November 12, 2014 / 6:00 PM / 5 years ago

IMF sees risks in Mexico reform implementation

MEXICO CITY, Nov 12 (Reuters) - Rising U.S. interest rates and hurdles to smooth implementation of economic reforms pose risks to Mexican growth, the International Monetary Fund said on Wednesday.

Mexico, Latin America’s second-largest economy, could see investor outflows and asset price swings if the United States raises interest rates earlier or more sharply than expected, the IMF said in a report after its annual health check of Mexico’s economy.

The U.S. Federal Reserve is expected to begin raising interest rates by the middle of next year, tamping investor appetite for risky, high-yielding emerging market assets.

“A surge in financial market volatility, triggered for example by a disorderly normalization of U.S. monetary policy, could lead to a reversal of capital flows and an increase in risk premia,” the IMF said in its so-called Article IV consultation with Mexican authorities.

Mexico’s peso sank to a more than two-year low last month on signs of slowing global economic growth and a sharp drop in oil prices.

Mexican President Enrique Pena Nieto pushed a raft of reforms through Congress last year, including a landmark energy overhaul to lure billions of dollars in private investment and a bid to boost competition in Mexico’s telecommunications sector.

“The legislative hurdles have been tackled, but implementation risks remain,” the IMF said in a paper that accompanied the annual consultation report. “Delays or problems with implementation that dampen investor confidence will have consequences ... These could have knock-on negative impacts on exports and fiscal revenues.”

The IMF expects Mexico’s economy to grow by 2.4 percent this year as expansion picks up after a harsh winter in the United States crimped American demand for Mexican factory exports and the construction sector sagged in early 2014.

The fund said improving U.S. growth will continue to bolster Mexico’s economy next year, which should expand by 3.5 percent, as energy and telecommunications reforms take effect.

But the IMF raised concerns about the impact of an unexpected drop in oil production on Mexico’s fiscal health. Mexico’s government has long relied on oil revenues to fund about a third of the federal budget.

“If production levels continue to surprise on the downside, it will be necessary to adjust expenditure or raise non-oil revenues to prevent a trend increase in public debt,” the fund said. (Reporting by Alexandra Alper; Editing by Simon Gardner and Cynthia Osterman)

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