Mexico - Development Finance Companies and Industrial Development Line Project

/ 3 ~~ JAi7M RESTRICTED No. P-10 INTERNATIONAL BANK FOR RECONSTRUCTIO EVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the $10 MILLION LINE OF CREDIT FOR PRIVATE ENTERPRISE IN MEXICO to a CONSORTIUM OF MEXICAN PRIVATE BANKS and NACIONAL FINANCIERA, S.A. Guaranteed by the UNITED MEXICAN STATES October 12, 1950  CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOLIvENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A LINE OF CREDIT FOR PRIVATE ENIRPRISE IN &EXICO Part. I - Introduction 1. On October 5, 1950, the following documents were distributed 'for the information of the Executive Directors (No. R-381)s (i) Memorandum explaining proposed Line of Credit Agreement dated September 21, 1950. (ii) Translation of draft Consortium Agreement. (iii) Draft Loan and Guarantee Agreements covering proposed line of credit. 2. On October , 150, the Consortium Agreement was duly'sigr.'ed and executed, tsubstantially in the form of the draft mentioned in paragraph I (i) above. 3. The draft Loan and Guarantee Agreements have been approved by the, eight bariks'and Nacional Financiera (the latter also on behalf bf the Mexican Government) in the same texts as referred to in paragraph 1 (iii) above' Part II - Mexico's Ability to Repay 4. The improvement in Mexico's financial and economic condition dur- ing'the first part of this year has continued. The production of minerals, which had been expected to decline as a result of the denunciation of the Mexico-Ui.S, Trade Agreement, has responded to higher market prices and the volume and value of mining output is now expected to exceed last yearls. Prospects of a record cotton crop and higher prices for cotton, lumber, coffee and henequen also make the agricultural outlook particularly bright this year, and the new refinery at Salamanca should substantially increase the production of petroleum products. 5. The value of Mexico's foreign trade in the first half of 195Q was about equal to that in the first half of 1949j but showed a small excess of imports. Higher import duties on both sides following the termination of the Mexico-U.S. Trade Agreement would normally tend to reduce both Mexico's imports and exports. If, however, recent war-generated demand and rising' prices in Mexican export markets are'maintained, Mexico may obtain increased protection for her industries without lose of exports.  - 2 6. During 1950, industrial expansion has continued. New investment 'was chiefly in textiles, chemicals, construction and metalworking. The $150 million line of credit extended to kexico by the Export-Import Bank early in September is officially earmarked to finance development projects in transportation, agriculture (including irrigation), communications and electric power. It is possible that Mlexican funds, formerly committed for some of these purposes, may now be released for the modernization or expansion of petroleum production or the construction of oil pipelines. The rate of development in any of these fields, will depend on the speed with which acceptable projects can be formulated for presentation to the Export-Import Bank, 7. Mexico's internal finances have remained stable. Government revenues in the first six months of 1950 have exceeded estimates and expen. ditures have been held down. It is expected, therefore, that the first half of this year will show a budgetary surplus. The volume of credit has continued to be held in check, and there has been no change in the Govern- ment's policy of channeling new credit into industrial and agricultural development. 8. Tourist traffic and cotton exports have contributed to the seasonal improvement of Mexico's exchange position, In August, there was a'sharp increase in foreign exchange receipts in the form of repatriated capital, augmented by flight capital from owners who feared possible U.S. foreign funds control or were concerned over the future value of the'dollar. Infla- tionary pressures, created by the inflow of exchange, although held in check by the Central Bank's policies, were reflected in an expansion of the monetary circulation by about 20% in the first part of 1950 compared with the corresponding period of 1949e 9. At the present level of indebtedness, Mexico's total foreign debt service will range between $39 and $42 million in the years 1950 to 1953j and will decline substantially thereafter, In the peak year, 1951, debt service represents 6% of 1949 current exchange receipts. VJhile this per. centage is not excessive, it would not be desirable for Alexic-o to increase her debt service obligations materially above present levels. 10. It is difficult to assess accurately at the present time the effect of the $150 million line of credit recently extended by the Export-Import Bank upon Mexico's ability to repay. This will depend both on the purpose and on the terms (especially the amortization period) of the loans to be extended under this credit. The more productive the loan projects are, and the more they take account of the need to improve M0exico's-long-term balance of payments position, the less strain they will place upon'Ikexico's capacity to repay. It is also important to assure that the terms of l6ans under this credit do not result in a material increase of Mexico.'s obliga- tions during the peak years of debt service immediately ahead. Information made available to the Bank indicates that it may take three to four years  -3- to allocate and disburse the entire $150 million credit, while the repay- ment period may extend for 15 or 20 years with a period of grace of say three years. It would appear, if this information proves correct, that for the next five or six years, there will only be minor additions to Mexicots debt service burden because of the Export-Import Bank credit, Thereafter, since charges on Mexico's present debt will have been reduced to $29 million by 1956) Idexico could absorb substantial service charges under the new Export-Import Bank credit without raising its total foreign debt service above the present level. 11. In any case, the addition of $10 million to Mexico's foreign debt under the terms of the proposed IBRD line of credit, involving withdrawals spread over three years and repayment normally in five, will represent some addition to service payments during the three peak years of debt service immediately ahead. The exact amount will depend upon the rate of utiliza- tion of the credit, but is unlikely to exceed $2 million even in the third year (1953), Recent repayment of the balance of $15 million owed to the United States Stabilization Fund reduced annual service charges by about $300,000 and the continued improvement in the Mexican balance of payments, if maintained, would provide additiopal resources to meet debt obligations. Proceeding on the assumption that the loans under the Export-Import Bank line of credit are made for productive purposes and that the schedule of service on these loans is reasonably adjusted to the pattern of Mexico's total debt service, it does not appear that the $g0 million proposed loan by IBRD is an unreasonable risk* Part III - Commitment Charge - Interest Rate 12. The commitment charge would be 3/4% per annum on the amount of the -approved loans outstanding and unused. Such charge would accrue'from the date on which each loan is approved by the Bank and the amount credited to the loan account. This technique is the same as that used in the Ethiopian Development Bank Loan and as that contemplated for the Turkish Development. Bank Loan. 13, The interest rate (including commission) would be 31% per annum on the principal amount of each loan withdrawn from the corresponding loan account, Part IV - Compliance With Articles of Agreement 14. I'am satisfied that the proposed line of credit complies with the Articles of Agreement of the Bank, I am also satisfied that in the prevail.- 'ing market circumstances the members of the Consortium are unable to obtain the line of credit elsewhere on reasonable terms. 15. Appendix I contains the report of the Committee provided for in Article IIIp Section 4, Paragraph (III) of the Articles of Agreement.  Part V - Recommendations 16. The loan operation proposed above presents a number of novel features which have yet to be tested in practice. I believe, however, that there are good prospects for their success and that they embody a valuable extension of the Bank's lending technique. 17. I therefore recommend that the Bank at this time open a line of credit of $In million in favor of the members of the Consortium on the terms specified in the draft Loan and Guarantee Agreements, Eugene R. Black President October 12, 1950  APPEDIX I STATUTORY LOAN COWVJTIEE REPORT To: The President, International Bank for Reconstruction and Development Report of Loan Committee under Article III, Section 4(iii), of the Articles of Agreement on the proposed line of credit to Banco Nacional de Mexico, S.A., Banco de Comercio, S.A., Banco Internacional, S,A., Banco de Londres y Mexico, S.A., Banco Mexiqan9, S.A., Banco Mercantil de Monterrey, S.A., Banco Industrial de Monterrey, S.A., Banco Comercial Mviexicano, S.A., and Nacional Financiera, S.A, The undersigned Committee, constituted under Article V, Section 7, of the Articles of Agreement of International Bank for Reconstruction and Development (hereinafter called the Bank) hereby submits its report pursuant to Article III, Section (iii), of said Articles in respect of the proposal. that the Bank open to Banco Nacional de Mexico, S.A., Banco de Comercio, S.A,, Banco Internacional, SIA., Banco de Londres y Mexico, S A., Banco Mexicano, S.A., Banco Mercantil de IMonterrey, S.A., Banco Industrial de Monterrey, S.A., Banco Comercial Mexicano, S.A,, and Nacional Financiera, S.A. a line of credit in the principal amount of Q10,000000. The purpose of this line of credit is to provide foreign exchange for the institution of a program to contribute to the industrial development of Mexico by providing, through the borrowers, financing for specific productive projects for the development of private investment enterprises in Mexico. .1. The Committee has carefully studied the merits of the proposal to open such line of credit and the purposes to which the proceeds of the line of credit are to be applied.  -2.- 2. The Committee is of the opinion that the program toward the finan- cing of which the proceeds of such line of credit are to be applied comes within the purposes of the Bank as set forth in Article I of said Articles of Agreement and that the said program is designed to promote the develop- ment of the productive facilities and resources of United Mlexican States and is in the interests of United Mexican States and of the members of the Bank as a whole. 3. Accordingly, the Committee finds that the said program merits the financial assistance of the Bank and hereby recommends the said program for such assistance. CO MI TTEE S/ R. L. Garner s/ Alfonso Cortina s/ L. Rist s/ A. S. G. Hoar s/ Ansel F. Luxford s/ Henry W. Riley Dated at Washington, D,C. October 12, 1950  INTERNATIONAL BANIC FOR RECONSTRUCTION AND DEVELOPMENT (DRAFT) RESOLUTION NO. Approval of recommendations of the President that the Bank open a line of credit in favor of Banco Nacional de Mexico, S.A., Banco de Cornercio, S.A., Banco Internacional, S.A., Banco de Londres y Mexico, S.A., Banco Mexi- cano, S.A., Banco P.Iercantil de Monterrey, S.A., Banco Industrial de Monterrey, S.A., Banco Comercial Mexicano, S.A., and NacLonal Finan- ciera, S.A., to be guaranteed by United Mexican States, in the amount of 10,000,000; authoriza- tion to President or Vice President or Loan Director or Assistant Loan Director or Treasurer or Asoistant Treasurer to execute loan and guar- antee agrpements and other documents relating thereto. RESOLVED: 1, THAT the Executive Directors hereby approve the recom- mendations of the President dated October 12, 1950, that the Bank open a line of credit in favor of Banco Nacional de Mexico, S.A., Banco de Comercio, S.A., Banco Internacional, S'A., Banco de Londres y Mexico, S.A., Banco Mexicano, S.A., Banco Mercantil de Monterrey, S.A., Banco Industrial de Monterrey, S.A., Banco Comercial Mexicano, S.A., and Nacio- nal Financiera, S.A. (hereinafter oalled the Borrowers), to be guaranteed by United Mexican States, in the principal amount of $l0,,OOOOOO (or the equivalent thereof in curren- cies other than dollars), in accordance with the terms and conditions set forth in the form of loan agreement between  -2- the Bank and the Borrowers which has been presented to the Executive Directors with the Report, dated October 5, 1950, (R-381), with interest (including commission), and commitment charge at the rates specified in the said form of loan agree- ment, and upon such other terms and conditions as are contained in said form of loan agreement between the Banlk and the Bor- rowers and in the form of guarantee agreemenlt between United Mexican States and the Bank which has been presented to the Executive Directors with such Report; 2.. THAT the rate of commission to be charged in connection witih said line of credit shall be 1% per annum of the princi- pal amount withdrawn from said line of credit fronm time to time outstanding; that said commission shall be included as part of the interest and service charge and shall be payable semi-annually on the dates for the payment of said interest and service charge; and that the amount of said commission so paid to the Bank shall be set aside in the special reserve as proVided in Section 6 of Article IV of the Articles of Agreement of the Bank; 3. THAT the form, terms and conditions of the said forr.s of loan agreement and guarantee agreement be, and they hereby are, approved; and 4. THAT the President or Vice President or Loan Director or Assistant Loan Director or Treasurer or Assistant Treasurer  - 3 - of the Bank be, and each of them hereby is, authorized in the name and on behalf of the Bank (a) to execute and to deliver a.loan agreement with the Borrowers substantially in.the form of the said form of loan agreement presented to the Execuative Directors, with such changes therein as they or anay of them shall approve, the execution of said loan agreement by any of said officers to be conclusive evidence of his approval of any such changes; (b) to execute and to deliver with the United Mexican States a guarantee agreement substantially in the form of the guarantee agreement presented to the E:ecutive Directors, with such changes therein as they or any of them shall approve, the execution of said agreement by any of said officers to be conclusive evidence of such approval of any such changes; and (c) to tale any and all such other action and ececute and de- liver any and all such othler documents as they or any of them shall deem necessary or proper in order to carry f'ully into effect the purposes of this resolution.