Overview

The Mexican economy is decelerating with annual GDP growth slowing to 2.3 percent in 2016, down from 2.6 percent in 2015. A challenging external environment of modest global growth and stagnant trade, tamed though gradually rising oil prices and diminished capital flows contributed to this reversal. Economic growth in 2016 was driven almost exclusively by private consumption supported by low inflation, workers’ remittances, credit expansion, higher real wages and formal sector job creation.

Weakening external conditions led to a further depreciation of the Mexican peso against the US dollar. Pass-through of currency depreciation to inflation remained limited for most of 2015 and 2016, with an annual average of consumer price inflation of 2.7 and 3.4 percent, respectively. Nevertheless, additional currency weakness and possible non-linear effects in the pass-through to inflation led to a strong monetary policy response raising the overnight interest rate by a total of 350 basis points over the past 15 months, to 6.5 percent by March 2017. An increase in domestic fuel prices by some 15-20 percent in January 2017 raised annual consumer price inflation by February 2017 to 4.9 percent. A structural change in domestic fuel pricing policies shifting, among others, to a fixed excise tax on fuels, may increase the pass-through of currency depreciation to inflation.

Increased external competitiveness from currency depreciation has not yet led to a vigorous expansion of exports. A modest reduction in the current account deficit by US$ 5.5 billion to US$ 27.9 billion (2.7 percent of GDP) in 2016 was mainly the result of a decline in imports and a significant increase in workers’ remittances (up by 8.8 percent to US$ 27 billion). A surge in Foreign Direct Investment (FDI) fully financed the current account deficit, thereby lessening reliance on diminishing portfolio capital flows.

A further economic slowdown is expected as uncertainty with respect to the scope of a potential renegotiation of the North American Free Trade Agreement (NAFTA) and the future of the U.S.-Mexico relations is holding back gross fixed investment in Mexico, particular with respect to the expansion of trade-related activities in the manufacturing industry.

The public sector met its deficit target with an overall fiscal deficit of 2.9 percent of GDP in 2016. The growth of non-oil tax revenue compensated for the fall in oil revenues and allowed the government to meet additional spending requirements, such as financial support to the National Oil Company PEMEX, increasing interest payments and pension costs. The ability of the public sector to contribute to growth is constrained by the need for fiscal consolidation and for stabilizing the debt-to-GDP ratio.

Last updated: April 05, 2017

 

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 World Bank Group (WBG) engagement in Mexico includes a selective and tailored package of instruments integrating financial, knowledge and convening services. The Bank’s financial engagement focuses mainly on: social protection and education programs — from early childhood development to upper secondary level; a green and inclusive growth agenda integrated by energy, environment, water, agriculture and transport projects, and financial inclusion programs. The current active portfolio as of April 2017, is comprised of 15 projects (including 3 stand-alone Global Environmental Fund, GEF), totaling US $2.4 billion in net commitments. Two IBRD projects have been approved by the Board in FY17 totaling US $250million — the Higher Education project (US $130million) and the Agriculture Services for Food Security and Competitiveness project (US$120million). The Bank has a wide grant portfolio of approximately US$270.5 million, comprising around 44 active grants supporting mainly activities in the areas of environment and energy. Through a strategically aligned knowledge program, the WBG also provides support to Mexico. Timely inputs have been provided in areas such as climate change, urban development, water and transport, among others.  

Last updated: April 05, 2017

 

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