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Luis Videgaray Caso

MEXICO - Finance

Shields Up

Secretary of Finance and Public Credit, Mexico

Bio

After obtaining a Bacehlor’s degree in Economics from the Instituto Tecnológico Autónomo de México (ITAM), Luis Videgaray Caso went on to pursue a Doctorate in the same subject at MIT. He has extensive experience in both the public and private sectors, including as Advisor to the Secretary of Finance and Public Credit from 1992 to 1992, and as Advisor to the Secretary of Energy in 1996. He was also Director of Public Finance at Protego from 1998 to 2005. He was Secretary of Finance for the State of Mexico from 2005-2009, before becoming a legislative deputy. He became Secretary of Finance and Public Credit in December 2012.

"Mexico’s macroeconomic stability will continue as a government priority."

What is your incoming strategy aimed at strengthening public finances?

Our priority is to maintain healthy public finances. Thus, at the beginning of his administration, President Enrique Peña Nieto instructed a balanced budget for 2013. It encompassed an unaltered tax structure and a reduction of government debt. While we have been able to maintain fiscal stability, public expenditure—excluding Pemex and CFE—has been less than 20% of GDP, while the average in Latin America is approximately 27% of GDP and 46% in OECD countries. This has impacted access to services such as education, health, infrastructure, and social security, among others. At the same time, Mexico still has a considerable margin to improve its tax revenue base; if we include tax revenues from oil, Mexico’s income is close to 16% of GDP, but just 10% if we exclude it. These figures are low when compared with other economies; for example, the average level of tax revenues in Latin America and in OECD countries are close to 19% and 25% of GDP, respectively. Hence, there is a need for Mexico to implement a comprehensive and sound fiscal reform. On the expenditure side, in addition to the austerity guidelines established at the beginning of the administration, the government will adopt broader efficiency, transparency, and accountability measures. We will also follow the guiding principle that any increase in expenditure will be consistent with fiscal balance and a corresponding increment in revenues.

How important a role will fiscal reform play in the government’s strategy, and where do you want to see the most immediate changes?

The fiscal reform will play a critical role in driving economic development, allowing us to increase those actions and programs that benefit the population in areas such as health, education, and social security, among others. At this moment, we are still analyzing the different alternatives. However, it is important to note that in order to maximize its effects, fiscal reform should involve all levels of government. We must ensure that both federal and local governments take part in this effort; especially considering that a significant margin to increase tax revenues lies at the subnational level. Therefore, effective coordination with local governments is vital for successful fiscal reform. Additionally, fiscal reform has to keep three other objectives in mind. First, it must simplify the current tax system because it has become very complicated as legal loopholes were closed in a piecemeal fashion. Second, we have to keep in mind that both the tax and spending structures change incentives for individuals to be in the formal sectors of the economy, so any reform has to reduce informality. Third, we need to make sure that it is a fair system as mandated by our constitution.

“Mexico’s macroeconomic stability will continue as a government priority.”

Mexico’s strength as a prime contender for regional economic prowess is to a large extent attributed to its overall fiscal stability. What role does the Secretariat play in supporting this?

Mexico’s macroeconomic stability will continue as a government priority. Our country has adopted important reforms to achieve this goal, such as providing statutory autonomy to the Central Bank; introducing a legal mandate for fiscal discipline; consolidating a free-floating exchange rate regime; introducing a defined-contribution pension system; and ensuring permanent efforts to maintain a sound regulatory framework for the financial system. In addition to all these policies, we have a two-year flexible credit line (FCL) for $73 billion with the IMF and international reserves at historical maximum levels of $165 billion. The capitalization levels of Mexican banks are higher than the regulatory minimums of 10.5% established in the Basel III agreements—Mexico is one of the few countries to have adopted Basel III requirements. Mexico has successfully tackled fiscal revenue risks related to oil prices through the derivative markets. Furthermore, Mexico has used catastrophe bonds and reinsurance schemes to transfer risks linked to natural disasters. These instruments have attracted international attention, positioning Mexico as a key player in natural disaster financial risk management

What levels of growth do you project for the Mexican economy in 2013, and how do you foresee inflation rates impacting the economy?

The Secretariat of Finance and Public Credit’s growth forecast for the national economy is 3.5% in 2013, well above the expected economic growth for most developed economies worldwide. Nevertheless, this is not enough. We need structural reforms in order to achieve higher economic growth to meet the challenges in education, health, and poverty alleviation in the coming years. Democratizing productivity is one of the main premises that will guide public policies conducted by the Secretariat in order to achieve the desired GDP growth. Democratizing productivity implies reforms to expand human capital through higher educational standards. It also means opening access to investments in the energy sector, higher investment in R&D, and further financing options for social entrepreneurship. We are working to implement significant reforms to transform Mexico. Macroeconomic stability has had a positive impact resulting in moderate levels of inflation and lower country risk levels that have given Mexico access to cheaper external credit. A direct consequence of macroeconomic stability and low inflation are the historic low interest rates: 4.12% for short-term rates (CETES 28 days at February 28, 2013) in the secondary market; inflation is under control at below 4%, and it is expected to drop to 3.66% in 2013; and the interest rate spread between domestic long-term bonds (10 years) and short-term bonds (one year) is 81 basis points (bps). At present, Mexico faces better financing conditions. On January 7, 2013, the federal government issued $1.5 billion in UMS Bonds due in 2044 at the lowest cost in history: the rate differential between the 30-year UMS Bond and the US Treasury Bond reached a historical minimum of 110 bps.

Do you expect an upgrade in Mexico’s sovereign rating in the medium term, and what sort of inward foreign investment flows do you expect looking ahead?

Responsible economic policies in Mexico have allowed us to maintain low debt levels and a sustainable fiscal balance. At the same time, our country has experienced a period of macroeconomic stability, with low inflation and interest rates, as well as a flexible exchange rate, which has worked as a buffer in periods of financial stress. The domestic sector in Mexico has expanded, which has been supported by an increase in employment and credit. These factors, along with the recent approvals of the labor and education reforms, as well as the reforms that will take place in 2014, will improve our sovereign rating. Looking ahead, we expect that foreign investment flows will continue increasing as a result of stable macroeconomic fundamentals and the implementation of structural reforms that will enhance investor confidence in Mexico.

To what extent do you think that Mexico will remain vulnerable to volatile business cycles in connected developed economies such as the US?

Mexico’s economic growth is highly integrated with the US business cycle, particularly in the manufacturing sector. A downturn in the US economy is likely to affect the country’s economic performance. However, in recent years domestic demand has grown stronger, supported by increasing competitiveness. At the same time, Mexico has diversified its export portfolio to reduce such vulnerability. Also, historical high international reserves coupled with the recent renewal of the IMF’s Flexible Credit Line and the flexible exchange rate mechanism are important tools that may mitigate any external economic and financial shocks.

What is your overall outlook for 2013?

We expect the economy to grow 3.5% in 2013, with an inflation rate close to the Central Bank’s target of 3% and a current account balance of -1.2% of GDP. Domestic demand is expected to continue growing supported by job creation and credit expansion. In the medium term, the structural reform agenda will consolidate stronger economic growth. However, risks persist in the global economy, where EU countries have yet to implement decisive actions to solve their financial and debt problems, and where the US and Japan need to establish credible medium-term fiscal adjustments.

© The Business Year – March 2013

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