Announcement of Mexico Receives Two Billion Dollars World Bank Financing Package for Debt Reduction on January 31, 1990

FOR IMMEDIATE RELEASE iWorld Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A.* Telephone: (202) 477-1234 BANK NEWS RELEASE NO. 90/47 Contact: Ciro Gamarra (202) 473-8721 MEXICO RECEIVES $2 BILLION WORLD BANK FINANCING PACKAGE FOR DEBT REDUCTION WASHINGTON, January 31, 1990 -- Mexico will reduce its external debt and debt service with the help of a $2 billion financing package from the World Bank. The package includes a $1.26 billion interest support loan and about $750 million reallocated from previous World Bank adjustment loans to be used for debt reduction. The financing package approved by the Bank's Board of Directors, along with resources from the International Monetary Fund (IMF) and Japan, will enable Mexico to implement a debt reduction plan, agreed upon by Mexico and commercial- bank creditors. The plan will restructure $48.4 billion of debt for the 1989-92 t period. The restructuring is expected to help Mexico achieve sustainable economic growth and stabilize the economy. The Bank's financing package, which would be available for disbursement almost immediately, includes a $1.26 billion World Bank loan for interest support. The loan will finance collateral for interest payments on discount and par bonds, which are eligible for credit enhancement under an exchange offer by the government. The loan accounts for 20 percent of the World Bank's projected $6.3 billion lending program for Mexico during the period fiscal 1989-91. Subject to continued sound macro-economic management and maintaining sufficient progress in structural reforms by Mexico and the approval of the Executive Board, this lending program will support further economic adjustment measures, poverty alleviation, targeted social programs, environmental management and other investments designed to sustain long-term economic growth. The financing package includes $750 million in "set asides" from six previously approved adjustment loans to support the reduction of Mexico's public debt with commercial banks. These set asides, which will support enhancement of the discount bonds to be issued by the government, amount to 25 percent of all adjustment loans the Bank has made or expects to make to Mexico during the fiscal 1989-91 period. NOTE: Money figures are expressed in U.S. dollar equivalents. -2- On June 13, 1989 the Bank approved three $500 million loans to support reforms in Mexico's financial and industrial and public enterprises sectors. A total of $375 million--$125 million from each of the three loans--was set aside for debt reduction but was not available to the government until completion of the debt reduction plan. The $375 million accounts for half of the $750 million in set asides included in the World Bank's current financing package. In addition, the Bank is amending the loan agreements for a $265 million fertilizer sector loan (approved on March 15, 1988), for a $300 million agricultural sector loan (approved on the same date), and a $400 million steel sector adjustment loan (approved on March 3, 1988) to mobilize the remaining $375 million in set asides provided in the financing package. The $750 million set asides from these six loans will be disbursed into the same collateral account in parallel with the interest support loan. The proceeds of the set asides will be used by the government to issue bonds in exchange for existing debt at a 35 percent discount. Mexico will secure repayment of the principal of these discount bonds with U.S. Treasury zero-coupon obligations (or other comparable collateral for bonds in other currencies) that have a principal amount and maturity that matches the bonds. The $1.26 billion loan and the set asides are expected to be fully disbursed by March 31, 1990, depending on compliance with terms of the loan agreements. The financing package also includes a waiver of the negative pledge restriction in the World Bank's loan and guarantee agreements with Mexico to permit a pledge of some $7.5 billion as collateral for the principal or interest payments of discount and par bonds. And it includes a restructuring of the World Bank's guarantees of $750 million under two facilities of multi-facility agreements," of 1987. The financing package will help Mexico reduce its debt by about 24 percent (after the recapture clause allowance) measured as the reduction in the discounted value of debt service as a percentage of the face value of the outstanding debt. This is achieved by reducing both amortization and interest payments. The debt package will reduce Mexico's net transfer to commercial creditors by about $4 billion a year from 1989 through 1994. The World Bank's financing package is the largest amount approved by the institution for debt-reduction purposes. The package, along with the country's economic adjustment efforts, will benefit the Mexican economy and help improve the living conditions. Jobs will be generated, targeted and cost-effective social programs will be put in place and programs to protect the environment will be strengthened. The $1.26 billion World Bank loan to the Banco Nacional de Comercio Exterior (BANCOMEXT) is for 17 years, including five years of grace, with a variable interest rate, currently 7.75 percent, linked to the cost of the Bank's borrowings. It also carries an annual commitment charge of 0.25 percent on the undisbursed balance. -0-