Recent developments affecting Mexico's creditworthiness

 No. E 114 r-~'~····· CONFIDENTIAL !: 67023 ) This report is restricted to those members of the staff to whose work it directly relates. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT RECENT DEVELOPMENTS AFFECTING MEXICO'S CREDITWORTHINESS October 30, 1950 Economic Department Prepared by: G. de Fleurieu Albert Waterston  RECENT D~OPMENTS AFFECTING I~ICOtS CREDITWORTHINESS Mexico's Debt Service 1. Because of the still precarious equilibrium of the Mexican balance of payments, the last comprehensive stuqy of Mexico's creditworthiness, completed in May 1950, concluded that Mexico could assume further loan commitments only i f total debt service payments did not rise materially above current levels. Mexico's foreign debt service payments will reach a peak of $42 million in 1951 and decline only moderately in the following two years. Thereafter, however, a substantial fall in payments will take place, and in 1955, the debt service will be more than $10 million below the 1951 level. 2. In addition to its regular debt service payments, Mexico also was obligated in ABY 1950 to repay $15 million to the United States Stabilization Fund and to repurchase pesos equivalent to $22.5 million from the IMF. Since then, Mexico has liquidated its debt to the U.S. Stabilization Fund, but the debt to the IMF remains. OUr best information indicates that, before the end of the year, Mexico may have to repurchase, with dollars, most or all of the pesos held by the Fund. Export-Import Bank Line of Credit I 3. Since the date of the last comprehensive report, Mexico's creditworthi- ness has been influenced by two events of major significance: the granting of the Export-Import Bank line of credit for $150 million and the Korean War. 4. It is too early to assess fully the impact of these changes. As far as the Export-Import Bank credit is concerned, the projects for which loans will be requested, the rate of withdrawals if and when loans are approved under the line of credit, and the terms of the amortization of these loans are at present only conjectural. 5. According to information furnished py the Export-Import Bank, the Mexicans have submitted data on only two projects, the Faleon Dam and the Alvaro~Obregon Dam irrigation systems, totalling $30 million. Negotiations for loans for these projects were opened some time ago, but only limited progress has been made toward their consummation. There is some expectation that the Mexieans may also ask for about $50-70 million to rehabilitate their railways .. If so, our Export-Import Bank source tells us that drastic changes in the adminis- trative methods and management are likely to be required as a condition for a loan. The Mexicans have also mentioned to the Export-Import Bank that they might ask for funds to finance a portion of their roadbuilding program, but no details have been made available concerning any projects. 6. At the moment, then, it would appear that a loan of $)0 :r.ri.llion might be approved next year. The best information is that the railway project, if it materializes, will require protracted negotiations and it seems unlikely that a loan for this purpose could be approved before 18 months or two years. In view of the fact that no other projects have been discussed in detail, it is to be expected that the entire credit will not be converted into loans before the ex- piration of three years and that withdrawals will probably extend over another year or two. In discussions with the Export-Import Bank, we were told that amortization schedules on loans which might be extended under the $150 million credit would take into account that Mexico's peak in debt service load comes in the years 1950-53. Ii. is probable that a period of grace of three or four years would be extended for each loan and that repayment would take place over 15 or 20 years. 7. on the basis of this information, it would appear that withdrawals from loans granted under the $150 million line of credit might well be made somewhat as follows:  Year Withdrawals Remarks 1951 $ 20,000;000 For irrigation projects 1952 40,000,000 ($10,000,000 for irrigation projects ($30,000,000 for railway projects 1953 70,000,000 ($40,000,000 for railroad projects ($30,000,000 for roadbuilding and other 1954 20,000,000 other projects $150,000,000 8. Under the most stringent conditions, with a grace period limited to only three years, repayments over a twelve-year period (instead of 15 to 20 years as suggested by the Eximbank), and interest at 3i% per annum, Mexico's debt pay- ments over the next 18 years would be as follows: - Year New Export-ImEort Bank Loans (tin other Debt Payments Total Tho usa n d s of Dol 1 a r s) 1951 525 42,111 42,636 1952 1,150 39,101 41,451 1953 3,937 38,619 42,556 1954 6,430 34,290 40,120 1955 9,316 31,833 41,149 1956 14,060 28,531 42,591 1951 15,415 24,851 40,266 1958 15,415 23,055 38,470 1959 15,415 21,937 31,352 1960 15,415 20,549 35,964 1961 15,415 18,498 33,913 1962 15,415 18,289 33,704 1963 15,415 9,191 24,612 1964 15,415 11,082 26,491 1965 15,415 10,985 26,400 1966 13,360 10,886 24,246 1967 9,249 10,641 19,890 1968 2,055 10,176 12,231 9. Even under the most rigorous assumptions, therefore, additions to Mexico's debt service as a result of the $150 million line of credit are not likely to raise Mexico's debt repayments above the 1951 level. However, the IBRD consortium line of credit conceivably could add a maximum of $2 million per annum for five years after withdrawals begin, and should the Bank of America extend a loan of $15 million for the construction of roads and the Tehuantepec River Dam under proposed terms, another $6 million in service payments would have to be made annually in 1952 and 1953 and $4 million in 1954. Economic Effects of Projects F 10. Nevertheless, total payments need not be excessively burdensome if withdrawals under the $150 million credit proceed more slowly than has been as- sumed under the somevfhat pessimistic assumptions made above. Moreover, if the proceeds of the Eximbank loans are used for the productive purposes mentioned to us, the balance of payments outlook would be rather improved on the whole. New areas could be opened for increased agricultural output by the contemplated irrigation, which would favorably affect both export and import prospects. Road construction projects and transportation facilities could expedite the economic development and save much unnecessary foreign outlays, while improving tourist receipts. 11. The Falcon Dam will allow 612,500 acres to enter into cultivation with corresponding savings on imports and increased earnings from exports. It will generate for Mexico 125 million kwh. of power yearly. The Alvaro-Obregon Dam. will open to cultivation 262,$00 acres and generate another 12$ million kwh. a year. 12. Loans to the railways might avoid considerable slowdown on exports which frequently occur today, and help to reduce substantial dollar expenditures for rental of freight cars, (at present over $4 million a year). 13. Opening or urgent improvement of highways in potentially productive or tourist tegions might also appear to be a sound use of the loan. On the other hand, if credits were used for such purposes as, say, luxury improvements in existing highways, the extra load of debt would not be justified by increased earnings of foreign exchange. The same would be true if the availability of  -5- foreign credits should encourage the government to use its ~~ funds for unecon- omic investment. Once more, therefore, the need for long-term government progr~ ing of public investment appears desirable. Effects of the Korean War 14. Since May 1950 - the last time that an appraisal of Mexico's credit- worthiness was attempted - the outbreak of hostilities in Korea has altered the medi~term outlook for the Mexican balance of payments. Even before the effects of the Korean situation could be registered fully, Mexico had succeeded in improving its balance of trade with the U.S. by 40% during the first eight months of 1950 over the corresponding period in 1949. From January through August of this year, exports to the U~S. rose 16%($27 million) over the comparable period last year, large~y as a result of bumper crops, while imports, aided by the effects of devaluation, decreased by 4% ($11 million). 15. In May 1950, mineral experts were pessimistiC about the prospects for Mexican metal exports. It was estimated at that time that lower levels of pro- duction and prices would reduce the value of metal exports durUlg 1951-55 by $20 million per annum below the 1948-49 average. On the basis of changes which have occurred since, that estimate needs to be revised, and it now appears likely that metal exports in 1951-55 will average $10 million above average exports in 1948-49. It is probable that higher prices and the general milita~J situation which gave rise to them ,viII offset the anticipated unfavorable effect of the termination of the U.S.-Mexican Trade Treaty at the end of this year so far as metals are concerned. Furthermore, the improvement in marketing prospects for oil may well be expected to yield an additional $5 million per annum during the next few years over previous estimates. 16. Last l~y, it appeared that increased volume of production would result in a rise of $10 million a year in receipts from agricultural exports. The rise  -6- in agricul. tural export prices now makes this estimate appear too low. On the basis of current prices and higher output, this year's cotton exports alone are expected to yield $55 million mare than last year. Even i f most of this year's increase in receipts from cotton is not maintained, it does not seem unreasonable to assume that overall annual exports during the next few years may result in an increase of a minimum of $60 million per annum over 1948-49 in view of the im- proved price outlook in other crops like coffee, henequen, etc. 17. On the other hand, the value of imports will undoubtedly increase, not only because of price rises, but also because the fear of shortages will undoubt- edly give impetus to imports for inventory or stockpiling purposes. The Mexican Minister of Finance has indicated that government policy would favor stockpiling of certain goods. Already, the automobile import quota has been increased 40% and all restrictions have been removed on the import of certain steel items and car and truck parts. It is conceivable, therefore, that the spectacular increase in the value of exports might be largely offset by increased imports. 18. Thus far, however, international reserves of the Bank of Mexico (fur- nished by the I}~ on a confidential basis) indicate a substantial rise since the stabilization of the peso in June 1949. On October 14, 1950, holdings of gold and dollars amounted to $167.2 million, more than three times the level in June 1949, and nearly $60 mi1:.i on greater than the end of last year. Even though the increase in reserves is partly due to the inflow or repatriation of "hot" money, it seems difficult, therefore, to escape the conclusion that recent changes in Mexico's terms of trade with the United states cannot fail to improve her balance of payments prospects and her ability to repay foreign Obligations. Inflation?!l Faotors 19. The heavy inflow of dollars into the country, coupled with rises in the prices of imports, presents a danger to Mexico's international economic position of which Mexican authorities are fully aware. VIholesale price increases in L~xico have been closely related to the rise in prices in the United states, particularly in the last few months. In the first nine months of this year, such prices rose 9.5% in Mexico, 4% of the increase taking place during the last month. U.S. wholesale prices rose 11.8% in the corresponding period, 5.2% occurring during the last month. 20. Money supply has increased by 20% since the pese was devalued, but this is less than the increase in foreign reserves during the same time. In spite of the maintenance of public works expenditures, the budget has been balanced. 21. In September 1949, nEWf bank deposits were sterilized except to the extent that they were used for long-term credits for specified productive purposes. President Aleman recently announced additional measures to meet the increased threat of inflation. According to press reports, a series of measures will be carried out immediately to increase the production, storage and distribution of basic foods and to limit their export or diversion to non-essential uses. While these measures should help allay some of the inflationary pressures upon Mexico, it remains to be seen whether they are effective to cope with a situation which originates outside the country. Conclusions 22. Since May 1950!, MeXico's export receipts and capital imports have un- doubtedly improved her ability to service foreign debt in the short run. In spite of the fact that the present world situation appears to favor countries which export raw materials, it is likely that a large part, or most, of Mexico's in- creased earnings from exports will eventuallY be absorbed by rises in the value of imports. It still remains true that Mexico has gained for the time being a certain amount of flexibility for servicing additional debt as a result of her improved international economic situation. On the other hand, uncertainties with  -8- regard to future import trends make it inadvisable for the Bank to change its original judgment concerning Mexicots ability to service debt made in the l~y 1950 report on Mexicots Creditworthiness. 1ilhile it is likely that the Eximbank credits will probably be used for productive purposes, the total amount involved seems to reaeh about the maximum which Mexico could reasonably expect to borrow over the next few years with a fair chance of repayment.