy faces a complex external environment in which a weak expansion of industrial activity in the United States, persistently low oil prices and heightened risk aversion and financial market volatility pose challenges to the economic policy and growth outlook. The policy priorities in this regard are clearly focused on maintaining prudent monetary, financial, and fiscal policies to create the conditions for stronger growth in the medium term, which should also be supported by the structural reforms under implementation.

The World Bank Board discussed in December 2013 the Country Partnership Strategy (CPS) covering FY14–19—which was jointly prepared with the Government of Mexico. This CPS focuses on the World Bank Group twin goals (ending extreme poverty and promoting shared prosperity) and is fully aligned with Mexico's National Development Plan (NDP) for 2013–18.  It offers integrated WBG packages of financial, knowledge, and convening services in four strategic themes:

  • unleashing productivity;
  • increasing social prosperity;
  • strengthening public finances and government efficiency; and
  • promoting green and inclusive growth.

The Bank’s financial engagement in Mexico (loans, Global Environment Facility, Clean Technology Fund) focuses mainly on education programs—from early childhood development to upper secondary level— and a green and inclusive growth agenda integrated by energy, environment, water, agriculture and transport projects.

The active portfolio as of March 08, 2016 is comprised of 18 projects (including 6 stand-alone GEF), totaling US$2.5 billion in net commitments. Two IBRD projects were approved by the Board in FY16 totaling US$500 million—the Expanding Rural Finance project (US$400 million) and the Municipal Energy Efficiency project (US$100 million).   The Bank also supports Mexico through a wide grant portfolio of approximately US$275.43 million (GEFs not included), comprising around 45 active grants mainly focusing on environmental and energy issues.

A few examples of the work of the World Bank in Mexico:

Subnational development. The World Bank is working closely with the Government of Oaxaca, one of the poorest States in Mexico, through a Memorandum of Understanding that includes financial, knowledge and convening services in multiple sectors, tailored to the specific needs of Oaxaca. Recently, the first Program for Results to Mexico was approved (US$55 million) which also happened to be the first sub-national loan to Oaxaca. The Bank has provided analytical and advisory services to encourage a results-based approach in public budgeting,  to promote social inclusion, reduce poverty and improve efficiency in the provision of health, education and social protection services in the state. Knowledge has also been shared with other countries through several South-South Knowledge Exchanges, for example in maternal and new-born approaches (Peru), and water supply and sanitation programs (Brazil).

Education. The World Bank has a broad engagement with Mexico on education and labor market issues, one example being the support of an early education program in rural areas, implemented by the National Council for the Promotion of Education, CONAFE.

Energy Efficiency. The Efficient Lighting and Appliances Project sought to promote Mexico’s efficient use of energy and to mitigate climate change by increasing the use of energy-efficient technologies at the residential level.  By the closing date of the project (FY14), 45.8 million of incandescent bulbs (IBs) had been replaced with compact fluorescent lamps (CFLs), and 5.074 million tons of CO2 emissions were avoided. 

Climate Change. The Coastal Watersheds Conservation Program aims to promote integrated environmental management of selected coastal watersheds as a means to conserve biodiversity, contribute to climate change mitigation, and enhance sustainable land use.  The project currently supports the implementation of 28 Sustainable Forest Management sub-projects in the Gulf of Mexico region and 3 sub-projects in the Gulf of California region.

Read about further results of World Bank projects and initiatives here.

 


LENDING

Mexico: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments