IMF says Mexico credit line may be cut from current $74 bln

The International Monetary Fund’s (IMF) board plans to vote on Mexico’s request to renew its flexible credit line, possibly for less than the current $74 billion, before it expires next week.

Mexico is interested in reducing the size now that there’s greater certainty around its trade relationship with the U.S., Alejandro Werner, the IMF’s Western Hemisphere director, said in an interview Wednesday at Bloomberg’s headquarters in New York. Werner said he expects the board’s decision before the current agreement expires Novmber 28.

Mexico first received the credit line, which serves as a precautionary instrument, for $47 billion in 2009 during the global financial crisis.

It increased to $88 billion in 2016 after a plunge in oil prices and amid concern about then-candidate Donald Trump‘s pledge to take the U.S. out of the North American Free Trade Agreement. It was reduced to $74 billion at Mexico’s request after a successor trade deal was negotiated.

“Mexico has basically expressed their intent to reduce the size of the FCL,” Werner said. “On the other side, we know that there are still tons of risks in the world economy, and so Mexican authorities have continually expressed their desire to keep this instrument. It’s become a part of their shield to external shocks.”

The IMF and the the administration of President Andres Manuel Lopez Obrador in September said that Mexico was interested in renewing the credit line. The fund at the time said that there had been no discussion about the size. Mexico pays a commitment fee for the access to the credit line, and the fee increases based on the amount available to borrow.

Awaiting Argentina Plan

Asked about Argentina, Werner said he’s open to President-elect Alberto Fernandez’s idea of a social pact, which would involve an agreement between businesses, labor unions and the government on salaries and prices in an effort to control inflation. He cited as an example the social pact that helped stabilize the Mexican economy in the 1990s, when he was an economist at the nation’s Finance Ministry and central bank.

A social pact could “lend legitimacy to whatever policy package is put into place by having everybody at the table,” Werner said, but added that it should be used alongside other mechanisms.

The IMF last year gave a record $56 billion loan to Argentina under Fernandez’s predecessor, Mauricio Macri, who lost last month’s election in part due to public outcry over the spending cuts put in place to meet targets in the IMF deal.

Werner wouldn’t comment on potential changes in the accord, such as fiscal targets, disbursements or a possible debt haircut, before seeing details of Fernandez’s economic plans. IMF Managing Director Kristalina Georgieva stressed to Fernandez in a call on Tuesday the fund’s “readiness to engage.”

“We don’t know what Argentina wants,” Werner said. “We are still waiting for more technical engagements to give us some signal of what the Argentinian government wants to undertake.”

Source: Bloomberg