Mexico Hits Pause on IMF Credit Line Reduction Amid Pandemic

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Mexico won approval from the International Monetary Fund to maintain its flexible credit line at $63.4 billion amid the global pandemic, bucking the reductions taken in recent years, according to three people familiar with the talks.

Approval from the IMF came at the mid-term review of the credit line Wednesday, according to the people, who asked not to be identified because the discussions are private. In the last renewal of the line a year ago, the IMF said that Mexican President Andres Manuel Lopez Obrador’s government intended to use the review to trim the line by 20% to $50.7 billion, conditional on a lowering of external risks.

The credit lines are intended to be phased out over time, and Mexico still plans to do so when risks subside, according to one of the people. The decision to maintain the current access comes despite Lopez Obrador having said in April that he doesn’t plan to tap the line because it would imply taking on more debt. The president has slashed spending, and the line -- which runs through next November -- costs Mexico $168 million a year to maintain, plus interest if it’s drawn upon.

The IMF press office and the press office of Mexico’s Finance Ministry declined to comment immediately.

Safety Net

The flexible credit line, known as an FCL, is a form of pre-approved lending and comes without conditions on how the money is spent. The IMF has used the FCL over the past decade to build a safety net under some of the biggest economies in Latin America, the region hit hardest by the pandemic this year.

The IMF makes FCLs available to nations with a track record of prudent economic policy, but which also are vulnerable to external shocks. Chile and Peru this year joined Mexico and Colombia in winning access.

Mexico was the first country in the world to get the credit line when it was created in 2009 during the global financial crisis and has been voluntarily reducing its access in the last several years. The line was cut from $88 billion in 2016 to $74 billion in 2018 after the negotiation of an updated free trade deal eased concern about the relationship with the U.S. It was cut again to $61 billion last year.

Once approved, the line’s value fluctuates slightly in dollar terms because it’s set in special drawing rights, the fund’s accounting unit.

For years, recipients didn’t draw on the FCLs, treating them like backup financing out of concern that using the funds would spook investors. But Colombia in the past two months announced plans to start drawing $5.3 billion from its line to fight the pandemic as the nation suffers the deepest slump in its history.

Lopez Obrador has refrained from significant stimulus spending in Mexico. The IMF last month suggested that the country boost fiscal support, particularly health and direct aid to families and firms. Mexico so far has raised that spending just 0.7% of gross domestic product, compared with a 3% average for emerging markets in the Group of 20. In the October advice, which came after an official visit to the country, the IMF said that the country would benefit from boosting near-term spending by 2.5%-3.5% of GDP.

Mid-term reviews of FCLs, like the one completed for Mexico this week, occur just prior to the one-year anniversary of approval for two-year credit lines. IMF staff prepares a report on a country’s policies, and the fund’s executive board meets to make sure that the nation continues to qualify for the line. As in Mexico’s case, FCLs often include a road map for possible changes in financing at the time of the mid-term review.

©2020 Bloomberg L.P.

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