Mexico - Export Sector Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.14222 PROJECT COMPLETION REPORT MEXICO EXPORT SECTOR LOAN (LOAN 3309-ME) APRIL 3, 1995 Public Sector Modernization and Private Sector Development Division Country Department II Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents Currency Unit (until 12/31/92) = Mexican Pesos (Mex$) = 100 cents Currency Unit (beginning 1/1/93) = Mexican New Pesos (MexN$) = 1,000 old Pesos Average Exchange Rates 1984 US$1 = 167.8 1985 US$1 = 257.0 1986 US$1 = 611.8 1987 US$1 = 1,378.2 1988 US$1 = 2,273.1 1989 US$1 = 2,261.7 1990 US$1 = 2,821.0 1991 US$1 = 3,020.5 1992 US$1 = 3,094.7 1993 US$1 = MexN$ 3.1 1994 (October) US$1 = MexN$ 3.4 Abbreviations and Acronyms Used AGSAL Agriculture Sector Adjustment Loan BANCOMEXT Banco Nacional de Comercio Exterior COI Comite de Operaciones Internacionales (International Operations Committee) DDSR Debt and Debt Service Reduction EDP Export Development Project FIFE Programa de Financiamiento de Inversiones Fifas para Exportaciones (Program of Financing Fixed Investment for Exports) ICB International Competitive Bidding IDB Inter-American Development Bank ISPL Industrial Sector Policy Loan (3087-ME) FSAL Financial Sector Adjustment Loan (3385-ME) MOP Memorandum of the President NAFTA North American Free Trade Agreement OECD Organization for Economic Cooperation and Development PCR Project Completion Report PECE Pacto de Estabilisaci6n y Crecimiento Econ6mico (Economic Stabilization and Growth Pact) PERL Public Enterprise Reform Loan (3086-ME) PROFIDE Programa de Financiamiento de Exportaciones en Divisas (Foreign Exchange Export Financing Program) SECOFI Secretarta de Comercio y Fomento Industrial (Ministry of Commerce and Industrial Development) SHCP Secretarta de Hacienda y Credito Pablico (Ministry of Finance and Public Credit) TPL Trade Policy Loan FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation April 3, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Mexico - Export Sector Loan (ESL - Loan 3309-ME) Attached is the Project Completion Report on Mexico - Export Sector Loan (ESL - Loan 3309-ME). Parts I and III were prepared by the Latin America and the Caribbean Regional Office with Part II contributed by the Borrower. Two hundred and seventy-five million dollars of the $300 million loan was targeted to the Banco Nacional de Comercio Exterior (BANCOMEXT), for export financing via "insurance" or rediscounting procedures with commercial banks. Twenty-five million dollars was for balance of payments support, with co-financing by IDB in the amount of $250 million. The ESL achieved its main objective of channeling credit to export expansion in ways consistent with the reforms of Mexico's macroeconomy and financial sector. A "hands-on" but short-lived involvement by Bank personnel in the management of BANCOMEXT helped that institution to adopt a commercial approach to financing export promotion. The ESL is part of a series of Bank operations in support of Mexico's economic reforms. These included, inter alia, introduction of a new, more market-oriented macro planning approach, a debt and debt service reduction (DDSR) operation and, most relevant to this operation, liberalization of the capital account, the financial sector and trade in line with the North America Free Trade Agreement (NAFTA). The Region broke new ground with this ESL in several areas, including export promotion. Based on the PCR, the project outcome is rated as satisfactory and sustainability as likely. Since the focus was not on capacity building, the institutional development impact is rated as modest. The PCR, including an insightful and useful Part II, is of very high quality. An audit is planned. Attachment This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without Wold Bank authorization.  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT MEXICO EXPORT SECTOR LOAN (Loan 3309-ME) TABLE OF CONTENTS Ems PREFACE ....................................................... i EVALUATION SUMMARY .......................................... mi PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .............. I 1. Project Identity .............................................. 1 2. Background ................................................ 1 3. Project Objectives ....... ... ..................................... 3 4. Project Design and Organization ... .................................. 3 5. Project Implementation ... ........................................ 5 Current performance of BANCOMEXT and medium term perspectives ............ 7 6. Project R esults . ............ ........ ... .............. .. ...... 11 7. Project Sustainability .......................................... 12 8. Bank Perform ance ............................................ 12 9. Borrower Performance ......................................... 12 10. Project Relationship ......... ................................ 13 11. Consulting Services ........................................... 13 12. Project Documentation and Data ..... ............................... 13 PART II: PROJECT REVIEW FROM THE GOVERNMENT'S PERSPECTIVE ...... 14 PART III: STATISTICAL INFORMATION .............................. 17 1. Related Bank Group Operations ..................................... 17 2. Project Timetable .. ............................................ 18 3. Loan Disbursements .............................................. 19 4. Project Implementation .. ........................................ 19 5. Project Financing by Source .. ..................................... 20 6. Status of Covenants ........................................... 21 7. Use of Bank Resources ......................................... 22 Annexl ......................................................... 25 Annex H . ...................................................... 35 AnnexII.. .. .................................................... 39 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  1 PROJECT COMPLETION REPORT MEXICO EXPORT SECTOR LOAN (Loan 3309-ME) PREFACE This is the Project Completion Report (PCR) for the Mexico Export Sector Loan (3309-ME) in the amount of US$300 million which was approved by the Bank on March 26, 1991. The Loan was closed on December 31, 1993 as scheduled. The loan was fully disbursed on March 1, 1993, more than nine months ahead of schedule. The PCR was prepared by the Public Sector Modernization and Private Sector Development Division of the Latin America & the Caribbean Country Department II (Preface, Evaluation Summary, Parts I and Part III). The Government prepared Part 11 of the Report, "Project Review from the Government's Perspective." During the Completion Mission conducted in October 1993, extensive comments were received from Government representatives and have been incorporated into Part I of this report. The cofinancier, the Inter-American Development Bank (IDB), provided comments which have been incorporated into the report. Preparation of the PCR was initiated during the project completion mission to Mexico in October 1993, and is based, inter alia, on the President's Report; the Loan, Project and Guarantee Agreements; amendment letters; supervision reports; the Bank project files; and information prepared by BANCOMEXT.  iii PROJECT COMPLETION REPORT MEXICO EXPORT SECTOR LOAN (Loan 3309-ME) EVALUATION SUMMARY Project Objectives i. The Export Sector Loan (Loan 3309-ME, for $300 million, approved by the Board on March 26, 1991) was a continuation of the Bank's efforts to assist the Mexican Government in achieving its objectives of promoting efficient private sector development and increasing the effectiveness of public sector institutions so as to enable the resumption of economic growth. The loan supported: a) the implementation of trade and customs reforms aimed at encouraging efficiency and expanding the tradeables sector; and b) the transition of the Banco Nacional de Comercio Exterior (BANCOMEXT), a public sector development bank devoted to export financing, in conformity with the general objectives of financial sector reform, to permit it to perform a more efficient role in trade financing in a more competitive financial system. Policy changes would be supported through a fast- disbursing policy based component ($25 million) and trade-related financing would be provided by a component ($275 million) allocated to BANCOMEXT. The latter was also expected to be fast disbursing given its size in relation to the volume of BANCOMEXT's short term trade financing. The loan contained three portions, each of $100 million (paras. 3.1 and 4.1). ii. The medium term strategy developed by the Government and BANCOMEXT for customs and trade reform was set out in a policy statement (see Annex I). It included the following basic principles: a) to operate predominantly as a second tier lending institution; b) to offer trade financing at market-based interest rates; c) to focus on providing guarantees and increasingly to rely on other financial intermediaries to carry out both lending and export promotional activities; d) to receive no fiscal transfers; e) to provide export promotional support increasingly on a cost recovery basis; f) to decentralize activities; and g) to operate profitably including maintaining equity in real terms (para. 3.2). Implementation Experience iii. Implementation of the Loan proceeded in line with appraisal estimates, with the Government pursuing substantial trade reform and the reorientation of BANCOMEXT operations. Customs reform was also implemented, but with a lesser degree of success. Loan disbursements proceeded ahead of schedule. The first portion of the Loan, comprising the entire policy component of $25 million and $75 million of the credit component, was released following effectiveness (May 6, 1991). The second and third portions, comprising the balance of the credit component, were released on May 1, 1992, and November 12, 1992, respectively. These releases followed review by the Bank of the progress of BANCOMEXT in implementing its medium term policy statement. Disbursement of the funds was efficiently undertaken by BANCOMEXT and the proceeds were fully disbursed earlier than originally estimated (para. 5.1). iv Results iv. The Mexican Government has continued to implement the trade and financial reforms supported by the loan. Critical to its macro strategy, the Government has negotiated the North American Free Trade Agreement which, in addition to further opening of the tradeable goods sector, provides for liberalization of the financial sector. Linked to the policy component of the loan, the authorities have made the expected progress in the reform and modernization of the customs administration, although at a somewhat slower pace than anticipated. v. BANCOMEXT has made considerable progress in accommodating itself to the open financial system resulting from implementation of the Government's financial sector reforms. It has increased the share of second tier operations in its portfolio. It has also increased resource mobilization through borrowing in international capital markets at attractive interest rates and its domestic lending has been accomplished at market-determined interest rates. As a consequence, it has improved its profitability and strengthened its balance sheet. Improvements in internal procedures and administration, as well as in its regional offices, have made possible a substantial diversification of loan operations and increased attention to the needs of smaller exporters. The institution has, moreover, adopted a flexible policy for cost recovery for its export promotion efforts and has taken important steps to rationalize these activities and to focus on priority issues. On the other hand, progress in expanding its credit insurance-guarantee program has been slower than anticipated (para. 6.2 - 6.3). vi. As expected, in 1992 there was a decline in BANCOMEXT's financing of trade-related transactions with the elimination of the COI system involving subsidies. However, in 1993 the institution experienced an expansion in demand for its funds although its relative share in export financing remains well below the levels achieved in earlier years. The recent increase in BANCOMEXT's export financing activities reflects in part the impact of restrictions imposed by the Bank of Mexico in 1992 on the volume of external liabilities the private banks could incur, thus limiting their capacity to mobilize external resources used in trade financing. This also reflects the current situation of the private banking system whose transition from nationalized status has been difficult and time consuming and whose first efforts in the private mode, concentrating on "retail" banking, have proven unprofitable as well as increasing the weight of non-performing loans in its portfolios. At the same time, however, the achievement by BANCOMEXT of a market-orientation, the basic objective of this operation, has enabled it to meet these emerging needs in an efficient manner. While it is likely that the special factors currently increasing demand for BANCOMEXT's funds will over time diminish in importance, the institution has developed lending programs, particularly for small and medium exporters, which will continue to be attractive to first-tier banks in the medium term (para. 6.2). Sustainability vii. The principal risks derive from the ability of the Mexican Government to consolidate its gains from the reform process to restore a growth path for the Mexican economy. The Government remains firmly committed to maintaining and expanding the policy reforms initiated under the project, including the area of customs reform. On the external side, the implementation of NAFTA also serves as an anchor for an increasingly open economy in the future. In addition to the coverage of tradeable goods, the treaty deals with liberalization of the markets for services, including finance. U.S. and Canadian banks will be permitted to establish fully-owned subsidiaries under certain quantitative limits over a period of seven years, after which those limits would be removed (para. 7.2). viii. With a strong balance sheet position, with experienced and competent staff and adequate internal organization, and with broad acceptance as a responsible borrower in international capital V markets, BANCOMEXT appears to be in a favorable position to sustain its successful transition for the medium term and to respond to changes in the availability of export financing (para. 7.1). Findings and Lessons Learned ix. The experience under the Loan yields several important lessons in the areas of sequencing of financial sector liberalization, inter-institutional coordination, and the design of implementation arrangements, as follows: * When implemented by strong institutions and supported by a close working relationship between the Bank and Government, hybrid operations with a fast disbursing policy component and line of credit may provide support for policy reforms while channeling resources to productive activities. * With carefully designed incentives for participating institutions, directed credit to the export sector may have a positive economic impact during the transition from close state control of financial markets to a liberalized policy environment. * Under credit line operations, credit institutions with a strong history of good performance under Bank operations should be governed by clearly defined operating procedures and need not be subject to excessive Bank supervision focussed on institution-building and direct oversight. * Close monitoring of phased liberalization should be maintained to ensure that regulatory arbitrage does not result from partial reforms, and that the exit strategy for the Government's transitional role during liberalization is well defined. * Through effective communication and the pooling of resources, the Bank and the IDB may provide complementary and reinforcing assistance in the design and implementation of complex sectoral projects. * Consistent and strong Government support at the ministerial and working levels is central to the successful implementation and long-term sustainability of policy and institutional reforms.  PROJECT COMPLETION REPORT MEXICO EXPORT SECTOR LOAN (Loan 3309-ME) PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. Project Identity Name: Export Sector Loan Loan No.: 3309-ME RVP Unit: LAC Region Country: Mexico Sector: Export Type Loan: Sector Adjustment - Credit Line 2. Background 2.1 When the Salinas Government assumed office in December 1988, Mexico had experienced a decade of macro-economic turmoil. The unprecedented expansion at the end of the 1970s, based on newly developed hydrocarbon deposits benefitting from the oil price boom and on massive external borrowing, was followed in 1982 by one of the most severe economic and financial crises in the country's history as falling oil prices, rising international interest rates and capital flight led to explosive inflationary and balance of payments difficulties. External creditors refused to roll over Mexico's short term debt and the Government was forced to suspend interest payments on its external obligations. 2.2 The period 1982 through 1988 was characterized by spurts of major stabilization efforts. The Mexican authorities embarked early on strong fiscal and monetary adjustments but the adverse external environment, the further weakening of oil prices in 1986, presented new difficulties. The accelerated inflation resulting from the consequent deterioration in the real terms of trade was followed by a renewed cycle of wage and price adjustments. At the end of 1987, the Government responded with an "Economic Solidarity Pact" (the Pacto), an agreement between business, labor and the Government calling for structural reform, further tightening of fiscal and monetary policy, a freeze of minimum wages and of basic public and private sector prices and a freeze of the nominal exchange rate against the US dollar. The Pacto was extended through the end of 1988. 2.3 During this period, however, the authorities had embarked on a major reform effort for trade liberalization. Beginning in 1985, a phased program was introduced to reduce the percentage of domestic production of tradeables subject to import quotas. From 92.2% in June 1985, coverage declined to 19.9% in June 1990. Similarly, maximum tariff rates of 100% in June 1985 were reduced to 20% in June 1990, while the average rate was reduced from 23.5% to 12.5% over the same period. Bank assistance to the trade liberalization program was provided through two Trade Policy Loans (TPL), TPL I (Loan 2745-ME) in July 1986 and TPL II (Loan 2882-ME) in November 1987. 2.4 Early in its term of office, the Salinas Government announced the extension of the Pacto (renamed PECE) and an ambitious macro-economic reform effort to consolidate and broaden the achievements of the stabilization and the trade liberalization programs, with the intent to restore the 2 economy to a growth path. The reforms covered a broad range of economic activities including, inter alia, modernization of the industrial sector through the removal of distortions in goods, services and factor markets to open the economy to both domestic and external competition, public sector enterprise reform to achieve more efficient operations which could involve a substantial component of privatization, and financial sector reform which would eventually embrace privatization of the nationalized banking system. A further element in improving the environment for private capital inflows would be an external debt restructuring exercise to reduce the burden of debt servicing. 2.5 The Mexican Government sought the active participation of the Bank in this process, not only support through financial assistance but also technical assistance in several areas where the Bank had developed special expertise. Financial assistance was provided through a package of three sectoral adjustment loans, each for $500 million, presented to the Board in June 1989: Industrial Sector Policy (ISPL), Financial Sector Adjustment (FSAL) and Public Enterprise Restructuring (PERL) Loans. In addition, recognizing the importance of debt restructuring in determining the ability of the Mexican authorities to mobilize the necessary external finance for economic growth, the Board approved an Interest Support Loan of $1.26 billion in September 1989, linked to debt and debt service reduction (DDSR) agreements reached under the "Brady Plan" arrangements' 2.6 Following the approval of the sectoral reform package, Bank staff began working on follow up operations which would maintain the momentum of the on-going reforms as well as to permit further resource transfers to Mexico to enhance resource mobilization. It was recognized that trade liberalization was considerably advanced and that the main concern had to be the consolidation of the measures taken. Implementation of policy reforms would depend greatly on putting in place an appropriate institutional and administrative infrastructure. There were many indications, both from government officials and private sector groups, that the customs system was one area where major improvements were required to achieve the desired trade opening. The measures which were considered necessary included actions such as modernization and computerization of customs documents, simplification of payments procedures, and decentralization of decision-making and introduction of more efficient and effective procedures. 2.7 Concurrently, the Bank had been discussing with the Mexican authorities an earlier request for a third credit line to the Banco Nacional de Comercio Exterior (BANCOMEXT), a public sector development bank devoted to financing Mexico's foreign trade and to promoting exports. A first Export Development Project (EDP I) for $350 million had been approved to BANCOMEXT in June 1983 with two principal components: (i) a revolving fund (PROFIDE, $275 million) for working capital sub-loans to finance imported inputs for exports; and (ii) a program (FIFE, $71 million) for medium and long-term subloans for financing fixed investment by enterprises to maintain or expand export capacity. EDP II for $250 million had been approved in October 1986 to support the objectives of TPL I, $175 million for PROFIDE and $74.5 million for FIFE. In disbursing these funds, BANCOMEXT operated as both a first-tier and second-tier institution, rediscounting sub-loans from other domestic financial institutions. The two loans had been fully disbursed and I'The set of Bank loans and the corresponding set asides to finance the DDSR plan were: the Steel Sector Adjustment Loan (2916-ME), $50 million of set asides; the Agricultural Sector Loan (2918- ME), $175 million of set asides; the Fertilizer Sector Loan (2919-ME), $150 million of set asides; the Financial Sector Adjustment Loan (3085-ME), $125 million of set asides; the Public Enterprise Reform Loan (3086-ME), $125 million of set asides; and the Industrial Sector Policy Loan (3087- ME), $125 million of set asides. In addition, the Bank financed the following structural adjustment loans: the Trade Policy I and II loans (2745-ME and 2882-ME); the Road Transport and Telecommunications Loan (3159-ME); and the Second Agricultural Sector Loan (3357-ME). 3 BANCOMEXT had been seeking external resources to expand its financial base. However, Mexico continued to confront difficulties in borrowing in international capital markets. 2.8 Emerging from the implementation of the FSAL, the Mexican Government began the articulation of policies for the modernization of the public development banks, redefining their roles, providing for consolidation where there was duplication of functions, and eliminating the possibilities of fiscal subsidies. In the future, development banks would concentrate on second-tier operations and would adjust their lending rates in line with the Government's cost of funds. These reforms were linked to restructuring of the commercial banking system which would be privatized in the near future. For BANCOMEXT to operate efficiently in the new environment, a transitional period would be required in which Bank support could play a critical role. 3. Proiect Objectives 3.1 The project was a continuation of the Bank's efforts to assist the Government in achieving its objectives of promoting efficient private sector development and increasing the effectiveness of public sector institutions so as to enable the resumption of economic growth. The loan would support: (i) the implementation of trade and customs reforms aimed at encouraging efficiency and expanding the tradeables sector; and (ii) the transition of BANCOMEXT to permit it to perform a more efficient role in trade financing in a more competitive financial system. Policy changes would be supported through a fast-disbursing component of $25 million and trade related financing would be provided by a component of $275 million allocated to BANCOMEXT. 3.2 The major elements of the transition, consistent with the Government's overall policy for the financial sector, and the timing of implementation were spelled out by BANCOMEXT in a policy statement which was appended to the President's Report as Annex IIB.1 (reproduced as Annex I in this PCR). The medium term strategy would be guided by the following basic principles: a) operate predominantly as a second tier financial institution; b) offer trade-financing at market-based interest rates; c) focus on providing guarantees and increasingly rely on other financial intermediaries to carry out both lending and export promotional activities; d) receive no fiscal transfers; e) provide export promotional support increasingly on a cost recovery basis; f) decentralize activities; and g) operate profitably including maintaining equity in real terms. 4. Project Design and Organization 4.1 The loan contained three portions, each of $100 million. The first portion, including all of the policy component and $75 million from the credit line, would become available for disbursement at the time of loan effectiveness. The second portion was expected to be made available after January 31, 1992, and the third portion was expected to be made available six months later, consequent on satisfactory reviews of actions taken by BANCOMEXT to implement its policy statement. 4.2 Developed as a consequence of extensive discussions between the Bank, Government and BANCOMEXT on trade and financial sector issues (paras. 2.6-2.8), the conceptual foundations for the project were clear and appropriate. The project objectives as reflected in the design were shared by all parties relevant to the project. Designed as part of the overall Government economic restructuring strategy then under implementation, the project was timely. Disbursement of the credit component ($275 million) was expected to be relatively fast, given the large annual volume of BANCOMEXT's short term pre-shipment export financing activities (of the order of $6 billion) in comparison with the size of that part of the loan. The limited size of the policy component ($25 million) reflected the uncertainty over Mexico's payments gap in early 1991 due to the impact of the Persian Gulf crisis on international oil prices and the subsequent instability in those prices. Early discussions of the proposed project had contained a notional distribution of funds providing one-third 4 of total loan size for this component. Inclusion of the component was essential to ensure cofinancing by IDB in the amount of $250 million as a fast disbursing sector adjustment type operation. 4.3 Project preparation and appraisal missions which included IDB staff discussed extensively the essential elements of the customs reform and reached agreement on broad measures for simplification and computerization of customs procedures. Preliminary steps were taken to decentralize custom clearances and payments and it was expected that, during the period of the loan, the new system would be implemented at all customs sites. 4.4 While the Bank has been moving away from extending directed credit lines in view of the distortions which can arise from such segmentation of financial markets, it has recognized the potential usefulness of these measures as a means to assist in the transition of development finance institutions protected from market forces to financial agencies operating efficiently in an open-market environment. Application of this criteria to provide a credit line to BANCOMEXT was considered fully appropriate. 4.5 A unique feature of the loan was the minimal intervention of the Bank in subloan processing. In contrast to most other credit lines of the Bank, the focus of this operation was not on institution building but rather to provide resources for the transition. In implementing EDP I and II, BANCOMEXT had fully demonstrated its competence in loan appraisal and processing. As a consequence, the Bank did not define the range of eligible sublenders nor concern itself with ex ante review and approval of subloans under $10 million. No ex ante allocation of funds was made among the designated eligible lending (pre-shipment) programs of BANCOMEXT. Procurement documentation for goods and works valued at more than $5 million, which would be subject to international competitive bidding (ICB), would, however, be subject to prior review by the Bank. 4.6 The policy statement and accompanying matrix resulted from detailed discussions between BANCOMEXT, Bank staff, and representatives of SHCP (Ministry of Finance) and SECOFI (Ministry of Commerce) on customs and tariff issues. The initial presentations of BANCOMEXT, prior to the articulation of the financial sector reform policies, had focussed on building up its capacity to meet the need for long-term fixed capital requirements for export expansion. However, given the experience that staff had accumulated in short-term export financing, in working with commercial banks to design packages to assist export enterprises, and in dealing in international capital markets, it quickly recognized the opportunities for elaborating economically viable financial programs to assist exporters within the framework of the new government's approach to public development banks. 4.7 It was recognized that a program to increase loan guarantees, shifting the emphasis in BANCOMEXT's operations from rediscounting, would require time for implementation. Similarly, it would be necessary to adopt a phased plan for the institution of cost-recovery techniques for export promotion activities. In these circumstances, it was agreed that the Bank would review progress in these two areas in connection with the release of the second and third Loan portions of US$100 million each. Similar arrangements were made for the releases of the portions of the IDB loan. 4.8 The issue of providing trade financing at market-based interest rates was more complex. At the time of loan appraisal, BANCOMEXT determined interest rates to final borrowers for all of its credit lines. Some 60% of BANCOMEXT's export financing operations were provided through the Comitg de Operaciones Internacionales (COI) system; BANCOMEXT paid a commission to commercial banks which used their dollar resources to finance short term export related operations at BANCOMEXT's terms and conditions. Final borrowers were charged 10.5% for short-term export transactions, 13.5% for longer term financing of over one year. Rediscount margins for commercial banks ranged from 1.5% to 3% to cover the costs of intermediation. At the same time, dollar- 5 denominated Government short term paper was earning some 14 to 15% and the commercial banks could earn 15 to 17% on their dollar funds through lending outside the COI scheme. Their participation in COI in essence reflected the fact that they were government-owned and their lending policies, established by their boards, reflected official priorities. 4.9 The Bank stressed that the rates charged for these loans should reflect domestic market conditions. The Mexican authorities insisted that the rates for export lending were competitive with what other exporting countries were charging and were consistent with the OECD consensus agreement as well as with their bilateral agreement with the United States. The differential between dollar lending rates in the Mexican market and in international markets reflected a "country-risk" premium which would disappear, or be substantially reduced, as Mexico achieved stability and a liberalized financial system. 4.10 In the course of 1990, as the Government implemented its policy for financial liberalization, which was to include the reprivatization of the commercial banks, BANCOMEXT announced the gradual phasing out of the COI scheme which was to be completed by the end of 1991, clearing the way for completing the negotiations for the Bank loan. The achievement of this goal would be reviewed by the Bank in early 1992 in connection with the release of the second portion. BANCOMEXT's interest rate policy after the elimination of COI would reflect an average market rate of interest for export credits for exporting firms operating in Mexico. In order to ensure that the rates charged would reflect market conditions, the Loan Agreement specified the formula for determining the rate, based on (a) international rates of interest obtained by subsidiaries of multinational firms and (b) rates obtained by prime Mexican firms from Mexican commercial banks. It was agreed that the Bank would review this rate at the time of release of the third portion. However, during 1992, BANCOMEXT eliminated the COI system entirely, and allowed free determination of intermediation margins for first tier institutions (para. 5.8). 5. Project Implementation 5.1 The first portion of the Loan, comprising the entire policy component of $25 million and $75 million of the credit component, was released following effectiveness (August 2, 1991). The second and third portions, comprising the balance of the credit component, were released on May 1, 1992, and November 12, 1992, respectively. These releases followed review by the Bank of the progress of BANCOMEXT in implementing its medium term policy statement. Disbursement of the funds was efficiently undertaken by BANCOMEXT and the proceeds were fully disbursed earlier than originally estimated. 5.2 During the period of project implementation, the Mexican Government continued to implement the trade and financial reforms supported by the Loan. Reductions in import restrictions and tariff levels introduced since loan approval have been concentrated among agricultural products, actions associated with the Agricultural Sector Adjustment Loan II (AGSAL II). As a consequence, the proportion of tradeable goods subject to import quotas was further reduced to 17% by June 1992. On the macro level, the Government pursued the North American Free Trade Agreement (NAFTA). This agreement represents a critical element in the attempts by the Salinas Government to open up and modernize the Mexican economy. In addition to the coverage of tradeable goods, the treaty deals with liberalization of the markets for services, including finance. Mexico has also undertaken free trade discussions with a number of other Latin American countries, signing an agreement with Chile and Costa Rica. It has recently signed a trilateral arrangement with Colombia and Venezuela. The Government is currently pursuing tariff reduction with the European Union. 5.3 Linked to the policy component of the loan, considerable progress has been made in reform of the customs administration, although at a somewhat slower pace than anticipated. Computerization 6 has been extended beyond the five major import points, a total of nine as of October 31, 1993, covering some 65% of imports. The goal of extending the system to all 47 entry points by the end of 1993 was not met due to the unexpected complexity of the problems which have been encountered in training personnel and adapting the system to the needs and characteristics of each locality. There has been a reorganization of the entire customs service, including the customs police, with a clearer definition of the authority and jurisdiction of the latter. Further reductions in staff, following upon the 60% reductions introduced in 1989 and 1990, have been achieved. A system of frequent rotation has been adopted for customs personnel to reduce the possibility of establishing personal relationships in particular areas. Beginning in January 1994, a system of second reviews, managed by private firms, has been introduced for the customs investigations which are undertaken on a random selection basis at each entry point. The second reviews will also be undertaken on a random selection basis. Finally, within the NAFTA agreement, there are a number of special programs providing for cooperation and harmonization of systems among customs officials of the three governments. 5.4 A key element in improving customs administration has been the reform of the system of customs brokers or agents. In addition to the steps taken in 1988 and 1989, noted in the MOP, to ensure market-determined fees and to increase transparency of transactions, this function is now being professionalized and passing a written examination is required before receiving a license. At the present time, about 700 brokers have qualified to receive licenses, as compared to about 500 prior to the reform. Discussions with the private sector during the preparation of this report indicate that the customs reforms sponsored under this loan have been among the most important policy changes to have been implemented as part of the structural reform program. Enterprise managers reported significant reductions in waiting time to clear customs and lower levels of corruption and theft. 5.5 BANCOMEXT's transition to the new financial environment has generally followed the lines laid out in its policy statement. During 1991, it began to strengthen its program of and administrative capability for export insurance and guarantees to provide international standard products and prices. The administrative arrangements have been based on the export-import banks of the Netherlands and the United States. In the course of 1992, BANCOMEXT prepared a new schedule of premiums which, after some delay, had been expected to enter into force on January 1, 1993. The level of guarantees provided under the program, however, has fallen below that expected in BANCOMEXT's presentation for the loan, $1.3 billion in 1991 compared to $1.4 anticipated, dropping to $1.1 billion in 1992 as compared to the projection of $1.8 billion. Although there has been some recovery in 1993, the preliminary estimate of $1.2 billion in guarantees extended during the year falls well short of the level of $2.8 billion projected earlier. The wide divergence between projected and actual figures resulted from lower than expected demand for these services (see para. 6.3). 5.6 Considerable progress has been made in developing cost recovery programs for promotional activities. For international events (e.g. trade fairs and trade missions) where beneficiaries can be readily identified, a cost sharing scheme has been developed permitting at the present time the recovery of about 50% of expenses, as compared to 10% in 1991. Similar measures are being introduced for cost recovery in other activities (e.g. trade information preparation and training) where the beneficiaries are easily identifiable. In establishing programs and fee schedules for reimbursable activities, the basic objective is to rationalize demand for these services. The purpose of fixing fees based on costs of service provision is to ensure that the potential or actual exporter requiring the services will put values on what he receives and thus will limit his demand to that which he expects to use efficiently. 5.7 BANCOMEXT has also undertaken an extensive review of all of its promotion programs to provide better focus and to establish appropriate priorities. One of the results of this review was the decision to eliminate 12 of the 40 existing overseas commercial offices. Savings achieved through the 7 closing of these offices were one of the major factors in the reduction of gross expenditure on promotional activities from some $30 million in 1990 to $24 million in 1993. 5.8 The progress in achieving market-based interest rates for BANCOMEXT's export financing has exceeded expectations under the loan. In the first place, as programmed, the COI scheme was eliminated on December 31, 1991. It was envisaged in the context of the loan that, even after the disappearance of the COI scheme, BANCOMEXT would continue to set administratively interest rates for final beneficiaries of its rediscounting operations but that these would reflect average market rates. However, in the course of 1992, BANCOMEXT moved away from administratively determined interest rates by freeing intermediation margins for first tier commercial banks using BANCOMEXT's rediscounting facilities, initially (on January 1, 1992) for medium and large exporting firms and subsequently (on May 4, 1992) for small exporters. By freeing up the margins, BANCOMEXT in effect allowed the first tier commercial banks to charge market-determined retail rates in using these funds. It should be noted that for on-lending some of its bilateral credits BANCOMEXT continues to fix interest rates to its final borrowers, generally in conformity with the contractual conditions of those credits. In addition, long term export credits (sales financing) are offered at rates in compliance with the OECD consensus. 5.9 Release of the second portion of the Loan was expected to follow upon a performance review scheduled to take place prior to January 31, 1992 but this was delayed by agreement among the parties until March 1992. In accordance with the Loan Agreement, the review covered progress under the project in general and specifically on the phase-out of the COI scheme as well as on the implementation of policies and programs for expanding the guarantee program and for cost-recovery for export promotion programs. Note was taken of the ability of BANCOMEXT to increase its resource mobilization in foreign capital markets and the consequent ability to expand its 1992 lending program. The review determined that sufficient progress had been made in the guarantee and promotion programs. As a consequence, the second portion was released on May 1, 1992. 5.10 The review prior to release of the third portion, originally scheduled to take place prior to July 31, 1992, was also delayed by agreement until August 1992. The action taken by BANCOMEXT to free intermediation margins for first-tier commercial banks exceeded the original provision that BANCOMEXT would set interest rates for final beneficiaries of the rediscounting operations to reflect average market rates. With respect to the guarantee program, it had been agreed during the previous review that progress in implementing this program would be further examined in connection with third tranche release. The mission undertaking this review requested further details on the elaboration of the premium schedule and a timetable for implementation. This information was sent to the Bank on November 10, 1992 and the third portion was released on November 12, 1992. 5.11 Loan proceeds were efficiently disbursed. Within the first portion, the adjustment component of $25 million was disbursed in July 1991 and the trade related component of $75 million was disbursed in five applications, in May and December 1991 and January 1992. The second portion was disbursed in one application in May 1992 and most of the third portion in two applications in November 1992. A small balance was disbursed in March 1993. A total of 1,019 subloans (average size approximately $270,000) were financed under the credit line component, all against discounted working capital loans and all less than US$2 million, well below the free limit of US$10 million and the US$5 million limit for ICB of goods and works (para. 4.5). Current performance of BANCOMEXT and medium term perspectives 5.12 With the elimination of the COI scheme at the beginning of 1992, the export financing activities of BANCOMEXT declined from the peak levels of $11 billion recorded in 1990 and 1991. This decline was foreseen in the MOP. In 1992 the volume of lending reached slightly less than $6 8 billion as compared to the forecast of $5.6 billion. Exports of manufactures continued to expand, however, and it appears that exporters' financing needs were being met in part by the commercial banks from the foreign exchange resources which they had been able to capture' and in part by direct external borrowing particularly by large companies with a history of export activity. With the overall improvement of Mexico's external position, these companies and the commercial banks whose privatization had been initiated during that year were able to enter once more into international capital markets to meet their increasing needs for trade finance. As noted in para. 5.8, in 1992, BANCOMEXT freed the ceiling on intermediation margins for the commercial banks using its funds so that the various components of trade finance were all being offered by the commercial banks to exporters at market-determined rates. 5.13 In the course of 1992, however, the basic conditions affecting the availability of short-term dollar funds experienced an important change. In April 1992, the Bank of Mexico issued a regulation imposing a limit on liabilities in foreign currencies which could not exceed 10% of the total liabilities of any commercial bank. This limitation, however, did not apply to BANCOMEXT. The monetary authorities at the time were concerned about the growing external indebtedness of the Mexican banking system resulting from arbitrage operations to take advantage of interest rate differentials. Many banks were obtaining dollar funds from abroad at relatively low interest rates, converting to pesos and then lending some portion of those resources in the domestic market or buying government paper with higher yields in pesos. 5.14 It appears that, at the time, most of the banks were at this ceiling, many in fact above it. Banks exceeding the ceiling were permitted to maintain their existing levels, with the expectation that, as they increased their mobilization of domestic resources, there would be a corresponding reduction to the required ratios. In effect, the commercial banks could not expand export financing in dollars without cutting back on other lending. 5.15 With the continued rise in exports of manufactures, exporters put pressure on the Bank of Mexico to modify the regulation and, in November 1992, the ceiling was raised by 4% provided that the additional liabilities were directly related to export financing and/or for sales of domestic capital goods. In addition, a second tranche was established which increased the ceiling by an additional 6% of the liabilities incurred in the three months immediately preceding October 1992 which could be used for export financing or for investment under restrictions in selected instruments.2' 5.16 By the end of 1992, BANCOMEXT was faced with increasing demand for its discount facilities. From the point of view of the commercial banks, their lending operations which were rediscounted with BANCOMEXT were not included in their foreign currency liabilities. While BANCOMEXT was not subject to this restriction, it was subject to a ceiling on its net external borrowing within the ceiling imposed by the government on net official external indebtedness. 5.17 BANCOMEXT increased its mobilization of external resources in 1992 to permit it to offset in part the elimination of the COI program. During that year, it initiated sales of medium- and long- term bonds in European markets and expanded the issuance of commercial paper in most of the major international financial centers at relatively favorable rates (see para. 6.4). Given the wide acceptance it found in those markets, in 1993 it engaged in more aggressive borrowing programs with large bond V Under the COI scheme, the state-owned commercial banks were required to lend their foreign exchange resources at rates determined by Bancomext, generally below the yields which the banks could earn lending these funds in the existing market. 2' This provision is subject to certain time limits. 9 and medium term note flotations in European and the Japanese markets. It also was able to establish lines of credits with additional numbers of foreign commercial banks, from five in 1990, to 43 in 1991, 100 in 1992, and 120 in 1993. To accommodate these borrowings, the authorities authorized a small increase in BANCOMEXT's ceiling within the component for development banks. 5.18 In these circumstances, with the Mexican private banking system subject to limits on its mobilization of foreign currencies which could be used for trade financing and with BANCOMEXT able to capture additional resources, BANCOMEXT experienced in 1993 a renewed growth in its export lending program. This was expected to reach about $9.5 billion for 1993, compared to the static level of $5.7 billion projected in the MOP. Moreover, the level of these operations is now expected to reach $11.9 billion in 1994, more than twice the level of $5.2 billion projected in the MOP and above the peak years of 1990 and 1991. Given the nature of the COI fee mechanism used in those years, which averaged some 50% of trade financing, BANCOMEXT is actually managing a substantially larger portfolio than it had in the past due to its ability to mobilize external financial resources at favorable rates.! 5.19 The current situation and performance of BANCOMEXT raise important issues concerning not only the future of that institution but certain aspects of prevailing macro-economic policies. The restriction imposed by the Bank of Mexico has forced the private banks to reevaluate the uses to which they put their borrowed dollar funds. Rediscounting export-related short-term paper with BANCOMEXT appears to have only marginal negative impact on their profitability, even for the larger banks which are able to borrow abroad at rates only slightly above that paid by BANCOMEXT. Most banks remain content with use of BANCOMEXT resources under prevailing conditions. For reasons examined further below, many see considerable advantage in making use of specific programs.' 5.20 The increased use of BANCOMEXT resources, derived from its external borrowing, in essence transfers the burden of additional external debt from the private sector to the public sector. While it remains true that BANCOMEXT has largely kept within its indebtedness ceiling, that limit is a ceiling and not a floor. 5.21 The scenario envisioned in the Memorandum of the President (MOP) was that BANCOMEXT would have a declining relative importance in the supply of export finance in the medium term, largely reflecting the elimination of COL While performance in 1992 was in line with that expectation, the institution is now increasing its role in providing financing for export-related transactions, particularly for small exporters. In the three year period 1989 through 1991, when COI- financed operations accounted for as much as 60% of BANCOMEXT's export financing, total export financing was equivalent to 70% to 85% of Mexico's exports of manufactures. In 1992, this figure Y BANCOMEXT's funding program (Annex III, Table 7) falls within the ceiling on net borrowing. Moreover, a large the credits received, particularly from commercial banks, as well some part raised in capital markets, are short term, mostly for three months, which can be rolled over as many as four times in a year. BANCOMEXT's balance sheet for the end of 1993 lists external liabilities equivalent to $13.8 billion. ' Until recently, there was, in fact, some incentive to use BANCOMEXT funds since these operations were not subject to a withholding tax imposed on interest payments for foreign credit transactions. This tax was reduced from 15% to 4.9% as of October 1, 1993, sharply decreasing the attractiveness of the BANCOMEXT alternative. Y Exports of manufactures represent some 80% of the products financed by Bancomext. 10 dropped to about 35%. However, with an expected rise of 58% in export financing operations in 1993 compared to an expected rise of 15% to 20% in the value of exports of manufactures, the figure will increase. A comparison using only data for pre-shipment financing yields similar results. Disbursements for pre-shipment financing in the period 1989 through 1991 were the equivalent of about 38% of the value of manufactured exports and declined to 23% in 1992. These disbursements are expected to rise in 1993 by about 45% as compared to the increase of 15% to 20% in manufactured exports. The present forecast for export financing in 1994 indicates a 25% increase over 1993, also likely to be slightly in excess of the expansion in the value of exports of manufactures. 5.22 This change in performance reflects a combination of many factors at this time: the particular set of circumstances and policies affecting the availability of financial resources; the restructuring of the newly privatized banking system and the management of its portfolio in these early stages; and the successful achievement by BANCOMEXT of its restructuring and adaptation to a more liberalized financial system. 5.23 For the purposes of this PCR, it is not possible to make an extensive analysis of the present situation of the commercial banking system and its capability to increase its trade financing activities. Some features are readily noticeable in what is now the first full year after privatization. Moving from the nationalized model to a private sector one has been a difficult and time-consuming task often involving frequent reorganizations and the identification of redundant personnel and of branches not capable of operating in the competitive environment. Several banks indicated that these organizational adjustments could be expected to continue for some time and would continue to affect their performance. There is also some evidence that, in the first blush of market-oriented behavior, a number of banks opted to invest considerable resources in "retail" banking - providing consumer credit (in particular, auto loans) and credit cards. Several of them have recently experienced substantial losses in these operations and are now restructuring their balance sheets and adjusting their operational strategies. As a consequence, they have curtailed lending, in part by putting up bureaucratic barriers to the loan approval process. Some private industrialists have complained that, at this time, it is more difficult to get a loan from the private banks than when they were nationalized. The availability of BANCOMEXT funds has tended to isolate the financing of export activity from the difficulties experienced by the banking sector overall. 5.24 Government officials stress that the long-term objective of financial sector reform remains a reduction in the role of development banks such as BANCOMEXT. They see no contradiction in the recent growth in importance of BANCOMEXT in the present situation, particularly in view of the market-oriented performance of that institution, and they expect that the special factors which are now influencing its behavior are likely to change in the near future.2' 5.25 Restrictions on its foreign liabilities will be modified with the entry of foreign banks under the NAFTA provisions. However, even if there are no changes in the immediate future in these provisions, as the Mexican banks increase their domestic resource mobilization, they will have leeway 2' An additional factor which is now subject to negotiations between the commercial banks and Bancomext is related to the sale of Bancomext's portfolio of discounted loans, i.e. its operations as a second-tier. As can be seen in the table on sources of funds (Annex III, Table 7), Bancomext recently renewed its efforts to sell such paper in external capital markets as a means of ensuring adequate cash flow to meet credit demand. The Bank of Mexico has issued a clarification to its regulation on the proportion of liabilities in foreign exchange which would require that such rediscounted paper appear in the balance sheet of the originating banks unless Bancomext has accepted recourse. An agreement between the banks and Bancomext is expected shortly. 11 to increase their borrowing in dollars which will provide them with an opportunity to expand export financing. For some banks, these developments could reduce their call on BANCOMEXT rediscounting. On the other hand, many officials in these banks believe some of the institution's programs provide sufficient advantages that they will continue to make use of them. 5.26 For example, one extremely popular program has been "Tarjeta Exporta", which focusses on small and medium exporters. Eligible firms in essence are pre-qualified by BANCOMEXT for short- term credit which is then arranged through their first-tier banks. From the point of view of the latter, administrative costs for the processing of loan applications and even for the transfer of funds, which is done electronically, are considerably reduced. BANCOMEXT, with its mandate to promote exports, has taken on the additional administrative costs associated with lending to small industry. Given the current problems of the commercial banks to get their houses in order after the privatization, the advantages to them of using this facility should not be underestimated. At the same time, however, it is likely that, as the larger banks complete their transition and develop their loan processing capabilities, they may find it more profitable in the near future to increase the use of their own funds. For small and medium size banks, on the other hand, BANCOMEXT is likely to remain an important instrument for their export financing operations for a longer period of time. 6. Project Results 6.1 Although it may be premature to draw conclusions on project results, there is no doubt that BANCOMEXT has already made considerable progress in accommodating itself to the open financial system resulting from the Government's liberalization policies. The objectives of the Bank loan, to facilitate the transition as part of the Bank's overall lending strategy to consolidate the results of the reform process and to bring about institutional changes so that it can more efficiently operate in a liberalized financial sector, have been achieved. 6.2 While the decline experienced in 1992 in its relative importance in export financing has recently been partially reversed for the reasons explored above in para. 5.22, BANCOMEXT has made impressive progress in improving its operations so that it could efficiently respond to newly emerging needs. It has increased the share of second-tier (rediscounting) operations in its portfolio, allowing first-tier operations to virtually disappear. BANCOMEXT has also increased resource mobilization through borrowing in international capital markets at attractive interest rates which has permitted it to meet export financing requirements, and its domestic lending has been accomplished at market-determined interest rates. The resulting improved profitability has strengthened BANCOMEXT's balance sheet significantly. Improvements in internal organization and procedures, as well as in the operations of its regional and international offices, have made possible a substantial diversification of loan operations and increased attention to the needs of smaller exporters. It has also developed innovative programs to capture funds from non-banking financial institutions such as credit unions. BANCOMEXT has, moreover, adopted a flexible policy for cost recovery for its export promotion efforts and has taken important steps to rationalize these activities and to focus on priority issues. 6.3 On the other hand, progress in expanding its credit insurance-guarantee program has been slower than expected. The Board of BANCOMEXT recently took the decision to create a trust fund which would take over all of the responsibilities for this activity, including establishing separate accounting and a separate reserve fund. Most of the guarantees which have been provided are required under the "Tarjeta Exporta" program for smaller exporters, covering pre-shipment expenditures on inputs and related items for which a small fee is charged. Post-shipment guarantees, related to sales financing, remain a relatively minor component of these operations. While some criticisms of the functioning of the program have been voiced by exporters which may explain in part 12 their unwillingness to enter into guarantee arrangements, some commercial banks indicate that most of their clients do not at this time feel the need for this service. 6.4 In evaluating these changes at the level of individual institutions such as BANCOMEXT, one has to take into account the achievements at the macro-economic level which represent the necessary conditions for success. At the end of 1990 and the beginning of 1991, there were marked improvements in both the domestic and external financial environment facing Mexico. The sustained implementation of macro-economic reforms, particularly for the financial sector, and the debt restructuring exercise (see para. 2.5), which were supported by the Bank's loans in June and September 1989, as well as the negotiations for NAFTA, had major impact in helping Mexico (and BANCOMEXT) to gain access to international capital markets at relatively favorable rates, reducing the "country risk" premium in those markets as well as in the domestic market for dollar-denominated paper. 6.5 Domestic interest rates for dollar-denominated paper began falling in the course of 1991, reflecting largely the decline of rates in international markets. However, there was also a narrowing of the differential between those rates. In these circumstances, the measures taken by BANCOMEXT to free intermediation margins for first tier banks using its rediscounting facilities, in essence permitting those banks to charge market-determined rates for export transactions, did not adversely affect the competitive position of Mexico's exporters. 7. Project Sustainability 7.1 The principal risks derive from the ability of the Mexican Government to consolidate its gains from the reform process to restore a growth path for the Mexican economy. The Government remains firmly committed to maintaining and expanding the policy reforms initiated under the project, including the area of customs reform. On the external side, the implementation of NAFTA also serves as an anchor for an increasingly open economy in the future. In addition to the coverage of tradeable goods, the treaty deals with liberalization of the markets for services, including finance. U.S. and Canadian banks will be permitted to establish fully-owned subsidiaries under certain quantitative limits over a period of seven years, after which those limits would be removed. 7.2 With a strong balance sheet position, with experienced and competent staff and adequate internal organization, and with broad acceptance as a responsible borrower in international capital markets, BANCOMEXT appears to be in a favorable position to sustain its successful transition for the medium term and to respond to changes in the availability of export financing. 8. Bank Performance 8.1 Bank performance during project identification, preparation, appraisal and supervision was thorough and effective. The concept and design of the project derived from the initiative of Bank staff in 1989 to seek ways to continue the momentum of the reform process and to ensure a flow of resources from the Bank at a critical juncture in Mexico's efforts to achieve stability and growth. The basic elements of the loan were spelled out by the Bank early in 1990 but disagreements over the interest rate issue delayed processing until the end of the year. The decision to go forward with a hybrid operation - part policy adjustment and part credit line - has been fully justified by the results. The objective of providing a quick disbursing loan notwithstanding the credit component was achieved through appropriate design of that component. 13 9. Borrower Performance 9.1 In general, performance of BANCOMEXT in all phases of the project cycle was excellent. BANCOMEXT has been an executing and/or financial agent for a number of Bank operations in Mexico (credit lines as well as adjustment loans) and is familiar with Bank requirements for processing data and legal compliance. While loan processing was delayed due to the differences over interest rate policy at the time, there was no fundamental difference in general policy approach to interest rates. Thus, when the external conditions permitted, BANCOMEXT exceeded its commitment for release of the third portion. In this connection, it should be noted that there have been an impressive number of instances in the implementation of Mexican adjustment loans when conditionality has been exceeded. In these instances, with basic agreement between the Bank and the Mexican authorities on policy orientation, cautious approaches by the latter to make commitments in situations marked by uncertainty have led to agreements for minimal conditionality. Once the uncertainty has been lifted, the measures taken have often gone beyond the original commitment. 10. Project Relationship 10.1 As noted above, the Bank has had close formal relationships with BANCOMEXT for a number of years and strong ties have developed between the two institutions, transcending the personnel changes which both have experienced. The main element is mutual respect for the competence and professionalism of each participant. Thus BANCOMEXT has on numerous occasions requested technical advice while the Bank, as in this instance, provided considerable independence for BANCOMEXT's subloan procedures. 11. Consulting Services 11.1 No consulting services were included under the project. 12. Proiect Documentation and Data 12.1 The legal documents of the project were adequate for achieving the project objectives. The President's Report, the supervision reports and the documentation in the Project File provided adequate background for the review of project implementation. Extensive interviews were conducted with Government and BANCOMEXT representatives during the Completion Mission, and BANCOMEXT provided extensive background materials. The Government provided Part II of this report, the Project Review from the Government's Perspective, which follows. 14 PART II: PROJECT REVIEW FROM THE GOVERNMENT'S PERSPECTIVE I. Background. In the post-war period through 1982, Mexico achieved high real growth rates with low or moderate inflation. However by 1982, high fiscal deficits, high external debt, over-reliance on oil exports, high tariffs, obstacles to direct foreign investment, other barriers to external competition and other structural imbalances, made the economy vulnerable to external shocks. In 1982, high real interest rates and falling oil prices in international markets brought Mexico to an economic and financial crisis. In response to this crisis, the Mexican Government developed a long-term strategy, which would encourage growth and give the country a competitive position within the world economy. In order to support the Mexican Government adjustment program, the World Bank granted the following loans: * Two Export Development Loans, EDP (Loan 2331-ME for US$ 350 million) and EDP H (Loan 2777-ME for US$ 250 million) to strengthen and diversify the export base. * Two Trade Policy Loans, TPL I (Loan 2745-ME for US$ 500 million) and TPL II (Loan 2882-ME for US$ 500 million), oriented to reduce import protection, a key barriers to sustained export promotion. * A package of three sectorial adjustment loans each for US$ 500 million: The Industrial Sector Policy Loan (ISPL), Public Enterprise Restructuring Loan (PERL) and the Financial Sector Adjustment Loan (FSAL). * The Interest Support Loan for US$ 1,260 million, which was the first operation of its kind in the World Bank, and to support debt and debt service reduction. Due to the implementation of fiscal and economic reforms, Mexico has done the following: 1. Eliminated the financial deficit of the public sector, which was 16.9% of nominal gross domestic product (GDP) in 1982, achieving surpluses of 1.6% (excluding financial intermediation) and 0.5% (including financial intermediation) of nominal GDP for 1992 and of 0.7% (excluding financial intermediation) for 1993, with a balanced budget projected for 1994; 2. Decreased the total public sector debt as a percentage of nominal GDP from a high of 121.5% of GDP at the end of 1987 to 31.3% of GDP at the end of 1992 and to 29.6% of GDP at September 30, 1993, with external public sector debt declining from 94.1% to 23.2% of GDP over the 1987-1992 period, and to 21.8% of GDP at September 30, 1993; 3. Opened the economy through liberalization of trade and investment, with current account deficits being more than balanced by substantial foreign financial inflows, leading to an accumulation of external reserves of US$ 24,537 billion at December 31, 1993; 4. Redefined the role of the Government in the economy through deregulation and privatization; 15 5. Produced real GDP growth averaging approximately 2.7% over the 1989-1993 period, although real GDP growth slowed to 2.8% in 1992 and 0.4% in 1993; and 6. Slowed inflation (as measured by the national consumer price index) from a high of 159.2% in 1987 to 8.0% in 1993. As a part of the overall financial sector liberalization program (which was supported by the Financial Sector Adjustment Loan (FSAL), the Government began to modernize the development banking system. In this context, the Export Sector Loan (ESL) supported the transition of Bancomext towards becoming a more market-oriented development bank. II. Project Description and Implementation. The ESL was provided by the World Bank for an amount equivalent to US$ 300 million to support Bancomext's export-import programs. The IDB cofinanced the project for the amount of US$ 250 million as a sectorial adjustment program. Bancomext's medium term strategy was guided by the following basic principles: a) Operate predominantly as a second tier financial institution; b) Offer trade financing at market-based interest rates; c) Focus on providing credit guarantees and increasingly rely on other financial intermediaries to carry out both lending and export promotional activities; d) Receive no fiscal transfers; e) Provide export promotional support increasingly on a cost recovery basis; f) Decentralize activities, and g) Operate profitably including maintaining equity in real terms. The loan components were: Million US Dollars Category 1: Imported goods 25.0 Category 2: Subloans 275.0 300.0 III. Loan Disbursements. The loan was disbursed in three portions, each for US$ 100 million. The first 100 million were disbursed in four portions, from May 10, 1991, four days after the loan effectiveness, to December 30, 1991. This first tranche included US$ 25 million of the policy component. The second tranche was disbursed on May 11, 1992, and the third on November 18, 1992. The loan was totally disbursed on March 18, 1993, nine months before it was initially expected. 16 IV. Lessons Learned. The project was granted to complement the Government's trade liberalization and export development policies by supporting Bancomext's transition, in order to perform a more efficient role in a more competitive financial system. In this extent Bancomext has achieved the following objectives: * In response to Bancomext's credit strategy, which is based on the utilization of the Mexican commercial banking infrastructure, Bancomext has increased second tier operations in its portfolio which represented 89% of the total loans granted in 1993. Bancomext also grants credit to other non-banking financial intermediaries, such as leasing companies, factoring companies and credit unions which increased from US$ 548 million in 1992 to US$ 1,342 million in 1993. * Starting in January 1992, the interest rates were liberalized for consolidated and intermediate enterprises. On April 1992, Bancomext concluded the liberalization process of interest rates applicable by the commercial banking system to the so called small enterprises by eliminating from its Financial Programs, the maximum intermediary fees. In this way commercial banks set final interest rates to their costumers under credit market conditions in Mexico. * Starting 1992 Bancomext paid closer attention to the recovery of promotional expenses. In 1993 Bancomext had recovered 85% of the total promotional expenses. * In the last few years Bancomext has been emphasizing on diversifying the sources of its financing and expects to continue such diversification. A feature of this diversification has been the issuing of loans guaranteed by the Export-Import Bank of the United States and of securities in the international capital markets. * In 1993, of the total guarantees granted, 89% were short-term operations. During this period, 98% of the pre-export financing loans which Bancomext guaranteed, were loans to promote exports by start-up and developing companies. Post-shipment guarantees, represented I1 % of the total and have been established in connection with Latin American trade. * Bancomext guarantee program has not grown as expected, mainly due to a slow demand for these services. However, Bancomext expects that its guarantee program will increase in 1994. The Export Sector Loan made a positive contribution to the achievement of Bancomext's objectives. The specific steps taken by Bancomext will assure the future role of the Institution which will enable it to respond to the need of the markets. The project was well designed and it was consistent with Mexican Government macro- economic policies. Therefore, the subsequent improvement of Bancomext operations will depend heavily in the Government's capability to consolidate these reforms. 17 PART III: STATISTICAL INFORMATION 1. Related Bank Group Operations Loan Loan in Project Name Year of Status Million US$ Approval 1.1 Bank Operations in the Export Sector Loan 2331-ME 350.0 Export Development 1983 Completed, PAR issued 6/90 Loan Loan 2745-ME 500.0 First Trade Policy Loan 1986 Completed, PAR issued 2/92 Loan 2777-ME 250.0 Second Export 1987 Completed, PAR issued 6/90 Development Loan Loan 2882-ME 500.0 Second Trade Policy 1988 Completed, PAR issued 2/92 Loan 1.2 Projects in Related Sectors Loan 2918-ME 300.0 Agriculture Sector 1988 Completed, PCR issued 2/94 Adjustment Loan Loan 3085-ME 500.0 Financial Sector 1989 Closing date: PAR issued 6/93 Adjustment Loan Loan 3086-ME 500.0 Public Enterprise Reform 1989 Completed, PAR issued 6/92 Loan Loan 3087-ME 500.0 Industrial Sector Policy 1989 Completed, PCR issued 8/93 Loan 3159-ME 1,260.0 Interest Support Loan 1990 Completed, PAR issued 6/93 Loan 3357-ME 400.0 Second Agricultural 1991 Second Tranche released in Sector Adjustment Loan December 1993, PCR under preparation 18 2. Project Timetable Item Date Date Date Planned Revised Actual - Identification (Initial EPS) January 12, 1990 - Pre-appraisal Mission February 1990 February 19, 1990 - Appraisal Mission March 1990 March 26, 1990 - Loan Negotiations April 1990 January 1991 January 9, 1991 - Board Approval May 1990 March 1991 March 26, 1991 - Loan Signature June 1990 May 1991 May 2, 1991 - Loan Effectiveness June 1990 April 1991 August 2, 1991 - Loan Closing December 31, 1994 December 31, 1993 December 31, 1993 - Loan Completion December 31, 1994 December 31, 1993 March 11, 1993 Comment: Preparation of loan was undertaken as part of ongoing dialogue on trade and export issues. 19 3. Loan Disbursements Cumulative Loan Disbursements (Millions of US$ Equivalent) Fiscal Quarter Appraisal Actual Actual as % Year Ending Estimate of Appraisal Estimate 1991 June 30 50 49.9 99.9 1992 September 30 75 74.9 99.9 December 31 100 98.7 98.7 March 31 150 99.9 66.6 June 30 175 199.9 114.2 1993 September 30 200 199.9 100.0 December 31 225 299.9 133.3 March 31 250 300.0 120.0 June 30 275 300.0 109.1 1994 September 30 290 300.0 103.4 December 31 300 300.0 100.0 4. Project Implementation Indicator Appraisal Actual Estimates Effectiveness April 1991 August 2, 1991 Release of Second Portion January 1992 May 1, 1992 Release of Third Portion July 1992 November 12, 1992 20 5. Project Financing by Source (Millions of US$ Equivalent) Source Appraisal Actual Estimates IBRD Expenditure Categories Policy Component 25.0 25.0 Trade Credit 275.0 275.0 Inter-American Development Bank Sector Adjustment Loan 250,0 25.0 Total 450.0 450.0 6. Status of Covenants Agreement and Section Description Date in Covenant Revised Date Status Loan Agreement 3.04(b) Credit allocation, cost recovery and January 31, 1992 May 1, 1992 OK guarantee policies 3.04(d) Interest rate policies July 31, 1992 November 12, 1992 OK 4.01(a) Accounting and reporting standards OK for project and subprojects 4.01(b)(ii) Audit report submission within six OK months of fiscal year end 4.01(c) Accounting and reporting standards OK for statements of expenditure 22 7. Use of Bank Resources A. Staff Inputs Stage of Project Cycle Staff Comments Weeks Preparation 160.4 Preparation began in FY88 Appraisal 23.3 - subtotal 183.7 Negotiations 12.8 - Subtotal including appraisal 196.5 Supervision 30.4 PCR Preparation 8.0 - Total 234.9 23 B. Missions Stage of Month/Year Number Days in Specialization of Performance Project Cycle of Persons Field mission members Rating Status a/ b/ Identificationg' Preparation 12/89 2 5 Econ, Ops Pre-Appraisal 2/90 6 10 Econ, Ops, FA Appraisal 3/90 3 10 Econ, Ops - Follow-up 8/90 2 8 Econ Supervision 1 3/92 2 5 Econ, Ops 2 8/92 2 5 Econ, Ops Completion 10/93 1 10 Econ Comments a/ Key to Specialization: Econ: Economist Ops: Operations Officer FA : Financial Analyst b/ Key to Status: 1: Problem-free or Minor Problems 2: Moderate Problems 3: Major Problems YProject was identified during preparation of the Second Export Development Project (EDP III), which was modified into the Export Sector Loan during 1989.  25 ANNEX I  27 Bancomext's Policy Letter (English Translation of Spanish Original Letter) Dear Mr. Conable: 1. The purpose of this document is to set forth the major guidelines that are to govern the operations of the National Foreign Trade Bank (Banco Nacional de Comercio Exterior--BANCOHEXT) during the next five years. 2. BANCOMEXT is the development bank responsible for financing and promoting Mexico's foreign trade of non-oil goods and services. Bancomext has the credit resources, facilities and infrastructure previously allocated to three institutions: BANCOMEXT itself, the Manufacturing Exports Development Fund (Fondo para el Fomento de las Exportaciones de Productos Manufactureros--FOMEX), and the Mexican Foreign Trade Institute (Instituto Mexicano de Comercio Exterior). 3. BANCOMEXT's basic objectives are to: - maximize foreign exchange earnings from the marketing of non- oil goods and services; - promote the rational utilization of external sources to finance Mexico's priority import needs; - facilitate and promote the participation of the various economic agents in Mexico's foreign trade. 4. The frame of reference for BANCOMEXT's operations is contained in the 1989-94 National Development Plan (Plan National de Desarrollo-- PND), the National Industrial and Foreign Trade Modernization Program (Programa Nacional de Modernizacidn Industrial y del Comercio Exterior-- PNMICE) and the National Development Financing Program (Programa Nacional de Finananciamento al Desarrollo--PRONAFIDE). Some of the most relevant aspects are: - The openness of the economy will be maintained and consolidated, and the external sector will be promoted as Mexico's main engine of growth. - Non-oil exports will grow faster than GDP, within the range of 10-12 percent a year. - Public and private investment will grow in real terms by 8-10 percent a year. 28 - Foreign investment and medium- and long-term resource mobilization will behave in line with the success of the economic measures, many of which are already in effect. - A financial system will be needed that is able to compete adequately with international banks and to meet the growing needs posed by higher economic activity. - The Government will strengthen the role and operation of the development banking system as an effective economic policy instruments. 5. In the context of the economic policy guidelines established by the present Administration, BANCOMEXT has a fundamental role to play. It will therefore be important to count on the financial and technical support of the multilateral financing agencies to help accomplish the transition to a more efficient development bank in an increasingly market-oriented setting. 6. BANCOMEXT's development over the next five years will be guided by the following basic principles: (a) BANCOMEXT will maintain a profitable and financial self- sufficiency without detriment to its activities of promoting Mexico's foreign trade. It will aim to operate without fiscal transfers and maintain its net capital in dollar terms. (b) It will encourage and expand the use of credit insurance as an operational instrument. (c) The necessary conditions will be created to give BANCOMEXT greater access to market financing in order to reduce the importance of the international financial agencies as financing sources. (d) Cost centers will be established in the Bank's promotional activities in order to evaluate their effectiveness and self- sufficiency. (e) BANCOMEXT's operations will be geared basically to rediscounting. Its relationship with the financial intermediaries will call for joint actions to develop and strengthen the capacities of the commercial banks to operate according to international conditions. (f) BANCOMEXT will retain the possibility of acting as first-tier * bank in cases where its intervention is necessary, such as (a) to demonstrate the viability of credit programs, (b) in the case of large projects, in which it will seek to develop cofinancing with other financial institutions, and (c) in the case of projects which, although they have been shown to be 29 viable and to have a favorable impact on foreign trade, are not catered for by the commercial banks. (g) The resource mobilization effort will allow BANCOMEXT to grant financial assistance on competitive terms according to the market. (h) It will seek to use the financial intermediaries' infrastructure for lending operations and for supporting the promotion of non-oil foreign trade through training, marketing, informational, technical assistance, legal assistance and other activities. (i) Recognizing that one of its basic goals is to increase export value as well as volume, BANCOMEXT will develop schemes for expanding the export of products with higher value added, more closely linked with the needs of the final purchasers of Mexican goods and services. (j) Schemes will be developed for fostering decentralization of operations in order to enhance the efficiency of both lending and promotional activities. 7. Recently the need for BANCOMEXT to support primary-sector activities such as fishing, farming and stockraising and mining, as well as tertiary activities such as tourism, gradually raising the value added of those activities has been recognized. To that end BANCOMEXT will expand its lending in those sectors, without neglecting the manufacturing sector, which will continue to receive major support. 8. In view of the type of financial needs to which BANCOMEXT's support is geared, it is proposed to reduce working capital financing and increase fixed investment lending to export enterprises. Similarly, it will increase its support for imports and the financing of medium- and long-term projects abroad. BANCOMEXT's share of activities in support of import substitution will be gradually transferred to other institutions. 9. BANCOMEXT does not aim to offer financial support for all non- oil foreign trade transactions. In its financial strategy, therefore, it will seek to develop greater complementation with the commercial banks, encouraging the creation and development of area and sectoral programs and focusing its activity on the following enterprises and operations: (a) Exports - large multinational enterprises - Mexican enterprises with recurrent export activity - small and medium-sized exporters - foreign trade consortia 30 - suppliers to exporters - large export projects (b) Imports - capital goods and services - bulk volumes of raw materials - widely-used raw materials - basic products (c) Financial agency activities - federal Government - large infrastructure projects or industrial projects with foreign participation 10. In implementing its programs BANCOMEXT will pay due regard to the differences that exist between the operations and the participants indicated in paragraph 9. 11. BANCOMEXT's first-tier credit activity has changed from a maximum of 50 percent of the total program in 1984 to 11.3 percent in 1989, and its goal will be to reduce its first-tier operations to 10 percent in 1994; the latter include an increase in participation in syndicated loans. 12. BANCOMEXT's interest rate policy is guided by the following basic principles: maintaining a sound financial institution, and furnishing financial support on competitive terms according to the international market conditions. 13. BANCOMEXT's interest rate for end-users of short-term export credit programs (pre-export and sales) will be in line with the prevailing market terms for dollar financing of operations of this kind. As of July 1992 BANCOMEXT will review its interest rate to keep it as an average market rate. The rate will be around a weighted average reflecting the cost of external financing for export operations of multinational enterprises, and the interest rates at which Mexican commercial banks lend dollar resources to finance export operations. 14. In medium- and long-term lending to finance export sales, BANCOMEXT's policy is to adjust to the conditions established by the 'OECD Consensus. 15. The interest rates on investment loans will pay due regard to international medium-term financing conditions and also the degree of credit risk involved in long-term lending. 31 16. The interest rates charged on import financing will be kept in line with the conditions set by the sources of funds with respect both to capital goods and services imports (at medium and long term) and to basic products. The interest rates for these programs will therefore be preferential so far as funding conditions permit. 17. BANCOMEXT will maintain its capacity to carry out its financial operations profitably. The average yield of its loan and investment portfolios will exceed the average cost of its resources. 18. Experience with credit insurance has been limited. BANCOMEXT is therefore conducting an Export Credit and Guarantee Insurance study with the aim of setting up by December 1991 an action program allowing it to develop export credit and guarantee insurance as an important support instrument. Its credit insurance programs would distinguish risk by country and term of operation. Premiums would be based on actuarial calculations and international practices that fully reflect the possible risks borne by BANCOMEXT. 19. During the next five years BANCOMEXT will tend to raise the share of its credit insurance and funding programs more than that of direct credit so that the domestic financial system directly finances the production and export of Mexican products. In that way these activities would receive the automatic and willing support of the domestic and international money and capital markets. This will depend in large measure on the favorable evolution of the economic policy measures undertaken by the Government. 20. BANCOMEXT's main sources of funds will be portfolio recovery and rotation, foreign loans (mostly commercial), money markets and international capital. Domestic markets will be used only to cover temporary cash-flow needs. 21. BANCOMEXT will seek at all times to obtain resources at longer maturities than that of its lending operations; however, current prospects appear to point to the development of term, currency and interest rate packages and mixes. As a result, financial administration in implementing coverage mechanisms for financial intermediaries and enterprises becomes a relevant activity. 22. On the basis of its foreign trade operations BANCOMEXT has developed a technical capacity to structure non-conventional funding mechanisms. That source of funds will receive special attention within the overall resource mobilization effort. 23. BANCOMEXT is obtaining guaranteed and commercial lines to be used by Mexican commercial banks, particularly those that lack the necessary infrastructure to for direct access to international markets. 24. The legal merger of FOMEX with BANCOMEXT substantially enhances BANCOMEXT's ability to raise funds and meet the challenge posed by its transition process. The merger provides the basis for a more solid 32 financial structure that will help obtain funds from commercial and international capital market lines. 25. BANCOMEXT will adhere to its present policy of not receiving fiscal transfers from the Government or resorting to subsidized central bank rediscounting for the performance of its financing operations. 26. BANCOMEXT's development, particularly in Mexico's non-oil external sector, will depend on the adequacy, timeliness and competitiveness of the resources available to it to support the expansion of export capacity and trade activity. 27. In the context of its transition toward a more efficient development bank and of its efforts to boost the resources available to exporters, BANCOMEXT intends to set up a program to phase out the COI scheme. In particular, it proposes to eliminate the COI over a maximum period of 18 months after July 1990, in accordance with the following timetable: Max. COI volume Year Period (millions of US$) 1991 Jan-Jun 3,396 Jul-Dec 2,236 1992 Jan-Dec -0- 1993 Jan-Dec -0- 1994 Jan-Dec -0- 28. BANCOMEXT will continue to assign great importance to the flexibility and ease of operation that its relatively small size allows. To that end it has set a target of 10 percent staff growth during the period 1990-94, chiefly in the regional offices of the interior and in the Bank's technical and financial areas. Decentralization will be the chief engine of growth of staff. The basic emphasis will be on human resource quality. 29. Similarly, BANCOMEXT will follow an appropriate policy of strengthening its organizational and management structure to enable it to meet the challenge posed by the transition process. 30. BANCOMEXT's present policy in promotional activities reflects its strategy of gradual recovery of the maximum possible portion of the cost of support activities of this kind. A promotional cost recovery strategy will be in place by the end of 1991. 31. BANCOMEXT has commercial advisory offices in various parts of the world which perform a series of promotional activities. In order to strengthen their importance and meet the challenge of enhancing the Bank's efficiency, a review of their functions was initiated in 1990 with the 33 object of adjusting the work they do in three types of services: secretarial, intelligence, and marketing. 32. Once the advisory offices have been suitably structured, BANCOMEXT will proceed to identify and implement a cost recovery system in those services where such a policy is possible and desirable. 33. BANCOMEXT's financial and promotional support services for the development of foreign trade are offered for the most part through its offices in the Federal District; however, most foreign trade activity is conducted by enterprises located in the interior of Mexico. To resolve this problem BANCOMEXT will seek to strengthen its presence in the interior by decentralizing and deconcentrating some of its functions as well as its human and physical resources. 34. Decentralization is being carried out in two stages: (i) strengthening of the seven regional directorates and the existing seven promotion offices (1989-90), and (ii) creation of eleven promotion offices (1990-91). 35. BANCOMEXT's functions and activities in a more competitive economic environment require that it be able to respond promptly and flexibly to calls on its administrative capacity. Bancomext is a federal public administration entity, subject to the norms and general rules of the Federal Government. However, under the new "Law of Credit Institutions' (July 1990) the Board of Directors is strengthened with "non-delegable" powers and attributions such as the approval of the operative and financial programs, general expense and investment budgets, the approval of acquisition annual programs, leasing and transfer of real estate, implementation of works and services, the basic organic structure, levels of employment and basis for the elaboration of salary tables and the establishment, relocation and closing of branches -and offices. 36. CrPative thinking, timely decision-taking and capacity to evaluate domestic and international economic phenomena are the fundamental basis through which BANCOMEXT will undertake dynamic adjustment of its organization and operation in order to achieve its objectives of providing comprehensive support for Mexico's non-oil foreign trade. Yours sincerely, Dr. Humberto Soto Rodriguez Director General Banco Nacional de Comercio Exterior, SNC  35  ANNEX 1.5 MEXICO: EXPORT SECTOR ADJUSTMENT PROGRAM POLICY AREAS ACTIONS TAKEN RECENTLY ACTIONS TO BE TAKEN TIMING I. Export Environment - Trade and Customs Policy Reduction in anti-export blas Revitalization of Tariff Commission and through ongoing unilateral trade establishment of Export Commission. liberalization process. Since Continued progress in removal of mid-1985 Mexico has undertaken a remaining QRs on imports and exports fast and far-reaching trade and simplifying tariffs. Improvements reform, taking it from a largely of measures directly supporting closed economy to one of the most exports, (temporary admission, duty open in the region, drawback, VAT rebate, etc.), simplifying procedures and reducing delays. Fully satisfactory implementation of agreed action plans for deregulating Industrial sectoral programs, prepared in context of the ISPL. New reglamento issued for maqubadora sector, deregulating and simplifying operational procedures. Bilateral trade negotiation. Announcement of intention to seek a Free Trade Agreement with the USA and Canada. Facilitate trade through the Revision of custom lw and Implement new system at all customs simplification and administrative practic , integration of sites. decentralization of customs customs with general tax collection. process. Specification of a simplified process and definition of control procedures, based on selective examinations and comprehensive follow-up. Gradual introduction of new customs system at all customs sites. II. Bancomext and Export FinancinC Competitive financial sector. Bancomext's financial operations concentrated in 2nd tier transactions. Government subsidies and transfers eliminpeed. History of profitability and financial viability. Presedttion of satifactory signed Satisfactory implementation of the action First statement coveringF plan, including phase out of the COI Review schem; and plan of detailed future POLICY AREAS ACTIONS TAKEN RECENTLY ACTIONS TO BE TAKEN TIMING a) Bancomext's role within guarantee and promotion policies and Government's overall development bank programs. and financial sector strategy; b) Interest rate policy, including Movement to average market reference rate Second phaseout of the COI scheme commissions; of interest for Bancomext rediscounting Review operations. c) Resource mobilization strategy; d) Export promotion policies and programs; e) Credit guarantee policies and programs. f) Action plan and timetable for transition policy actions. III. Supporting Policies Promote export adjustment through Satisfactory macroeconomic framework. Satisfactory assessment of the Throughout macroeconomic stability and consistency of the macroeconomic project financial deregulation. framework. 39 ANNEX M  41 MIEXIO ECONOMIC INDICATORS ANNEX M Table 1 Mid-1992 Population Cmits.) Page I of 3 1992 Per Capita GNP In USS: 3460 A. Shares of Gross a.stic Pr.dut B. Grwth Rates(% per arm) (fran current price data) (from contant price data) ----- ----------------------------------------------- --------------------------------------- 1965 1973 1980 1991 1992 1993 1965-73 1973-80 1980-93 1992 1993 -------------------------------------------------------- ------- ------------------ Gross Dcrrestic Product m.p. 100.0 100.0 100.0 100.0 100.0 100.0 6.8 6.2 1.6 2.8 0.4 Net Indirect Taxes 4.3 5.0 7.7 10.0 10.1 9.1 Agriculture 13.9 11.1 8.2 7.7 8.4 8.5 3.1 34 0.6 -1.4 1.8 Irdustry 27.1 29.0 32.8 30.0 28.3 28.4 8.3 7.0 1.7 3.2 -0.2 (of uhich Marufacturing) 19.7 22.1 22.1 22.3 20.4 20.4 8.3 6.7 2.1 2.3 -1.5 Services 59.1 59.9 59.0 62.2 63.2 63.2 6.8 6.1 1.6 3.1 1.2 Resource Balance -1.9 -1.9 -2.3 -3.1 -5.6 -5.8 Exports of GNFS 7.7 6.9 10.7 13.9 12.6 12.8 6.2 8.5 5.7 0.8 3.5 Inports of GNFS 9.6 8.8 13.0 17.0 18.1 18.7 6.9 9.7 6.2 21.2 -1.2 Total Expenditures 101.9 101.9 102.3 103.1 105.6 105.8 6.9 6.6 1.9 8.1 -0.6 Total ConsuTption 80.2 79.9 75.1 80.7 82.3 84.1 6.5 6.1 2.5 6.2 0.3 Private Consuption 73.8 71.6 65.1 71.7 72.2 74.8 6.3 6.0 2.6 6.7 0.0 General Government 6.3 8.2 10.0 9.0 10.1 9.3 8.7 7.3 1.9 2.3 3.0 Gross Domestic Investment 20.5 20.0 27.2 22.4 23.3 21.7 8.4 7.8 0.1 14.6 -3.3 Fixed Investmnt 17.6 19.2 24.8 19.4 20.8 22.3 9.5 7.2 0.4 11.1 -1.4 Changes in Stocks 2.9 0.8 2.4 2.9 2.5 -0.5 Gross Danestic Saving 18.5 18.1 24.9 19.3 17.7 15.9 8.4 8.9 -3.9 -9.6 -5.6 Net Factor Incane -2.8 -1.4 -3.4 -2.4 -2.2 -2.0 Net Current Transfers 0.0 0.5 0.1 1.0 0.9 0.8 Gross Naticmal Saving 15.7 17.2 21.6 17.9 16.4 14.7 9.9 7.7 -3.5 -14.8 -8.8 In billions of LCUs 1965 1973 1980 1991 1992 1993 (at constant 1987 prices) Gross Domestic Product 67 115 178 218 225 226 6.8 6.2 1.6 3.0 0.4 Capacity to Inport 8 14 35 49 50 49 6.7 12.3 1.9 2.3 -2.0 Terms of Trade Adjustwt 1 2 14 4 5 3 Gross Domestic Incane 68 117 192 223 230 228 6.9 6.8 1.0 3.3 -0.7 Gross National Product 66 114 173 214 219 219 7.0 5.9 1.8 2.3 0.2 Gross National Ircane 66 116 187 218 224 222 7.1 6.5 1.2 2.6 -0.9 -------- (1987 = 100) -------- ----infLaticn Rates(% p.a.) .--- C. Price Indices 1980 1989 1990 1991 1992 1993 1965-73 1973-80 1980-93 1992 1993 Consuner Prices (IFS 64) 2.2 257.0 325.5 399.3 461.2 506.2 4.6 20.3 60.3 15.5 9.8 Wholesale Prices (IFS 63) 2.1 241.2 297.5 358.6 406.6 442.8 4.0 22.3 59.0 13.4 8.9 Inplicit GDP DefLator 2.5 251.3 326.0 396.7 453.6 474.3 5.9 21.2 57.9 14.4 4.6 InpLicit Expenditures Deft. 2.3 249.2 316.2 382.1 426.6 451.7 5.8 20.6 58.4 11.6 5.9 0. Other Indicat9rs: 1965-73 1973-80 1980-93 Growth Rates(% p.a.): Pcpulation 3.3 2.7 1.9 Labor Force 3.4 4.4 3.2 Gross Watt. Incane p.c. 3.7 3.7 -0.8 Private Consurpticn p.c. 2.9 3.1 0.6 Inport Elasticity: Inports (G+NFS) / GOP(ap) 1.0 1.6 4.0 Marginal Savings Rates: Gross National Saving 19.1 31.1 -23.1 Gross Danestic Saving 17.6 36.2 -35.1 ICCR (period averages): 4.2 13.0 Share of Total 1965 1973 1980 1990 1993 Labor Force in: Agriculture 49.6 41.6 36.5 Irdistry 21.9 25.8 29.0 Services 28.5 32.6 34.5 Total 100.0 100.0 100.0 100.0 100.0 IEC 06/ 42 ANNEX WI Mexico ECOIC ICICATORS Table. Page 2 of 3 Volum Index (1987=100) Value at Current Prices (millions USS) E. Merchandise Exports 1980 1989 1990 1991 1992 1993 1980 1989 1990 1991 1992 1993 X. FUEL 63.8 94.7 99.4 103.1 99.7 .. 10441 7876 10104 8166 8307 7418 Manufactures 33.5 118.3 131.1 146.6 157.2 .. 5549 24936 27828 31602 35421 41685 Resical 45.8 127.0 152.3 175.4 183.1 .. 2041 2359 2779 2920 2469 2783 Total Exports FOS 51.9 106.7 116.9 127.1 129.6 . 181 35171 40711 42688 46196 51886 F. Merchandise Imports Food 394.7 420.2 596.8 600.8 809.1 .. 2448 3499 5099 5640 7744 7842 FueL ard energy .. .. .. .......... Oth. consuner goods .. .. .. .. .. .. .. .. Other intermed goods 145.4 173.5 193.8 245.1 294.3 . 13022 26499 29705 35857 42830 46468 Capital goods 261.9 167.5 229.9 277.9 370.6 .. 5174 4769 6790 8471 11556 11156 Total Irports CIF 186.7 188.5 226.9 276.5 346.2 .. 20644 34767 41594 49968 62130 65467 G. Merchandise Term of Trade 1980 1989 1990 1991 1992 1993 Merch. Exports Prfce Index 125.9 119.4 126.2 121.7 129.2 Merch. Imports Price Index 62.4 104.0 103.4 101.9 101.2 Merch. Terns of Trade 201.8 114.8 122.0 119.4 127.6 USS miLians (at current prices): H. Balance of Payments 1980 1989 1990 1991 1992 1993 Exports of Goods & NFS 20844 42307 48673 51402 55388 61239 Merchandise (FCS) 15512 35171 40711 42688 46196 51886 Non-Factor Services 5332 7136 7962 8714 9192 9353 Imports of Goods & NFS 25189 42426 51535 60508 73617 76395 Merchandise (Fm) 18897 34766 41593 49967 62129 65366 Non-Factor Services 6292 7660 9942 10541 11488 11028 - Resource Balance -4345 6119 -2862 -9106 -18229. -15156 Net Factor Incme -6669 -8042 -8708 -8679 -9595 -10924 (interest per ORS) 6068 9309 7442 8362 7622 6885 Net Current Transfers 275 2075 3465 2745 3020 2687 (workers remittances) 139 1821 1980 1855 2068 Curr A/C Bat Before Off. Grants -10739 -6086 -8105 -15039 -24804 -23393 Net Official Transfers 39 156 0 186 0 0 Curr A/C Bal After Off. Grants -10700 -5930 -8105 -14853 -24804 -2339 Lcrg-Tenn Capital Inflow 10535 4112 5315 21596 19065 27310 Direct Investment 2186 3176 2633 4762 4393 4900 Net LT Loars 6821 2232 7328 4650 -3615 3967 Other LT Inflow (net) 1528 -1296 -4646 12185 18287 18942 Total Other Items (net) -573 2369 6025 1581 6913 1624 Net Short Term Capital 1043 -936 2849 3344 7477 3072 Capital Flows N.E.I. 0 0 0 0 0 0 Errors and Onissins -1616 3305 3176 -1763 -565 -1449 Changes in Net Reserves 738 -551 -3235 -8324 -1174 -6041 Net Credit frcm the IMF -136 389 -360 215 -861 -1162 Other Reserves Changes 874 -940 -2875 -8539 -313 -4879 As Share of GDP: Resource Balarce -2.2 -0.1 -1.2 -3.2 -5.5 -4.2 Interest Payments 3.1 4.5 3.0 2.9 2.3 1.9 Current Account Balance -5.5 -3.0 -3.3 -5.2 -7.5 -6.5 Memorand.m Items: Reserves excL. Gold (mil. USS) 2960 6329 9863 17726 18942 25110 Reserves incL. Gold (mil. USS) 4175 6740 10217 18052 19171 .. Official X-Rate (LZUs/USS) 0.02 2.46 2.81 3.02 3.09 3.12 Index Real Eff. X-R 3ase 1980 100.00 73.75 75.36 83.61 89.84 96.53 GOP (millions of current USs) 194775 206225 244046 286628 329322 359913 IEC 06/ 43 ANNEX III Mexico - ECCNOMIC INDICATORS Table 1 Page 3 of 3 Share of GP () Growth Rates Government Finance 1980 1989 1990 1991 1992 1993 1980-90 1990 1991 1992 1993 Current Receipts 26.8 29.4 29.6 26.6 26.9 27.1 73.2 36.5 13.2 18.9 5.8 Current Expenditures 23.9 30.2 26.9 22.5 20.9 22.1 74.6 20.5 5.2 9.8 10.9 Current Budget Balance 2.9 -0.8 2.7 4.2 5.9 5.0 Capital Receipts .. .. .. .. .. .. -8:Z Capital Experditures 9.6 4.0 5.0 4.5 4.3 3.8 4 0 Overall Deficit .. .. .. .. .. .. Official Capital Grants .. .. .. .. .. .. External Borrowing (net) 2.7 -0.5 0.6 -0.9 0.1 .. Domestic Non-Bank Borrowing -0.9 3.1 -1.0 -1.2 0.3 .. Domestic Bank Financing 4.7 2.3 2.6 2.4 -2.0 .47. 51. 14.7 Net Disbursements (USS miLLions) Debt Outstanding & Disbursed CUSS miLLios) J. External Capital Flows, Debt and Debt Burden Ratios 1980 1989 1990 1991 1992 1993 1980 1989 1990 1991 1992 1993 Public & Publicly Guer. LT 5121 488 6631 2099 -3376 992 33915 76093 77490 79048 72219 74260 Official Creditors 795 937 4174 1402 614 184 4481 16796 22767 2514 25281 2609 Multitateral 501 728 2610 903 490 112 3189 10753 14303 15475 15537 16199 of which IBRD 333 620 2524 628 371 107 2063 7821 11030 11928 11966 12322 of which 1DA 0 0 0 0 0 0 0 0 0 0 0 0 Bilateral 294 209 1564 499 123 72 1291 6043 8464 9669 974 9900 Private Creditors 4326 -449 2457 697 -3989 808 29434 59297 54723 53904 46938 48161 Suppliers -52 33 62 26 -3 0 257 316 330 134 117 118 Financial Markets 4378 -482 2395 671 -3987 808 29177 58981 54393 53770 46821 48043 Private Non-guaranteed 1700 -1960 1864 1785 3055 2623 7300 3971 5835 7620 10675 13413 Total LT 6821 -1472 8495 3884 -321 3615 41215 80064 83325 86668 82894 87673 IMF Credit -134 389 993 171 -568 -1175 0 5091 6551 6766 5950 4787 Net Short-Tern Capital 1043 -936 2849 3409 6230 3031 16163 8662 16082 21857 24535 26388 Total inct. IMF & Net ST 7729 -2019 12337 7464 5342 5471 57378 93817 105958 115291 113378 118848 Bank and IDA Ratios 1980 1989 1990 1991 1992 1993 Share of Total Long-Term DCD Notes: 1. IBRD as % of Total 5.01 9.77 13.24 13.76 14.44 14.05 2. IDA as % of Total 0.00 0.00 0.00 0.00 0.00 0.00 Data an EconKnic Indicators tables 3. IBRD+IDA as % of Total 5.01 9.77 13.24 13.76 14.44 14.05 should follow the definitions and the concepts of the Standard Tables and Share of LT Debt Service Standard Attachments. The indicators 1. IBRD as % of Total 2.73 9.33 17.73 17.06 10.33 13.04 should include data through the most 2. IDA as % of Total 0.00 0.00 0.00 0.00 0.00 0.00 recently coipleted calendar year (or 3. IBRD+IDA as % of Total 2.73 9.33 17.73 17.06 10.33 13.04 fiscal year in the case of fiscal year countries). Staff estimates my be used DCO-to-Exports Ratios if final or preliminary actuaLs are not -----------------yet available. The use of estimates ard 1. Long-Term Debt/Exports 185.43 169.68 154.62 152.62 137.40 137.11 preliminary figures should be indicated 2. IMF Credit/Exports 0.00 10.79 12.16 11.91 9.86 7.49 by: 3. Short-Tenn Debt/Exports 72.72 18.36 29.84 38.49 40.67 41.27 4. LT+IMF+ST DCD/Exports 258.14 198.83 196.62 203.03 187.92 185.87 a = estimated data p = preliminary data D00-to-GP Ratios 1. Long-Tern Debt/GP 21.16 38.82 34.14 30.24 25.17 25.53 2. IMF Credit/GP 0.00 2.47 2.68 2.36 1.81 1.39 3. Short-Tern Debt/GP 8.30 4.20 6.59 7.63 7.45 7.68 4. LT+IMF+ST DC/GDP 29.46 45.49 43.42 40.22 34.43 34.60 Debt Service /Exports 1. Public & Guranteed LT 35.50 20.11 14.81 16.58 25.28 18.11 2. Private Non-gurenteed LT 6.52 8.18 1.44 2.15 4.79 4.62 3. Total Long-Term Debt Service 42.02 28.29 16.25 18.73 30.07 22.73 4. IMF Repurchases+Sery. Chgs. 0.62 2.58 3.18 2.90 2.32 2.50 5. Interest only on ST Debt 6.68 2.11 1.82 2.51 1.92 1.41 6. Total (LT+IMF+ST Int.) 49.32 32.98 21.25 24.13 34.31 26.65 IEC 06/ 44 MEXICO BALANCE OF PAYMENTS (millions of U.S. dollars) ANNEX I Table 2 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Exprts oftGNS 22.590 28.241 28,152 30,004 33.886 31,503 26,339 32.975 36,712 42.307 48,673 51,401 55,299 Non-Maquita Merch. Exports 15.512 20,102 21,230 22,312 24,196 21.664 16,158 20,495 20.546 22,842 26,838 26,854 27,516 Oil Exports 10,441 14,573 16.477 16,017 16,601 14,767 6.307 8.630 6.711 7,876 10.104 8,166 8.307 Non-Oil Exports 5,071 5.529 4,753 6,295 7,595 6,897 9,724 11.865 13.835 14.966 16,735 18.683 19.209 Agriculure 1,528 1,482 1,233 1.189 1,461 1,409 2.098 1.543 1.670 1,754 2.162 2,373 2.112 Mining 512 686 502 524 539 510 383 576 660 605 617 547 356 Manufacturing 3,030 3.360 3,018 4.583 5.595 4,978 7,242 9.746 11.504 12.607 13.955 15.769 16,740 Automobiles 129 110 81 124 146 141 546 1,325 1,452 1,567 2.531 3,801 3,661 Non-Amomobiles 2,902 3.251 2.936 4,458 5.449 4,837 6,697 8.421 10,052 11,041 11,425 11,968 13,079 Maquila Exports 2.519 3,205 2,826 3,641 4,904 5.094 5,646 7,105 10,146 12.329 13,873 15,833 18.680 Non-Factor Services 4.559 4,933 4.097 4.051 4.785 4,746 4,535 5.376 6,020 7.136 7,962 8.714 9.104 ImportsofGNS 27,430 35,401 22.841 16,216 21,028 23,741 21,805 23,894 34,146 42,426 51,535 60,508 73,617 Non-Maquila Merch. Imports 19.342 24,955 15.036 9,026 12.167 14.533 12.433 13,305 20.274 25.438 31.272 38.184 48.193 Consumer Goods 2.449 2,308 1,517 614 848 1,082 846 768 1,922 3.499 5.099 5,834 7,744 Inermediate Goods 11,720 14,573 9.017 6,215 8,746 10,287 8.632 9,907 14.325 17.171 19.384 23.762 28,893 Capital Goods 5.174 7.574 4.50 2,197 2.573 3,165 2,954 2,631 4,027 4.769 6,790 8,588 11,556 Maquila Imports 1,747 2,229 1.975 2,823 3,749 3,826 4.351 5,507 7,808 9,328 10.321 11,783 13.937 Non-Factor Services 6,341 8,217 5.830 4.368 5.112 5,382 5,021 5,082 6,064 7,660 9,942 10,541 11,488 TradeBalance (4,840) (7,160) 5,312 13,788 12,858 7,762 4.533 9.081 2,566 (119) (2,863) (9.106) (18,318) As a Percentage of GDP -2.5 .2.9 3.1 9.3 7.3 4.2 3.5 6.5 1.5 -0.1 -1.2 -3.2 -5.6 Net Factor Income (6,583) (10,259) (12,462) (9,378) (10.270) (9,157) (7.671) (6,940) (7,373) (8.042) (7.716) (6,369) (6.876) Net Current Transfers 704 856 888 1.014 1,178 1,799 1,368 1.679 1,885 2,075 3.465 2,186 2,385 Current Account Balance (10,718) (16.563) (6.263) 5,424 3.765 404 (1,771) 3,820 (2,922) (6,085) (7.114) (13,789) (22.309) As a Percentage ofGDP -5.5 -6.6 -3.6 3.6 2.1 0.2 -1.4 2.7 -1.7 -3.0 -2.9 -4.8 -6.9 LoogTerm Capital Inflows 10,469 19,183 16.661 7,828 3,784 861 934 2,756 (128) 3,723 5,674 20,509 20,586 Direct Foreign Invesanenm 2,090 3,076 1.900 2.192 1,541 1,984 2,401 2,635 2,880 3,176 2,633 4,762 5.366 Portfolio investnent 0 0 0 0 0 0 0 0 0 493 1,994 9,870 13.553 Net MLT Borrowing 1/ 6,820 12.498 7.970 2.356 1.623 (23) 550 3.779 (1.505) (1,847) 5.902 3,526 (2.981) Pub & Pub-Guar Net Borrow. 5,120 9.598 8.670 2,356 1,239 878 840 4,616 1,227 488 6.631 2,099 (3,376) From Commercial Banks 4.180 6,978 6,019 2.648 1.205 987 (490) 3,999 822 (230) 1,766 274 564 From Non-Commercial Banks 940 2,620 2,651 (292) 34 (109) 1.330 617 405 718 4,865 1,825 (3,90) Priv. Non-Guar. Net Borrow, t,700 2.900 (700) 0 384 (901) (290) (837) (2.715) (1.960) 1.8W4 1,785 3.055 Other Long-Term Inflows 1,559 3,609 6.791 3.250 620 (1.099) (2,017) (3,657) (1,504) 1,901 (4,356) 2,352 4,648 Net Short-Term Capital 1,043 7,415 (6,887) (8.528) (3,578) (1.788) 691 (5,048) (677) (936) 2,849 3,409 6,230 Errors and Omilsslos 142 (8,898) (7,033) (2,645) (1.718) (2,512) (342) 3.469 (2.648) 3.305 2.183 (2.208) (1.973) Change In Net Reserves 21 937 1.136 (3,521) 2.079 2.253 (3,033) (488) 4.997 (6,376) 7 3.593 7,922 2,034 Use of IMF Credit 1/ (136) 0 221 1,039 1,100 610 1,091 1,103 (358) 389 (360) 215 (861) ChangeM In Gross Reserves 2/ 801 1,136 (3.300) 3.118 3.353 (2,423) 603 6.100 (6.734) 396 3.233 8,137 1,173 11 Data from World Bank. 'World Debt Tables'. Adjusted for: principal not paid, arrears. and prepaymenrts. =119 21 Data from IMF. 'Iniernational Financial Statistics. Source: Banco de Mexico 45 ANNEX M Table 3 Page 1 of 2 IMPORT CONTROILS AND TARIFFS, FEBRUARY 1990 AND JUNE 1992 February, 1990 June, 1992 Contribution to Coverage of Average Coverage of Average Activity Total Coverage I Controls Tariff Controls Tariff 1. Agriculture 5.49 56.1 8.2 47.6 7.5 2. Livestock 1.08 17.5 9.5 17.5 9.5 3. Forestry 0.0 0.0 9.3 0.0 9.3 4. Fish and Seafood 0.44 56.3 19.8 56.3 19.8 5. Carbon Derivatives 0.0 0.0 8.1 0.0 8.1 6. Petroleum Extract 3.68 100.0 8.6 100.0 8.6 7. Iron Ore 0.0 0.0 10.0 0.0 10.0 8. Nonmetallic Minerals 0.0 0.0 13.0 0.0 13.0 9. Quarrying 0.0 0.0 10.4 0.0 10.4 10. Other Minerals 0.0 0.0 8.5 0.0 8.2 11. Meat & Milk 1.59 22.8 10.8 22.4 11.0 12. Fruits & Vegetables 0.0 0.0 19.0 0.0 19.0 13. Milling Products 0.0 0.0 11.3 0.0 11.3 14. Mixtomal Products 0.0 0.0 10.5 0.0 10.5 15. Coffee Products 1.65 99.7 20.0 27.4 20.0 16. Refined Sugar 0.0 0.0 10.0 0.0 10.0 17. Vegetable Oils 0.63 49.1 5.7 0.0 13.7 18. Animal Foods 0.0 0.0 10.0 0.0 10.0 19. Misc. Food 0.17 7.5 16.5 5.5 17.2 20. Alcoholic Beverages 0.0 0.0 19.9 0.0 19.9 21. Malt Beverages 0.07 5.6 19.4 5.6 19.4 22. Nonalcoholic Beverages 0.0 0.0 19.8 0.0 19.8 23. Tobacco Products 0.81 100.0 20.0 100.0 20.0 24. Soft Fiber Products 0.03 1.5 14.2 0.2 14.2 25. Hard Fiber Products 0.0 0.0 11.7 0.0 11.7 26. Other Textiles 0.0 0.0 17.7 0.0 17.7 27. Apparel 0.0 0.0 20.0 0.0 20.0 28. Leather & Shoes 0.0 0.0 16.2 0.0 16.2 29. Sawmill Products 0.0 0.0 15.4 0.0 15.4 30. Other Wood Products 0.0 0.0 17.9 0.0 17.9 31. Paper & Cardboard 0.01 0.6 9.3 0.0 9.4 32. Printing 0.0 0.0 3.9 0.0 3.9 33. Petroleum 1.82 86.4 4.4 86.4 4.4 34. Basic Petrochemicals 0.0 0.0 4.9 0.0 4.9 35. Basic Chemicals 0.0 0.3 9.8 0.0 9.8 36. Manure & Fertilizer 0.0 0.0 10.2 0.0 10.2 37. Synthetic Resins 0.0 0.0 12.1 0.0 12.1 38. Pharmaceuticals 0.05 4.6 15.7 4.6 15.7 39. Soaps, Detergents & 0.0 0.0 18.8 0.0 18.8 40. Other Chemicals 0.14 6.3 13.1 0.0 13.7 41. Rubber Products 0.0 0.0 16.1 0.0 16.1 42. Plastic Products 0.0 0.0 15.4 0.0 15.4 43. Glass & Glass Products 0.0 0.0 16.5 0.0 16.5 44. Cement 0.0 0.0 10.0 0.0 10.0 45. Other Chemicals 0.0 0.0 16.5 0.0 16.5 46. Basic Ferrous Metals 0.0 0.0 19.1 0.0 10.1 47. Basic Nonferrous Metals 0.0 0.0 12.4 0.0 12.4 46 ANNEX M Iablel Page 2 of 2 IMPORT CONTROLS AND TARIFFS, FEBRUARY 1990 AND JUNE 1992 February. 1990 June, 1992 Contribution to Coverage of Average Coverage of Average & Total CgrageI C 1/ T.ig Controls TCtilf 48. Metal Furniture 0.0 0.0 16.8 0.0 16.8 49. Structural Shapes 0.0 0.0 16.1 0.1 16.1 50. Other Metal Products 0.03 1.4 14.0 1.4 14.0 51. Nonelectrical Machinery 0.05 3.1 15.6 3.1 15.6 52. Electrical Machinery 0.0 0.0 15.9 0.0 15.9 53. Home Electrical appliances 0.0 0.0 19.7 0.0 19.7 54. Electronic Equipment 0.0 0.0 17.6 0.0 17.6 55. Electrical Equipment 0.0 0.0 15.6 0.0 15.6 56. Automobiles 2.15 70.6 18.5 70.6 18.5 57. Vehicles Parts 0.03 1.3 13.2 1.3 13.2 58. Transport Equipment 0.0 0.0 12.6 0.0 12.6 59. Other Manufacturing L _Q10 11..O Average/Total 19.9 19.9 12.5 17.0 12.5 J/ Production weights as of 1986. Sourc: Bank estimates and SECOFI data. BANCOMEXT BALANCE SHEET, 1985-1993 &1 b/ (millions of U.S. dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993 Assets A Cash and Securities 189 43 123 307 230 251 652 228 811 B Portfolio 6,209 8,296 9,659 7,518 8,571 8,093 8,179 9,417 11,408 C Various Debtors (net) 76 I83 592 114 119 56 22 25 20 D Pixed Assets (net) 7 6 8 9 15 28 37 95 106 E Other Assets 673 793 353 737 222 674 863 1,273 2,740 1 Total Assets (A+B+C+D+El 7154 9.321 10.735 8.685 9.157 2A01 9753 1103 15.086 LiAbilities F Short Term liabilities 296 372 279 257 266 385 592 668 1,043 G Bank Loans 5,496 7,494 9,343 6,447 7,218 6,741 7,101 7,702 7,693 H OIber Liabilities 315 373 -217 870 386 726 800 1,336 2,442 1 Subornated Debentures 600 546 666 699 110 200 200 200 200 Outstamling Bods Ahroad 0 0 0 0 0 0 0 0 2,442 2 Total Liabiliies (F+G+11+n) 6707 75 10071 8.273 7980 8.051 8 693 9.907 1MZ§ J Capital Stock 71 32 141 176 906 782 749 738 741 K Capital Reserves 10 48 50 91 103 128 223 276 321 L Revahsation Surplus 18 is 13 18 26 58 31 49 122 M Net Profits 348 438 460 127 142 83 56 68 82 3 Total Capital (J+K+L+M) 447 536 664 412 1177 1051 1059 1 131 4 Total Liabilities and Capital (2+3) 7154 9.321 1 p1 Figures for 1985 to 1988 are from an estimated consolidation of Bancomext and FOMEX. h/ Includes transactions as financial agent of the Government. BANCOMEXT INCOME STATEMENT, 1985-1993 (millions of U.S. dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993 A Interest Income 589 755 830 1,018 1,181 856 732 775 918 B Commission Income 11 10 7 10 15 20 43 37 48 C Premium Income 1 2 2 0 2 0 0 2 3 D Other Income 13 2 1 34 0 0 0 0 58 1 Sub-Total (A+B+C+D) 614 769 840 1,062 1,198 876 775 813 1,027 E Interest Expense 446 668 652 688 849 558 593 591 694 F COI Commissions 7 13 59 57 78 60 0 0 0 G Other Commissions 4 3 68 1 28 27 26 11 H Other Expenses 0 0 0 0 0 0 0 0 29 2 Sub-Total (E+F+G+H) 457 684 717 753 938 646 620 617 734 I Net Income (1-2) 157 85 123 309 260 230 155 196 293 J Operating, Promotional & Other Exp. 22 20 67 24 73 188 127 129 158 K Operating Profits (I-J) 135 65 56 285 187 41 29 67 135 L Foreign Exchange Earnings 267 437 270 32 84 47 32 31 38 M Change in Capital Reserves 35 53 24 180 125 0 0 26 91 N Income Taxes 13 8 9 7 0 0 0 0 0 0 Employees Profits Share 3 2 3 3 4 5 4 4 5 P NJ:t Profits (K+L-M-N-O) 351 439 290 127 142 83 56 68 77 BANCOMEXT FINANCIAL PROGRAM. 1985-1994" (millions of U.S. dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993/e 99/p M& R6/ 1. Loan Disbursements A. Expoits 2,806 4,090 6,306 8,549 10,873 10,918 11,068 5,992 9,482 11,852 13,630 14,993 1. Pro-Shipment (555) (1,924) (2,635) (3,857) (5,359) 5,198 5,548 3,833 5,564 6,954 7,997 8,797 2. Post-Shipment (2,251) (2,166) (3,671) (4,692) (5,514) 5,720 5,520 2,159 3,918 4,898 5,633 6,196 B. Imports 756 745 808 1,176 1,119 1,614 1,587 1,895 2,022 2,528 2,907 3,198 C. Import Substitution 689 259 64 691 795 60 19 0 0 0 0 0 D. Industrial Equipment 106 200 237 206 459 570 499 1,088 1,996 2,495 2,869 3,156 E. Strengthening 0 0 0 0 0 316 154 0 0 0 0 0 Total Credit (A+B+C+D) 4357 5294 7415 10.2 13,246 1347 13.327 8.975 13.5 16,875 19 21.34 II. Guarantees B. Pre-Shipment 0 0 597 909 1,272 746 912 826 595 925 1,110 1,276 F. Post-Shipment 90 142 122 27 93 102 156 110 89 168 201 246 G. Imports 0 0 0 0 20 160 206 198 514 254 318 397 Total Guarantees(E+F+G) 90 142 719 936 1.385 j,0 1J74 1.134 1198 1347 1629 1919 Total (I +1 _ _ 8F 1_ 4 1LM~ 1M 1111M 140 100 1,469 1 UM 236 al Excludes operations as GOM financial agent. el Estimated ... p/ Projected BANCOMEXT FUNDING PROGRAM, 1985-1991 a/ (millions of U.S. dollars) 1985 1986 1987 1988 1989 1990 1991 1. External Sources 729 990 1,931 1,884 1,271 2,489 4,054 Commercial Banks 146 259 493 626 695 1,015 912 Official Agencies 349 620 1,229 1,178 415 879 597 Capital Markets 0 0 0 0 81 60 228 Multilateral Organizations 234 111 209 80 80 12 213 "Trade Related" Financing - - - - 0 522 2,104 II. Internal Sources 3,312 3,533 3,292 4,266 5,478 4,344 2,773 E. Own Resources 3,165 3,331 3,165 3,764 5,092 4,344 2,773 F. Commerical Banks 61 84 59 294 232 - - G. Capital Markets 86 118 68 208 154 - - III. COT Scheme 316 771 2 4472 6499 6646 6500 Total (1+11+111) 4 5 294 7415 10622 1 7 al Excludes operations as GOM's financial agent. BANCOMEXT FINANCIAL PROGRAM BY TIER. 1985-1996" (millions of U.S. dollars) 1985 1986 1987 1988 1989 1990 1991 1992 19931e 1994/p 1995/p 1996/ 1. Loan Dlisursenients A. Exports 2.A0 40 606 8.9 083 10,918 jL98 9 482 18 1 j.224 FTI 408 556 712 740 153 529 361 325 545 680 782 860 ST 2,398 3.534 5.594 7,809 10,720 10,389 10,707 5.667 8.937 11,173 12.849 14.134 1. Pre-Slipmeni hl 555 1.24 162 -g_ 5.359 5198 _548 3 5563 694 954 799 &M irr 55 235 254 ~ 275 104 257 258 itI 160 200 230 253 ST 500 1,689 2.381 3,582 5.255 4,941 5.290 3.722 5,403 6,754 7,767 8,544 2. Post-Slipmenm _1 2166 3671 4 5-720 5520 2. 3919 49899 64 6.92 FT 353 321 458 465 49 272 103 214 385 480 552 607 ST 1,898 1.845 3.213 4.227 5.465 5.448 5.417 1.945 3,534 4,419 5,082 5,590 D. Imports 756 745 808 jj76 1jj.2 l614 1587 l9 2 023 22 2258 39 FT 417 458 700 1.032 782 1.319 1.117 751 792 985 1,133 1.246 ST 339 287 108 144 337 295 470 1.144 1.231 1.543 1.774 1.952 C. Import Substitution 689 259 64 691 795 60 19 0 0 0 0 0 FT . 230 55 39 300 176 47 14 0 0 '0 0 0 ST 459 204 25 391 619 13 5 0 0 0 0 0 D. Industrial Equipment 106 200 237 206 459 570 499 L088 L995 2494 2.6 I.I5 FT 41 102 189 12 317 235 81 462 291 364 419 460 ST • 65 98 48 44 142 335 418 626 1,704 2.130 2,450 2.694 E. Strengthening 316 154 0 0 0 0 0 Fr 1 7 0 0 0 0 0 ST 315 147 0 0 0 0 0 Total Credit 4357 524 7.415 10.662 12416 13,478 13327 8 97 16875 237 Fil 1,096 1,171 1,640 2,234 1.428 2.131 1,580 1,538 1.628 2.029 2,333 2,567 ST 3.261 4.123 5,775 8,388 11,818 11,347 11.747 7.437 11.872 14.846 17,073 18,780 11 Guaranecs Total Guaranmees 90 142 719 936 13S5 Lä8 7 274 1.1 19 1.347 Lf1j98 ML Fr 0 0 0 0 0 60 160 0 0 0 0 0 ST 90 142 719 936 1.385 948 1,114 1.134 1,198 1.347 1,629 1,919 Total(1+) 4 8 5 ,558 1463 54486 (4.6+ 10.09 14,698 18,222 24135 23,266 FT 1,096 1,171 1,640 2.234 1.428 2.191 1,740 1,538 1,628 2,029 2,333 2.567 ST 3,351 4.265 6,494 9.324 13.203 12,295 12,861 8,571 13,070 16,193 18,702 20.699 Note: FT. - first tier, ST. - second tier a/ Exclides operations as GOM's financial agent. el estimated 00 L/ Includes $360 million in 1990 and $240 million in 1991 for a femporary L/ projecied financial restrucruring program. Also includes in years 1989 thru 1984 loans made for export promotion expenditures. BANCOMEXT FINANCIAL PROGRAM BY CURRENCY, 1985-1996 a/ (millions of U.S. dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993/e 1994/p 1995/p i22yv I. Loan Disbursements A. Exports 2806 4.9 6 8549 10,873 i0918 g106 5992 9.481 11853 iLj5 iL LC 489 1,347 1,472 2,538 2,841 170 324 233 380 476 594 743 PC 2,317 2,743 4,843 6,011 8,032 10,748 10,744 5,759 9,101 11,377 14,221 17,776 I Pre-Shipment 555 4 2 3857 5359 5198 5548 3833 5564 6954 6 LC 489 1,347 1,472 2,538 2,841 81 183 116 169 211 264 330 PC 66 577 1,163 1,319 2,518 5,117 5,365 3,717 5,395 6,743 8,429 10,536 2 Post-Shipment 251 26 3671 4692 5514 5720 0 2159 3918 42898 6122 7.653 LC 0 0 0 0 0 89 141 116 211 264 330 413 PC 2,251 2,166 3,671 4,692 5,514 5,631 5,379 2,043 3,707 4,634 5,792 7,240 B. Imports 756 745 808 1.176 I1119 I 614 1.587 1895 2022 2528 31 3 LC 386 380 437 224 6 182 189 240 256 320 400 500 PC 370 365 371 952 1,113 1,432 1,398 1,655 1,766 2,208 2,760 3,450 C. Import Substitution 689 259 64 691 795 50 19 0 0 0 0 0 LC 633 168 57 329 185 41 16 0 0 0 0 0 LA PC 56 91 7 362 610 19 3 0 0 0 0 0 D. Industrial Equipment 106 200 237 206 459 570 488 8 996 2.495 3.119 3.898 LC 38 114 135 17 42 132 264 336 145 145 145 145 FC 68 86 102 189 417 438 235 752 1,851 2,350 2,974 3,753 E. Strengthening 0 0 0 0 0 316 154 0 0 0 0 0 LC 0 0 0 0 0 14 7 0 0 0 0 0 PC 0 0 0 0 0 302 147 0 0 0 0 0 Total Credit (A + B + C + D) 4.357 5294 7415 10622 13246 13I48 139327 897 50 5 2Lq24 26367 LC 1,546 2,009 2,101 3,108 3,073 539 800 809 781 940 1,139 1,388 PC 2,811 3,285 5,314 7,514 10,173 12,939 12,527 8,166 12,719 15,935 19,955 24,979 II. Ouarantees Total Guarantees (E+F+G) 90 142 719 936 135 1274 1.3 1.198 1.347 1,629 1919 LC 0 0 0 616 744 42 53 47 34 55 66 76 PC 90 142 719 320 641 966 1,221 1,087 1,164 1,292 1,563 1,843 Total (I + 1) 4.447 5436 8.134 I 558 149631 1448 14,601 10 10 4 698 18222 227 28628 LC 1,546 2,009 2,101 3,724 3,818 581 853 856 815 995 1,205 1,464 FC 2,901 3,427 6,033 7,834 10,813 13,905 13,748 9,253 13,883 17,227 21,518 26,822 note: LC - local currency, FC - foreign currency E/ Excludes operations ai GOMs financial agent c/ csimated pl projected BANCOMEXT CREDIT DISTRIBUTION BY INANCIAL INSTITUTION (Percent) Institution 1990 1991 1992 1993/e 01. Banco Nacional de Mexico 11.19 28.50 20.60 18.86 02. Banca Serfin 8.48 21.10 16.20 14.14 03. Bancomer 13.94 21.50 21.20 16.78 04. Citibank 25.02 7.00 7.10 4.71 05. Banco Internacional 2.17 4.50 6.10 6.85 06. Multibanco Comermex 1.48 3.00 2.90 4.33 07. Banco del Allantico 3.91 2.60 5.20 3.01 08. Banco Mexicano Sonex 6.38 1.60 2.90 5.78 09. FIRA/Banco de Mexico 11.16 2.60 3.10 1.97 10. Banco Mercantil del Norte 1.09 1.00 1.60 2.93 ¡1. Banca Cremi 1.81 1.00 1.60 1.00 12. Banco BCH 0.46 1.20 1.70 2.35 13. Mercantil Probursa 0.00 0.00 1.40 4.04 14. Banca Promex 2.59 0.50 0.70 0.98 15. Banco Obrero 2.50 0.20 0.60 0.24 16. Banco del Centro 0.02 0.40 0.60 1.21 17. Banco del Oriente 0.86 0.40 0.40 0.55 18. Banca Confia 0.31 0.40 1.20 1.35 19. Banco de Credito Rural 0.00 0.20 1.10 1.19 20. Banco de Credito y Servicio 1.00 0.40 0.80 3.08 21. Banpais 1.32 0.60 1.60 3.72 22. Banoro 0.00 0.20 0.80 0.43 23. Banco del Pequeno Comercio 0.08 0.40 0.10 0.50 24. NAFIN 2.08 0.00 0.00 0.00 25. Mercantil de Mexico 1.90 0.60 0.00 0.00 26. Banobras 0,25 0.10 0.00 0.00 27. Arrendadoras 0.00 0.00 0.50 0.00. Total 100.00 100.00 100.00 100.00 e/ estimated Source: Bancomext BANCOMEXT GUARANTEE PROGRAM, 1985-1996 (millions of U.S. dollars) 1985 1986 1987 1988 1989 1990 1991 1992 1993/e !94/p 1995/ 199/ Guarantees Granted 90.4 142.0 688.5 935.9 11,385. 1008.0 1,2740 1,134. 1,129 14.7 112.1 1 1. Pre-Shipment 90.4 142.0 572.0 909.0 11,272.0 746.0 912.0 826.4 594.7 924.7 11,109.6 1,276.0 2. Post-Shipment 0.0 0.0 116.5 26.9 93.0 102.0 156.0 110.0 89.2 167.8 200.8 246.2 3. Imports 0.0 0.0 0.0 0.0 20.0 160.0 206.0 198.3 514.0 254.2 317.7 397.2 el estimated p/ projected BANCOMEXT EXPENDITURES ON PROMOTIONAL ACTIVITIES (millions of U.S. dollars) 1986 1987 1988 1989 1990 1991 1992 1993/ 1994/p Fairs, Missions and International Events 0.9 1.6 1.4 1.1 1.3 4.3 3.0 5.0 5.5 Foreign Trade Incentives 0.0 1.1 4.6 0.5 N.S. N.S. 0.6 2.0 2.3 Assistance to Exporters N.S. 0.1 0.1 0.2 N.S. N.S. 0.2 0.2 0.3 Training N.S. N.S. 0.1 N.S. 0.4 0.6 1.4 2.4 2.8 Information Systems 0.1 0.3 0.5 0.7 N.S. N.S. 1.0 2.6 3.0 Operating Expenses Trade Offices 6.6 10.4 11.4 16.0 6.3 6.8 16.4 10.0 11.0 (-A Fixed Assets 0.7 0.3 N.S. 1.5 N.S. N.S. 1.6 1.6 1.7 Publications/Advertising -- 0.7 -- Total Expenditures 8.3 13.8 18.1 20.0 8.0 12.4 24.2 23.8 26.6 Government Transfers 11.1 q0.0 18.1 0.0 0.0 0.00 0.0 0.0 0.0 e/ estimated p/ projected BANCOMEXT AVERAGE COST OF FUNDS (Percent Margin over LIBOR) 1991 1992 1993/e 1994/p 1995/e 1996/2 External Sources A. Commercial Banks +0.75 +0.75 +0.70 +0.70 +0.70 +0.70 B. Official Agencies +0.50 +0.50 +0.50 +0.50 +0.50 +0.50 C. Capital Markets + 1.95 + 1.17 +1.44 +1.34 +1.25 + 1.14 D. "Trade Related" Financing +1.00 +1.17 +0.95 +0.85 +0.85 +0.85 85t el estimated p/ projected