“Capital outflows are a factor of vulnerability”

The International Monetary Fund (IMF) warned that “the strong increase in capital outflows from Mexico responds to the deterioration of institutional quality and long-term prospects.”

In the conclusions to the annual review carried out by experts from the Monetary Fund for Mexico, they explained that the government continues to privilege state energy producers and reversing the 2013 energy reform, “affecting the investment climate.”

Within the analysis, carried out annually in compliance with Article IV of the Constitutive Agreement, they stressed that capital outflows have become a factor of economic and financial vulnerability that can lead to lower GDP growth and pressure inflation.

They indicated that the disinvestment of foreign capital may weaken the Mexican peso and consequently it will feed the pressures that inflation has from additional increases in merchandise prices.

According to figures from the Bank of Mexico, the settlement of debt securities denominated in Mexican pesos amounts to 268,000 million pesos between January 4 and October 21, a figure that exceeds the closing of positions registered throughout 2020 and which totaled 257,238 million pesos.

The specialists of the Monetary Fund pointed out that the events that can fuel a greater aversion to risk are: lower domestic demand as a result of even lower growth; restrictive fiscal and monetary policies and some type of stress on the financial system.

If any of the aforementioned scenarios occurs, they consider that the Bank of Mexico would be forced to apply a “decisive tightening of monetary policy to anchor inflation expectations and raise credit spreads with the United States.”

They stated that “the net outflow of portfolio investments was the result of the combination of a greater acquisition of assets abroad by residents and a lower acquisition of Mexican assets by non-residents.”

Depreciation and debt

In the annual review carried out by the experts of the Monetary Fund, they clarified that “the strong presence of foreign investors has left the market strongly exposed to reversals of capital flows and increases in the risk premium.”

They considered that among the greatest downside risks for the economy is a change in investor sentiment towards Mexico that weakens the peso and contributes to more capital outflows.

To illustrate the financial impact that a significant depreciation of the Mexican peso would have, they detailed that the 30% slippage of the Mexican currency against the dollar could increase the debt by 50% of GDP.

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