MONETARY POLICY

The monetary program for 1999 was geared towards reducing inflation through the avoidance of excess money supply, as well as providing the necessary flexibility in the monetary policy. In December 1999, M1 increased 12.4 percent, while M4 grew by 6.7 percent.

On January 13, 1999, Banco de M¨¦xico (BM) increased the "short" (or corto, the mechanism BM uses to reduce market liquidity) from 130 to 160 million pesos in order to limit the currency¡¯s depreciation and stabilize the foreign exchange market. A year later, the BM decided to increase the corto again by 20 million pesos and thus reinforce the downward trend observed in the CPI and achieve the official inflation goal of 13 percent. On 16 May 2000, BM increased the corto to 200 million pesos, signaling its strong commitment to the reduction of inflation.

The ongoing reduction of inflation forecasts observed during 1999 and the lower country risk explain the significant reduction of nominal interest rates in 1999. This reduction, however, does not imply an easing of monetary policy, as this would immediately be followed by an exchange rate depreciation.

In this sense, the average nominal interest rate (28-day Cetes) in 1999 was of 21.8 percent, lower than the 24.8 percent observed in 1998. Finally, as of 31 December 1999 international reserves stood at 30.7 billion.

FISCAL POLICY

Throughout 1999, the Mexican government implemented several measures geared towards strengthening the country¡¯s fiscal stance. The public balance deficit amounted to 52,509 million pesos, a smaller figure than that authorized by Congress in December 1998. Hence, the public deficit/GDP ratio was 1.14 percent, lower than the 1.25 percent of GDP deficit forecasted at the beginning of the year.

This favorable result is explained by lower privatization-related public income, as well as increased BM operation costs, which were substituted by larger oil-related income, and lower foreign debt servicing costs, derived from the peso appreciation. The strengthening of the fiscal stance also increased domestic savings, thus increasing private/business sector investment, and contributed to the reduction of inflation and interest rates.

MEDIUM-TERM OUTLOOK

Mexico is an open economy with sharp income inequalities that have to be overcome. In this sense, the Mexican government¡¯s main economic objectives are to attain a high and sustainable annual growth rate, with inflation kept within single digits, and to turn these achievements into a better standard of living for the Mexican population. Another important goal is to achieve a successful transition into the next administration after this year¡¯s presidential elections.

The macroeconomic program for the year 2000 is intended to lower the inflation rate to 10 percent, with the goal of making it converge with that of our main trading partners no later than 2003. Expected GDP growth for 2000 is 4.5 percent, supported by an increase in gross fixed investment and sustained non-oil export growth. Growth for 2001 is forecast at 5.0 percent.

Due to high growth rates and enhanced access to international capital markets, the current account deficit is poised to increase somewhat to 3.1 percent of GDP in the year 2000. However, more than 70 percent of any such deficit will be financed through FDI, while the rest will be covered through medium- and long-term foreign debt. The public sector deficit is forecast to decrease to 1 percent of GDP in 2000, while the primary fiscal surplus will increase to 2.9 percent of GDP. Net foreign debt, in turn, will remain stable at 25.2 percent of GDP.

So far, it seems that Mexico is on track for reaching its year-end objectives. For instance, by April 2000 the yearly inflation rate stood at 9.73 percent, already below the target for the whole year, while yearly GDP growth in the first quarter of 2000 was 7.9 percent. As far as the trade balance is concerned, in the first quarter of 2000, the commercial deficit was US$1.3 billion. Furthermore, the price of the Mexican oil mix was 25.6 US dollars per barrel (dpb) while the average for 1999 was only 15.6 dpb, thus easing fiscal pressures.

Finally, it is worth mentioning that the Mexican government accords high priority to the strengthening and consolidation of the banking system, in order to put it on a more secure footing and enable it to operate in a more volatile global environment. The recent improvements in the Mexican financial system are a key component of the second-generation structural reform process. A strong and healthy banking system is needed to increase domestic savings to levels compatible with Mexico¡¯s investment needs and to channel those savings, under competitive conditions, to all sectors of the economy.

The government is committed to apply fully the Basle Core Principles for effective banking supervision. Loan classification and provisioning rules will be strengthened further and will be consistent with a minimum general provision on standard loans. The definition of regulatory capital and connected lending will be revised, and minimum guidelines on banks' internal controls will be issued. The National Banking and Securities Commission (CNBV) will update banks¡¯ accounting principles, will strengthen monitoring of connected lending, banks' risk management practices, compliance with anti-money-laundering laws, and will further improve disclosure of banks¡¯ information. The strengthening of the Mexican financial system is a key element in the efforts to reduce the economy¡¯s vulnerability to external shocks.

MEXICO: OVERALL ECONOMIC PERFORMANCE

a annual growth rate
b annual accumulated rate
c CETES (28 days), average
d at year end