Monday, June 11, 2018

Gimme $40B: Mexico Next In Line at IMF Trough

It's depressing enough to drive you to drink some tequila: Deserved or undeserved, Mexico has acquired a reputation for repeated balance-of-payments shortfalls. Every decade or so in recent history, something major happens. During the early Eighties, Mexico was hard hit when the Paul Volcker-led Federal Reserve increased policy rates Stateside to combat high inflation, making Latin countries that borrowed large amounts off foreign capital unable to pay. Then, of course, the Tequila Crisis of 1994 was brought on by domestic unrest coupled with unchecked government spending that could not be funded as election time rolled around. Given the year on the calendar, you could very well say that Mexico was overdue for some action on the BOP shortfall front before the second decade of the new millennium rolled around.

Once more, Mexico finds itself in trouble for largely understandable reasons. With 80% of its exports heading Stateside, its economic fortunes are highly intertwined with those of Estados Unidos. Plus, the demise of the US housing boom means less work for Mexicans--legally employed or otherwise--in jobs relating to the construction industry. Hence, remittance flows have slowed markedly. In recent, years, however, Mexico has maintained relatively sound economic management practices. Certainly, I would say Mexico is better run than the US, which should be in far greater trouble if it weren't for the dollar being an international reserve currency and the Mexican peso not being one.

The IMF has been crafting a facility for countries like Mexico--not very hard-hit but keen on obtaining some form of insurance nonetheless. Its latest iteration as of 24 March is called the Flexible Credit Line (FCL). From the IMF blurb, here are a few of its salient features:
The Executive Board of the International Monetary Fund (IMF) today approved a major overhaul of the IMF’s lending framework, including the creation of a new Flexible Credit Line (FCL). “These reforms represent a significant change in the way the Fund can help its member countries—which is especially needed at this time of global crisis,” said IMF Managing Director Dominique Strauss-Kahn. “More flexibility in our lending along with streamlined conditionality will help us respond effectively to the various needs of members. This, in turn, will help them to weather the crisis and return to sustainable growth.”

Mr. Strauss-Kahn invited strong-performing countries that may be hit by the global crisis to use the new Flexible Credit Line which he said “could strengthen further their economic position...”
The key difference with the FCL is that release of loans will no longer hinge on meeting conditionality requirements by certain dates:
In the past, IMF loans often had too many conditions that were insufficiently focused on core objectives.

This modernization is to be achieved in two key ways. First the IMF will rely more on pre-set qualification criteria (ex-ante conditionality) where appropriate rather than on traditional (ex post) conditionality as the basis for providing countries access to Fund resources. This principle is embodied in a new Flexible Credit Line. Second, implementation of structural policies in IMF-supported programs will from now on be monitored in the context of program reviews, rather than through the use of structural performance criteria, which will be discontinued in all Fund arrangements, including those with low-income countries. While structural reforms will continue to be integral to Fund-supported programs where needed, their monitoring will be done in a way that reduces stigma, as countries will no longer need formal waivers if they fail to meet a structural reform by a particular date.
The IMF appears chuffed that a relatively sound economy like Mexico is giving this new facility credence by taking out a $40B line. At the same time, Mexico wants the financial community to see this not as a "bailout" but rather as insurance as mentioned earlier. From Bloomberg:
Mexican President Felipe Calderon is betting that the benefits of being able to tap as much as $40 billion from the International Monetary Fund will outweigh the stigma associated with turning to the international lender.

Calderon said yesterday that the country will activate a credit line of at least $30 billion from the IMF, after the organization said last month it would relax loan conditions for developing countries that need short-term assistance. Activating the line makes the funds available and doesn’t imply plans to draw on it immediately, a Mexican government official said.

The IMF said last month it would make loans easier to get for developing nations that have low inflation, moderate levels of foreign debt and sound public finances. The move may dispel worries that Mexico could have a balance of payments problem and concerns about a possible fiscal shortfall in 2010, said Jimena Zuniga, a Latin America economist at Barclays Capital.

“It’s more of a prize than a shame,” Zuniga said in a telephone interview from New York. “By gearing this new credit line to economies that meet certain subjective criteria, this new facility doesn’t carry the stigma that using IMF money may have had in the past.”

A 23 percent decline in the peso over the past six months reflects concern about the country’s ability to finance its current account deficit and corporate debt that comes due this year. Investors have also worried that Mexico may have a budget shortfall next year, after the expiration of contracts that guaranteed the government a minimum price for its oil this year...

Mexico’s plan to activate the credit line eased market concerns that the central bank would deplete its reserves with a policy that calls for selling dollars to support the peso, said Gabriel Casillas, an economist at UBS AG in Mexico City. The IMF credit line would increase foreign reserves, unlike a $30 billion swap line offered by the U.S. Federal Reserve, he said.

“This will be positive,” said Guillermo Osses, who helps manage $40 billion of emerging-market debt at Pacific Investment Management Co. in Newport Beach, California. “Helping the economy to recover in a slowdown like the one we are experiencing now is very different from those countries that used IMF lines in the late 1990s to avoid a default.”

Still, Calderon’s announcement may hurt investor confidence in Mexico because borrowing money from the IMF has a stigma attached to it, said Marc Chandler, head of currency strategy at Brown Brothers Harriman in New York. “Does a strong country go to the IMF to borrow money? I say no,” Chandler said in an interview. “It’s perceived to be a sign of weakness that countries go to the IMF.”
Once more, the question begs itself: Is this really a kinder, gentler IMF? We've been told that conditionality burdens were to be eased so many times in the past to no real effect that I am really quite apprehensive.

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