OBG talks to Luis Videgaray Caso, Minister of Finance and Public Credit

Interview: Luis Videgaray Caso

Real GDP growth was 1.1.% in 2013. What have been the main factors behind this figure?

LUIS VIDEGARAY CASO: GDP growth in 2013 was 3.1% (or 1.1% in real terms), less than had been projected. This was a result of both external and internal factors. A global slowdown contributed to a reduction in Mexican exports, while internally the construction sector’s performance, especially housing, slowed during the first three quarters. However, we are already seeing signs of recovery, and the official forecast for GDP growth in 2014 is 3.9%. In 2013, Congress approved constitutional reforms proposed by President Enrique Peña Nieto to education, telecoms and energy, in addition to legislation on education, legal modifications to the financial and banking sectors, and key fiscal reform. In 2014 the executive branch presented legislation regarding telecoms, antitrust and energy. The antitrust law was approved in early 2014 and the others are being discussed. The main objective of the reforms is to raise living standards by increasing economic growth and improving productivity. In order to attain higher and sustained economic growth, structural changes are needed to provide households and firms with incentives to invest and enhance productivity. We estimate that with these reforms economic growth will average 4.8% between 2014 and 2018, and improve to 5.4% by 2019.

In what way can the government encourage greater access to social security?

VIDEGARAY: According to the National Council for Evaluation of the Social Development Policy, 61% of Mexicans (72m people) lack access to social security, and 66% of adults over 65 have never contributed to it. Mexico is the only OECD member without unemployment insurance. Apart from protecting family income during unemployment, this enables workers to search properly for a new formal sector job. The government has proposed to guarantee a pension for all Mexicans over 65 who require support to cover their basic expenses after retirement. This is non-contributory and would be financed by general taxes. The initiative includes unemployment benefit for workers in the private formal sector. In July 2014, the government will introduce the social security incorporation regime (RISS), which grants discounts and subsidies for social security contributions. Benefits will extend to those who register for the fiscal incorporation regime. These measures could reach 2.2m workers via the unemployment programme, 600,000 under the RISS, and 6.6m through pensions, providing benefits every year between 2014 and the end of the administration in 2018.

What fiscal credentials will attract foreign investors?

VIDEGARAY: Foreign investors should be attracted by Mexico’s sound economic fundamentals and higher growth. This can be seen in the financial sector, with an average capitalisation of 16.1%; in external accounts, where the current account deficit stood at 1.8% of GDP in 2013; and international reserves, at an historic high of $180.9bn. The country’s strong public finances, with public debt resting at around 40.5% of GDP, is another attractive characteristic of the economy.

Structural reforms will increase Mexico’s potential growth and some, such as for energy and telecoms, could attract foreign investment, even in the short term. The objective is to increase growth by reducing the cost of doing business and therefore boosting investment. Significant results already include Moody’s decision to upgrade Mexican public debt to an A-rating.

Although the fiscal reform focuses on a progressive tax system, it was designed to maintain competitiveness in the economy. OECD data shows that the overall tax rate on corporate income will be 37%, including taxes on dividends and capital gains from stock, which is well below other high-growth emerging economies such as Chile (40%) and South Korea (51%), as well as the OECD average (42%). Given the importance of fiscal certainty to promoting investment, the government will not propose new taxes, increase tax rates or change tax exemptions and benefits until November 30, 2018.