Washington, DC: An International Monetary Fund (IMF) mission, led by Mr. Gustavo Adler, visited Mexico City during September 7-15 for the 2026 Article IV consultation, and has held additional virtual meetings since. At the end of the discussions, the mission issued the following statement:
Key Messages
- Growth is projected to gain strength, reaching 1.5 percent in 2026 and 1.8 percent in 2027 although remaining constrained mainly by external uncertainty. The disinflation process has continued, and headline inflation is near target, although some underlying price pressures persist.
- Fiscal consolidation continued in 2026 and is expected to proceed gradually going forward, but greater efforts are needed to put debt on a declining trajectory. Protecting much needed growth-enhancing investment requires mobilizing revenues, better prioritizing spending, and allowing for greater private sector involvement.
- Monetary policy should continue to focus on locking in disinflation by maintaining a moderately tight stance until there is clear evidence that inflation is moving durably toward the target.
- Against the backdrop of a sound financial system, efforts should continue to improve AML/CFT frameworks and to deepen intermediation to support growth and inclusion.
- Raising potential growth requires boosting private investment by closing infrastructure gaps, reducing regulatory burdens and uncertainty, and strengthening trade integration, alongside sustained efforts to improve security, combat corruption, and lower informality.
Macroeconomic Outlook
After a weak 2025, growth is expected to gain some strength. Less restrictive fiscal and monetary policies, accelerating exports to the U.S. and limited impact of the global energy price shock—amid low dependence of imported fuels, stable regional natural gas prices and fiscal measures to insulate domestic gasoline prices—are all supporting activity in 2026. Growth is projected to accelerate further in 2027 although uncertainties surrounding the USMCA review and recent domestic regulatory and institutional changes will continue to weigh on activity. Headline inflation has fallen in recent months—helped by economic slack, a restrictive policy stance, receding agricultural prices, a strengthening peso and stable domestic gasoline prices—and is now near the target. However, persistent core price pressures and somewhat elevated inflation expectations will likely delay a durable return to Banxico’s inflation target to early-2028. The current account deficit is projected to narrow this year on the back of strong exports to the U.S.—driven primarily by the IT boom—before widening over the medium term as domestic demand further recovers.
Risks to activity are broadly balanced. Downside risks stem primarily from heightened trade and geopolitical tensions, higher global interest rates, and delays in consolidating public finances. On the other hand, a larger-than-anticipated impact from public investment plans, stronger-than-expected U.S. demand and a more rapid resolution of tariff-related uncertainties add to upside risks. Inflation risks remain tilted to the upside as core inflation and inflation expectations could remain elevated while intensifying geopolitical tensions, the effect of El Niño and active income policies could put additional pressure on prices.
Fiscal Policy
While consolidation continues, greater efforts are needed to put public debt on a declining path. Following a sizable deficit reduction in 2025, efforts to strengthen public finances continued this year, although at a slower pace. Looking forward, the draft 2027 budget entails a more gradual consolidation than previously announced and an upward debt trajectory in coming years. A more ambitious and front-loaded consolidation should be considered to place debt firmly on a declining path and rebuild policy space.
Credibility of the consolidation plan would be strengthened by the early identification of measures. A balanced and credible set of measures should be identified to safeguard the medium-term fiscal objectives and create space for priority infrastructure and health spending. On the expenditure side, consideration should be given to better targeting social programs, ensuring a gradual phasing out of fuel subsidies and durably strengthening Pemex’s finances. On the revenue side, in addition to measures included in the 2027 budget, options to mobilize more revenues include increasing subnational property and vehicle taxation—building on ongoing initiatives to strengthen the property tax base—, phasing out border tax incentives, raising and broadening the carbon tax, and reforming the personal income tax and promoting formalization.
Plans to boost infrastructure investment are welcome, although additional safeguards will be key to ensure investments are growth-enhancing and protect public finances. Growth-enhancing infrastructure investment should remain consistent with absorptive capacity, medium-term fiscal sustainability, and the budget envelope. While steps have been taken to strengthen appraisal controls and enhance the disclosure of multi-year commitments, further safeguards would help address risks associated with the more discretionary nature of and the deferred recording under the new investment framework. Specifically, limiting further deferred expenditure recognition and the accumulation of contingent liabilities that could arise from mixed projects, as well as better aligning safeguards under the new framework with the Public Private Partnership law, would help protect public finances.
Strengthening the fiscal framework would bolster credibility and support consolidation. Mexico’s fiscal framework has generally helped instill fiscal discipline, although it has not prevented an upward drift in public debt over time. The recent elimination of the balanced budget rule and the narrowing of the coverage of the structural current spending rule point to the need to strengthen the framework, which now relies primarily on the ‘net indebtedness’ rule as the main operational anchor. Adherence to the latter rule will be key to preserve the integrity of the fiscal framework. Moreover, ensuring transparency and oversight of off-budget operations will be key to support consolidation objectives and preserve the link between the fiscal rules and debt dynamics. Against this backdrop, consideration should be given to (i) revamping the framework by introducing a medium-term debt anchor, well-defined correction mechanisms and binding escape clauses; (ii) creating an independent fiscal council; (iii) implementing stronger mechanisms to ensure compliance with the rules; and (iv) compiling and publishing fiscal statistics in line with the principles of the Government Finance Statistics Manual.
Monetary Policy
Lingering price pressures warrant maintaining a cautious monetary policy stance until inflation is firmly converging to target. While headline inflation has eased and is near the target, core price pressures persist and expectations remain above Banxico’s 3 percent target. A moderately tight stance should continue to be maintained until these underlying pressures show clear signs of receding, while further tightening may be needed if disinflation stalls or renewed energy and food price shocks risk feeding into broader price increases. The extension of Banxico’s liquidity management facility to include outright bond purchases alongside sales should continue to be confined to short-duration government securities to prevent price distortions in longer-term government bonds and mitigate risks to the central bank balance sheet.
Banxico’s communication could be further strengthened by providing greater clarity on the policy objective and reaction function. Continuing to emphasize its commitment to the 3 percent inflation target while further stressing that the variability range is not a tolerance range, as well as describing the role of inflation expectations and economic slack in price formation and indicating how monetary policy takes into account these variables, would all provide greater clarity on Banxico’s policy objective and reaction function, improving predictability and accountability.
The exchange rate should continue to serve as a shock absorber. The peso is supported by healthy external buffers and an external position that is broadly in line with fundamentals. Given a deep and liquid FX market, limited balance sheet currency mismatches, and sound macroprudential policies, exchange rate flexibility should be maintained, continuing to limit FX intervention to episodes of market liquidity disruptions or clear disorderly market conditions.
Financial Sector Policies
Mexico’s financial system remains sound. Banks continue to hold strong capital and liquidity buffers, supported by low nonperforming loans, adequate provisioning, and solid profitability. Stress tests by Banxico indicate that banks can withstand major shocks, including a sharp slowdown in U.S. demand and a repricing of sovereign bonds. Corporate and household leverage remain low, currency mismatches are limited, and there are no signs of stretched asset valuations. However, the sovereign-bank nexus warrants continued monitoring, particularly in the context of recent sovereign rating changes, rising global interest rates and the expected expansion of state-backed financing vehicles for infrastructure investment.
