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Mexico, 4/76-10/77 (2)
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Arthur F. Burns Papers
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The original documents are located in Box B80, folder "Mexico 4/76 - 10/77 (2)" of the
Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
BOARD OF GOVERNORS
RESERVE THE OF SYSTEM OF 2
OFTHE
FEDERAL RESERVE SYSTEM
WASHINGTON, O.C. 20551
September 17, 1976
CONFIDENTIAL (FR)
CLASS II FOMC
TO:
Federal Open Market Committee
SUBJECT: Paper on Mexican
FROM: Arthur L. Broida 013
Economic Situation
Attached for your information is a paper entitled
"Analytical Aspects of the Mexican Economic Situation" and a
two-page summary thereof. The paper was prepared by Messrs.
Maroni and Truman of the Board's Division of International
Finance.
Attachment
FORD & 038830 LIBRARY
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Summary of Analytical Aspects of the Mexican Economic Situation
This paper is in two parts. Part I analyzes the macro-economic
setting of the Mexican economy in light of the recent sharp (37 per cent)
depreciation of the Mexican peso. Part II analyzes several aspects of the
peso depreciation itself.
Part I argues that prior to the September 1 depreciation of the
peso the Mexican economy was in a situation of excess demand accompanied
by very high inflation rates. This situation was largely stimulated by an
expansion in the size of the public sector and the public-sector deficit.
The expansion in the public sector led to a growing current-account deficit.
At the same time private investment was stagnating. Consequently, the
crucial objective of any Mexican economic stabilization program to complement
the peso's depreciation must be to shift resources into the external sector.
Part I analyzes, in turn, Mexican budget policy, monetary policy, investment,
and wages and prices. It concludes that domestic aggregate demand should
be restrained through a reduction in the size of the public-sector deficit.
This will allow a tightening of monetary policy that would both support
aggregate-demand policy and encourage a net inflow of capital. Finally,
real wages should be restrained, if not reduced, to curb private consumption.
The crucial issue in this last area is not how large the direct price
effects of the peso's depreciation will be but rather how much will be
passed through into increases in nominal wages. To date, we have little
specific information that the Mexican authorities are willing or able to
take the necessary policy actions in these areas.
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-2-
Part II first traces the cause of the peso's depreciation on
September 1 to a steady deterioration of the country's external trade and
financial position. The proximate cause was the low level of Mexico's
foreign exchange reserves. The size of the peso's depreciation is next
discussed. This section reaches the conclusion that the 37 per cent
depreciation of the peso that has occurred does not seem out of line with
what might reasonably be expected, although it is on the high side of that
range. The following section discusses the outlook for the Mexican Current
Account under the assumption that the Mexican authorities will adopt an
adequate economic stabilization program. It concludes that over the
shorter term of a year or so some improvement might be expected in three
specific areas: tourism, net earnings of border assembly plants, and net
earnings from border transactions. The outlook for the Mexican capital
account is also discussed briefly. Finally, a review of Mexico's reserves
and its prospects for borrowing from the U.S. Treasury or the International
Monetary Fund is presented.
FORD is LIBRARY GERALD
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Analytical Aspects of the Mexican Economic Situation
CONTENTS
page
I. Analysis of the Macro-Economic Situation
1
A. Budget Policy
1
B. Monetary Policy
5
C. Investment
7
D. Wages and Prices
9
II. Analysis of the Peso Depreciation
11
A. The Balance-of-Payments Situation Prior to the
Peso's Depreciation
12
B. The Size of the Peso's Depreciation
14
C. The Outlook for the Current Account
18
D. The Outlook for the Capital Account
20
E. The Outlook for Mexico's Reserves and
Borrowing from Official Institutions
21
List of Tables -- All tables are at the end of the paper.
Table 1 -- Gross Domestic Product, 1965-1975
Table 2 -- Expenditure on Gross Domestic Product, 1965-1975
Table 3 -- Consolidated Public Sector Accounts, 1965-1975
Table 4 -- Revenues and Expenditures of the Federal Government
since 1970
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FORD & LIBRARY 074870
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CONTENTS (Cont.)
Table 5 -- Index of Industrial Production since 1970
Table 6 -- Money Supply since 1964
Table 7 -- Consumer Price Index in Mexico and the United
States since 1968
Table 8 -- Selected Interest Rates in Mexico and the
United States since 1970
Table 9 -- Increases in Minimum Wages, Mexico City, 1966-1976
Table 10 -- Mexico's Balance of Payments since 1970
Table 11 -- Level and Composition of International Reserves
since 1970
Table 12 -- Composition of Merchandise Trade in 1975
Table 13 -- Geographic Distribution of Merchandise Trade in 1975
Table 14 -- Selected Data on External Debt
Table 15 -- Wholesale Price Index in Mexico and the United States
since 1968
Table 16 -- GNP/GDP Deflators in Mexico and the United States,
1968-1975
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FORD & LIBRARY
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Analytical Aspects of the Mexican Economic Situation
I. Analysis of The Macro-Economic Setting
The principal malady of the Mexican economy over the past 3-1/2
years has been excess demand originating in the public sector. Real GDP
increased at a historically high average rate of about 7-1/2 per cent per
year in 1972-73, but slackened off somewhat to 5.9 and 4.0 per cent in 1974
and 1975 respectively. (See Table 1.) A sharp rise in the relative size
of the public sector beginning in 1972 was incompletely offset by a rise
in public-sector revenues. Although a substantial proportion of the
consequent increase in the public-sector deficit was financed externally,
this added to the external debt, and the excess demand and accompanying
inflation added to the current-account deficit. Private and particularly
public consumption expanded rapidly. Public investment increased, while
private investment declined as a per cent of GDP. (See Table 2.) In large
part because of the reduced rates of private investment the Mexican economy,
at least in the short run, has by all reports, only limited unutilized
capacity available. Consequently, the crucial objective in any Mexican eco-
nomic stabilization program to complement the recent depreciation of the peso
is to shift resources into the external sector and away from other uses.
To accomplish this shift two adjustments will probably be required: reduction
in the size of the public-sector deficit as a percentage of GDP and mainte-
nance of a restored international competitive position. Both adjustments
will tend to reduce the real income of the Mexican population.
A. Budget Policy
In 1972, the size of the consolidated public sector began to
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MR 95-1, # 2
143H 4/12/96
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-2-
increase from about 14 per cent of GDP before 1972 to above 20 per cent in
1975*/ (See Table 3.) This was the result of a deliberate policy to expand the
size of the public sector, which had been relatively small, and to increase
rates of public investment. While the share of public-sector revenues in
Mexican GDP also rose, the increase was not as large as the increase in
the share of expenditures. Hence the size of the public-sector deficit
rose from under 3 per cent of GDP before 1972 to almost 9 per cent in 1975.
Current data are available only for the revenues and expenditures
of the Federal Government, and the latest data are only for May, 1976.
(See Table 4.) These data suggest no substantial decline in the absolute
size of the public sector deficit in the first five months of this year,
through the rate of increase may have been arrested.
We see no evidence that the absolute size of the Mexican public-
sector deficit is related to the slowdown in Mexican real growth. But
the cyclical position of Mexico, or more accurately Mexico's relative
cyclical position, has contributed to Mexico's balance-of-payments problem.
Mexico was probably surprised and was certainly disadvantaged when it
experienced positive real growth of 5.9 per cent and 4.0 per cent in 1974
and 1975 at the same time that its major trading partner -- the United
As is the case for many countries, data on the size of the
public sector and its deficit can be compiled under many different defini-
tions. The definition used in the text includes the Federal Government,
Federal District, Social Security, budgetary controlled Decentralized
Agencies and Enterprises (the number of such units increased in 1973), and
the deficit financing of the largest non-budgetary controlled public
enterprises.
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States -- was experiencing negative real growth. The adverse cyclical
income effects on Mexico's balance of payments were substantial, on the
order of $500 million over the two years combined. The lagged effects of
sluggish external demand and, perhaps, high inflation rates on its
domestic economic growth are continuing. (See Table 5 showing the slug-
gish growth of industrial production through May (the latest month available)
except in the petroleum, petrochemical, and, more recently, the mining
sectors.)
One problem that has reportedly contributed to the expansion
of the public-sector deficit is a lack of adequate administrative controls
on the expenditure side, particularly regarding the Decentralized Agencies
and Enterprises. The consequences of this deficiency became particularly
acute as the public sector was allowed to expand after 1971. The Mexican
authorities apparently recognize the need for reform in this area.
President Echeverria's new program as outlined by Mr. Fernandez Hurtado,
refers to a planned reduction in the public sector deficit "through strict
programming and surveillance of public expenditure to attain quantitative
goals related to the adjustment process of the economy." But we do not
know the specifics of what the Mexican authorities have in mind, and any
results in this area will no doubt be slow in coming.
On the revenue side, roughly half of the Federal Government's
current revenues are raised through income taxes. But observers have com-
mented that the tax system is complex with important instances of inconsistent
treatment of the same form of income. It is badly in need of reform and
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FORD is LIBRARY GERALD
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-4-
rationalization. These characteristics of the tax system have contributed
to the Government's failure to achieve its revenue targets in recent years.
The Echeverria program mentions the need for increasing public sector
revenues but is not specific except in calling for (1) an export surtax,
(2) a reduction of tax rebates for exports, (3) a reduction of import taxes,
(4) an excess profits tax, and (5) special fiscal treatment of private enter-
prises seriously affected by the exchange-rate depreciation. The first
three types of measures are designed primarily to offset, in part, the effects
of the depreciation on the external sector and not for revenue purposes.
The only specifics on the fiscal program that have been revealed
are (1) a reduction in average import tariffs from 20 per cent to 9 per cent,
which will have a negligible effect on revenues since the peso price of im-
ports on which duties are levied will increase pari passu with the 58 per cent
depreciation; (2) a reduction in the import tariff to finance export
promotion from 2 to 1 per cent; (3) a one-year 20 per cent export tax on
fish and agricultural products, and a one-year 7.5 per cent export tax on
manufactured goods, which together might increase revenues by 5,000 million
pesos; and (4) a removal of subsidies on exports of manufactured goods', which
amounted to 1,861 million pesos in 1975. The net fiscal effects of these
actions might lower the public-sector deficit by about 7,000 million pesos
or about 0.7 per cent of GDP in 1976.
We understand that prior to the depreciation of the peso,
technicians at the Bank of Mexico were tentatively talking about lowering
the public-sector deficit from 9 per cent of GDP in 1975 to 3.5 per cent in
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1978. We do not know how firm these plans were, whether they have been
changed, or how they might be implemented.
B. Monetary Policy
The Bank of Mexico is required to help finance the Government's
deficit. Thus, it has little independent scope to exercise monetary
restraint. As the public-sector deficit grew, its financing placed an
increasingly heavy drain on the internal savings of the country. Table 3
shows that, in 1975, more than 50 billion pesos were raised from internal
sources to help finance the deficit, nearly five times as much as in 1971.
As a percentage of GDP, the internal financing of the deficit was over
twice as large in 1975 as in 1971. The Bank of Mexico had long been
forcing the banks to absorb large amounts of Government securities through
the reserve requirements, but this became increasingly difficult to accomplish
as the size of the fiscal deficit grew rapidly, and the Bank of Mexico
found itself obliged to hold increasing amounts of these securities. As a
result, the rate of growth of the money supply, which had been averaging about
11 per cent in the years 1966-71, jumped to over 20 per cent. This was
accompanied by increasing tightness of credit to the private sector, as
reserve requirements were raised drastically. Interest rates in Mexico
are administered and the process of changing them is cumbersome, often
involving the introduction of a new financial instrument. The principal
tool of monetary control is a complex set of reserve requirements. Never-
theless, it is useful to look at what has been happening over the past
several years to the course of monetary policy and the growth of the money
supply.
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Except for an explosion in the rate of growth of the Mexican
money supply -- defined as coin and currency plus demand deposits -- in
1972, which probably contributed substantially to the subsequent imbalances
that developed in the Mexican economy, the course of monetary policy --
judging by the behavior of the money supply -- has been at best neutral.
(See Table 6.) In 1973 and 1974, the growth in the money supply was
slightly more rapid than the rate of growth of consumer prices. (See
Tables 6 and 7.) In 1975, the growth in the money supply became marginally
more expansionary. Through May of this year, which is the last month for
which data are available, the growth of the money supply (year over year)
FORD
has edged down slightly from over 20 per cent to under 20 per cent, / while
GERALD
LIBRARY
consumer prices were rising at year-over-year rates around 15 per cent.
We do not know what has happened to Mexico's money supply between
May and August. The Echeverria program states that "a system of regulated
credit growth will be established by the Bank of Mexico for use by the
private and public sectors." We do not know what this new system involves,
but as a practical matter, the Bank of Mexico cannot refuse credit to
the Government. Thus, success in tightening monetary policy depends upon
success in reducing the public-sector deficit and upon the amount of external
financing for the deficit that is available.
Interest rates on deposits in Mexican financial institutions are
administered by the Bank of Mexico. The fact that Mexican interest rates
/ The Bank of Mexico releases money supply data on a seasonally-
adjusted as well as a not-seasonally-adjusted basis. The seasonal factors
are apparently large. On a seasonally-adjusted basis the money supply in
May 1976, was 8.2 per cent above December, 1975. On a not-seasonally-adjusted
basis, the money supply shows a decline of 4.3 per cent. On both bases the
money supply in May was 19.7 per cent above the level a year earlier.
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-7-
were not permitted to rise in line with interest rates on dollar-denominated
assets in 1973-74 must have contributed to some net private capital outflow
in these years. (See Table 8.) Banks were authorized to issue six and
nine months certificates of deposits in early 1974. Initially, however,
these instruments had relatively unattractive yields. In 1975 the
interest-rate differential shifted more in favor of the large Mexican
CDs as U.S. interest rates declined, and in August of this year the maximum
interest rates payable on small CDs was raised by 1 percentage point while
that on large CDs was raised 1.25 percentage points.
The Mexican government cannot afford for balance-of-payments or
other reasons to lower interest rates. In fact, since real interest rates
on short-term assets appear to be negative in Mexico, there may be room to
raise them substantially. The only mention of interest-rate policy in the
Government's new program which was announced on September 1 was the state-
ment that "interest rates for small savers will be increased." At present
we have no further information about what the Bank of Mexico plans to do
with its interest-rate policy or monetary policy in general.
GERMLO FORD VIRRAPA
C. Investment
Between 1970 and 1975 real private investment increased only 12.5
per cent as real GDP rose 31 per cent. In 1975 real private investment
is estimated to have been less than in 1974*/ This stagnation in private
investment is due to several factors. Two are most prominent. (1) Private
entrepreneurs were distrustful of President Echeverria when he took office
in December, 1970. His administration was committed to adjusting Mexico's
Quarterly national income statistics are not available for
Mexico.
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-8-
severely skewed income distribution and, by implication, threatened the
continuation of the previous administrations' extremely favorable en-
vironment for private investment. (2) It seems clear that there was some
crowding out of private investment in 1975. Between 1970 and 1975 private
consumption rose 27 per cent in real terms, real public consumption rose
77 per cent, and real public investment rose by more than 100 per cent.
Some of these public investment projects were related to social
programs -- housing and rural development -- but many were designed to add
directly to the capital stock -- petroleum, petrochemicals, steel,
fertilizers. / Unfortunately, except in petroleum, the payoff to these
large projects will not come until 1977 and later. In the meantime, these
projects absorb resources and place strains on the domestic economy and
the Mexican balance of payments.
The Government's new program announced on September 1 indicated
that there would be no reduction in the rate of public investment in
productive activities and social services. (Presumably, President Echeverria
meant that there would be no reduction in the real rate of public invest-
ment.) Two implications can be drawn from this aspect of the Government's
program: (1) These public investment projects will continue to contribute
to an expansion of the nominal size of public sector expenditures and
most of them are being undertaken by decentralized enterprises that are
/ Data on the split between social and industrial investment
do not appear to be available.
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-9-
under only loose financial control by the Federal Government. (2) Until
these public investment projects begin to yield positive returns, the
productive capacity of the overall Mexican economy will be under strain.
There appears to be little slack available to reduce the external deficit
on current account (with the possible exception of the tourist industries
and the border assembly plants); consequently, the reduction in the current-
account deficit must occur through a reduction in real absorption rather
than through an increase in real output.
D. Wages and Prices
Data on wage rates and earnings rates in Mexico are not readily
available. The best proxy is the series for minimum wage rates in Mexico
City. (See Table 9.) Increases in official minimum wages tend to set the
standard for other wage settlements. Between January 1974 and January 1976,
when the most recent adjustment in minimum wages occurred, real wages in-
creased by almost 13 per cent, while real GDP increased by only 10 per cent.
An adjustment in wages for government workers is due on September
30. This, in turn, is likely to lead to an increase in minimum wages.
President Echeverria has promised that this adjustment would be designed
to compensate for the purchasing power lost since January. Mr. Fernandez
Hurtado has indicated privately that the Government does not feel it can
afford politically to enforce a reduction in real wages. In fact, union
leaders have threatened a general strike unless nominal wages are increased
by 65 per cent. If this is the case, then it will prove difficult to restrain
the growth of private consumption to the extent necessary to permit an expansion
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-10-
in private investment and a reduction in the current account deficit. A
successful depreciation leading to an improvement in the country's current
account requires a reduction in real absorption in the case where an economy
has little or no excess capacity.
On the price side, the situation is even more precarious. From
April through July, the month-to-month increase in the Mexican consumer
price index declined to under 1 per cent -- compared with month-to-month
increases of over 1 per cent in late 1975 and early 1976 -- and the year-
over-year increase declined to about 13 per cent from the early pattern of
over 15 per cent. (See Table 7.) Generalized price increases accompanying
the recent substantial depreciation of the peso will add to these infla-
tionary pressures.
The Mexican government has indicated its intention to hold down
the rate of inflation and mop up excess profits resulting from the depre-
ciation. It remains to be seen how successful it will be in this effort.
The crucial issue is probably not how large the direct price effects of
depreciation are but rather how much will be passed through into increases
in nominal wages. One step the Government can take and has indicated it
will take is in the area of prices of services supplied by the public sector.
Prices in this sector have tended to lag behind increases in the general
price level and increases in costs. Ceteris paribus, any tendency to hold
down these prices further would only add to the size of the public-sector
deficit and produce further distortions in the economy.
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II. Analysis of the Peso Depreciation
The Mexican current account position deteriorated rapidly
after 1972. (See Table 10.) Moreover, in 1973 the Mexican inflation
rate began to diverge substantially from that of the United States, to
whose currency the peso had been pegged at an unchanged rate since 1954.
This eumulative divergence continued through mid-1976. Thus, it became
increasingly clear to many observers that the peso would have to be
devalued or allowed to depreciate; the only question was when. Mexico's
gross reserves of foreign exchange declined from $1,142 million on
March 31, 1976, to an estimated $537 million on August 9 -- despite a
drawing of the full $360 million Federal Reserve swap line on April 9,
1976 and drawings on Euro-credits. (See Table 11.) Mexico was apparently
able to rebuild its foreign exchange reserves by over $250 million between
August 9 and August 31 through heavy official borrowing on the private
market. But the prospects of a significant underlying improvement in
Mexico's reserves over the following several months were dim.
Consequently, Mexico's Secretary of Finance and Public Credit,
Mr. Mario Ramon Beteta, announced late on August 31, that the fixed peso-
dollar exchange rate was being abandoned and that the peso would be
allowed to float subject to central bank intervention to prevent specu-
lative and erratic fluctuations. The peso quickly depreciated about 40
per cent to a price of over 20 pesos per U.S. dollar compared with 12.50
per dollar at the old parity. On September 13, the peso was appreciated
about 3 per cent and stabilized at 12.70/12.90 per dollar, equal to a
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-12-
58 per cent increase in the peso price of the U.S. dollar or to a 37
decline in the dollar value of the peso.
The analysis in Part I above indicated that if the depreciation
of the peso is to be successful in restoring a sustainable pattern to the
structure of Mexico's international transactions, it must be accom-
panied by a strong domestic economic stabilization program. Domestic
aggregate demand should be restrained through a reduction in the size of
the public sector deficit. Monetary policy should be tightened in support
of aggregate-demand policy and to encourage a net inflow of domestic and
foreign capital. Finally, real wages should be restrained, if not reduced,
to curb private consumption.
On the assumption that Mexico adopts an adequate domestic
economic stabilization policy in support of its new exchange-rate policy,
we can analyze how an improvement in Mexico's external accounts will
come about and over what time period. In the short run any improvement
in the current account should be the result of an increase in tourist
earnings and earnings on net border transactions and from border assembly
plants. In the longer run of a couple of years we can expect some pick
up in merchandise exports and reduction in merchandise imports.
A. The Balance of Payments Situation Prior to the Peso's Depreciation
The decision to let the Mexican peso depreciate was the culmina-
tion of a steady deterioration in the country's external trade and
financial position, caused partly by internally generated inflationary
GERALD FORD VIORARY
pressures and partly by economic and financial developments in the rest
of the world. The Mexican deficit on current account rose from an
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average of about $750 million in 1970-72. to $1.1 billion in 1973,
and over $3.6 billion in 1975. (See Table 10.) The Mexican current
account deficit was not directly affected by the increase in petroleum
prices since Mexico, in 1973, was a only small net importer of petroleum
and has since become a net oil exporter. The value of merchandise imports
rose sharply partly because of the world-wide inflation and partly
because of excess demand in the Mexican economy. The value of exports
also rose, but less rapidly, The growth of Mexican exports was slowed
in the last part of 1974 and in 1975 by the world recession, which also
contributed to a 5 per cent decline in the country's important tourist earnings,
and by the deterioration of its competitive position. (See Table 12 for
data on the composition of Mexican exports and imports and Table 13 for
data on the geographic distribution of its trade.) The deterioration of
Mexico's competitive position and the influence of the U.S. recession was
also reflected in the reduced net contribution of border assembly plants
to the Mexican balance of payments and the reduction in the rate of
increase of the net surplus on so-called border transactions.
To cover this growing current account deficit and net errors
and omissions, which turned negative in 1973 -- presumably, reflecting
capital flight -- a substantial increase in external borrowings was
required. (See Table 14.) At the end of 1975, the external debt was
estimated at $20-22 billion, consisting of about $14 billion in debts
of the public sector (of which $11.3 billion carried an original maturity
of one year or more) and private sector debts of $6-8 billion. Mexico's
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-14-
total external debt may well have climbed by at least another $2.5 billion
since the end of 1975. Claims on Mexico by U.S. banks amounted to $11,537
million at the end of June, 1976, up $3,388 million from the end of
September, 1975, when comprehensive data were first collected.
Two features of the growing Mexican external debt are (1)
the growing coneentration of the debt in accounts of the public sector
and (2) the deterioration of the quality of the debt as a result of its
shorter average maturity. The debt service on public debt of maturity
of more than one year was 25 per cent of exports in 1975, having reached
a peak ratio of almost 30 per cent in 1968; it was 18 per cent in 1974.
For what the concept is worth, this ratio will definitely increase over
the next several years.
B. The Size of the Peso's Depreciation
The Mexican peso has been allowed to appreciate slightly after
its initial depreciation and has been effectively pegged at a rate
vis-a-vis the U.S. dollar at which the dollar is 58 per cent more
expensive in terms of pesos than it was from April 1954 through August 31,
1976. The question arises of how large a depreciation of the peso is
appropriate.
One approach is to argue that the peso's value should be determined
primarily by market forces of supply and demand. However, the Mexican
authorities are unlikely to permit the peso to float freely for an
/ We have been told that the IMF has calculated that the peso
should depreciate by 40-50 per cent, but we do not know the basis of
this calculation.
FORD & LIBRARY GERALD
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-15 -
extended period of time. They argue that the peso market is not
extensive enough to operate without a substantial central bank presence
in the market. In fact, they have announced a new target rate (19.70-19.90
per dollar) for the peso without as yet declaring a new parity.
A second possible line of analysis is to apply (admittedly
crude) relative purchasing-power-parity concepts to the question. From
1960 to about 1972, the rate of increase of consumer prices and the GNP
deflator in the United States was roughly equal to the rate of increase
in these price measures in Mexico. On the other hand, the rate of increase
in wholesale prices was much more rapid in Mexico over this period.
In 1975, however, using 1970 as a base, the Mexican wholesale
price index had increased 4 per cent more than the U.S. WPI (See Table
15.); over the same period, the Mexican consumer price index and
GDP deflator increased about 27 per cent more than the similar U.S. price
measures. (See Tables 7 and 16.) Moreover, by July 1976, the Mexican
WPI had increased 18 per cent more than the U.S. WPI on a 1970 base, and
the Mexican CPI had increased 36 per cent more on the same base.
Two conclusions can be drawn from these data. First, the 58
FORD is LIBRARY 068410
per cent rise in the peso price of the dollar has more than offset the
price differential with the United States that had opened up on any price
measure at the time of the depreciation. Second, the Mexican-U.S. price
differential was widening and could reasonably be expected to widen
further in the months ahead even without the depreciation.
A third possible line of analysis is to apply the price
elasticities approach to estimate how large a devaluation of the peso would
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be necessary to achieve a given improvement in the Mexican current account
over the same time period. However, estimates of the relevant price
elasticities are not available for Mexico, and, given the rapid rate of
inflation in Mexico, it would be necessary in any application of this
technique to calculate how much of a particular depreciation of the peso
would be eroded by subsequent price inflation.
The Treasury staff has made a crude calculation based on
estimates of price elasticities of the demand for exports and imports of
other countries and the assumption that the objective is to generate a
$2.1 billion improvement in the Mexican current-account balance by 1978.
In this calculation it is estimated that a 40-50 per cent increase in
the peso price of dollars would be needed. This appears to be a realistic
estimate based upon this approach.
A more eclectic approach can also be considered. Under this
approach explicit recognition can be given to several important factors.
First, the underlying rate of Mexican inflation is likely to be at least
double that in the United States for at least the next two years. This
is because of the build up of inflationary pressures in Mexico, on the
one hand, and, on the other hand, the depreciation itself. Thus, under
the most optimistic scenario, the Mexican price level is likely to increase
10-12 per cent more over the next two years than the U.S. price level.
If the peso is to be fixed more or less permanently to the dollar again,
then this amount must be added to the estimate of the needed depreciation.
Second, it should be recognized that the Mexican authorities
have said that they would reduce some import restrictions and remove
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their export subsidies following the depreciation of the peso. These
actions are desirable in their own right and are a normal accompaniment
to devaluations by developing countries. They serve, however, to reduce
the size of the effective devaluation.
Third, given that the Mexican authorities have indicated their
intention to fix eventually a new parity with the U.S. dollar (for the
moment a rate of 19.70/19.90 per dollar has been chosen), given the
fact that their reserves have been severely depleted, and given the fact
that Mexico has built up a substantial external debt burden, it would be
prudent for the Mexican authorities to err on the side of too large
rather than too small a devaluation.
Finally, on a related point, the Mexican authorities have
apparently indicated an interest in seeing a substantial initial depre-
ciation of the peso that might be followed by a subsequent small
appreciation. The rationale of this strategy might be to encourage a
net capital inflow, since the expected appreciation would add to the
expected return on peso-denominated assets. Similarly, the actual small
appreciation of the peso subsequent to the initial depreciation may have
servedto increase confidence in the currency.
In summary, the depreciation of the peso that has occurred does
not seem out of line with what might reasonably be expected, although it
is on the high side of that range. This judgment is based, however, on
the premise that an appropriate domestic economic stabilization program
will be adopted in order to ensure that the effects of the depreciation
on the Mexican balance of payments will not be eroded.
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C. The Outlook for the Current Account
Under this heading it is reasonable to ask, first, what would
be a realistic target for the Mexican current account. As a developing
country it would be abnormal to expect Mexico to run a current-account
surplus. On the other hand, the country cannot expect to add to its
external debt at the rate it has over the past four years (1973-1976).
Given the increase in nominal magnitudes since Mexico last appeared to
be in balance-of-payments equilibrium in the early 1970s, one might take
as a starting point a target for the Mexican current account of, say a
deficit of $1-$1.5 billion, compared with the annual deficits in the
earlier period of about $750 million.
One might ask next where this improvement might come from. Over
the longer term of two to three years, one might expect it to come
generally from an increase in current account receipts, including those
from expanded oil exports, relative to current account payments. But,
as we have already stressed, this will require a domestic economic
stabilization program designed to restrain the growth of domestic demand
and hold down, if not reduce, the level of real wages and incomes.
Over the shorter term of a year, one might expect some improve-
ment in three specific areas aside from favorable cyclical effects as
a result of higher U.S. growth and, perhaps, lower Mexican growth. The
first area is tourism, where receipts declined by five per cent in 1975
and increased by only 16 per cent in 1974, compared with increases of
22 and 29 per cent in 1972 and 1973. (See Table 10.) On the payments
side, Mexican tourist payments rose by 30 per cent in 1974 and 19 per cent
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in 1975, compared with 17 per cent in 1973. It is reported that the
tourist industry is one sector where there definitely is excess capacity
in Mexico. It can be expected that the income and price effects of the
peso's depreciation will combine to produce a substantial increase in
Mexican tourist receipts and at least a decline in the rate of increase
in tourist payments.
The second area of possible immediate improvement is receipts
from border assembly plants. Receipts from these installations increased
by an average of over 50 per cent per year in 1972-74, but they stagnated
in 1975. With the dramatic change in relative costs as a result of the
peso's depreciation, it might be expected that there will be a revival
in this area. But a crucial factor will be what happens to nominal wages
in Mexico following the depreciation of the peso. If U.S. entrepreneurs
are not convinced that the rate of increase in nominal wages will be held
substantially below the increase in the peso price of the U.S. dollar,
then one can expect no substantial gain in this area.
The third area of possible immediate improvement is net receipts
from so-called border transactions. (There are the large volume of transactions
that occur as border residents cross over to make purchases or work.)
These net receipts had been increasing at around a 20 per cent annual
rate from 1971 to 1973, but the rate of increase declined to 8 per cent
in 1974 and under 6 per cent in 1975. As in the case of tourism, this
is an area where income and price effects can have a relatively dramatic
impact over a short period.
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Over the longer term of a couple of years, one might expect a
pick up in regular merchandise exports and a reduction in imports compared
with what they otherwise might have been. Because many categories of
imports are now subject to quantitative restrictions (leading to Mexican
prices of imported goods -- prior to the depreciation -- that were as
much as 25 per cent above the world price), the price effect of the
devaluation on imports might be less than that on exports. On the other
hand, the demand for Mexican exports other than manufactures may be relatively
price inelastic; moreover, the value of imports is larger. On balance, we
would look for about an equal impact on both types of trade.
D. The Outlook for the Capital Account
The first item to notice with respect to capital account trans-
actions is that the Mexican authorities have wisely and pointedly declined
to institute capital controls. They said explicitly that the country's
tradition of free capital movements would be maintained and that Mexican
financial institutions would receive adequate liquidity to assure that
their commitments (to foreigners) would be met. This latter action might
lead to an unwanted expansion or the prevention of a reduction in domestic
liquidity, but it is the price that must be paid over the short run to
maintain stability and guard against attempted capital flight.
In addition to relying, as was mentioned earlier, on a possible
further small appreciation of the peso to add to the attractiveness of
peso-denominated assets, the Mexican authorities might also consider
tightening up on monetary policy and raising interest rates not only to
dampen domestic demand but also to encourage a net capital inflow.
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Finally, the primary objective of Mexican policy should be to
reduce the rate of public-sector borrowing abroad and to replace it if
possible by private-sector borrowing for investment. But progress in this
area will depend on progress in reducing the current account deficit,
which, in turn will depend on the adoption of an adequate domestic
economic stabilization policy.
E. The Outlook for Mexico's Reserves and Borrowing from Official
Institutions
As is indicated in Table 11, Mexico has experienced in 1976 a
substantial decline in its foreign exchange reserves amounting to an
estimated $365 million from December 31, 1975, to August 31, 1976. In
addition it has acquired a $360 million short-term official debt under
the Federal Reserve swap network. Although at one point in August the
Mexican authorities were apparently concerned that they lacked adequate
international reserves to meet their reserve requirements against notes
in circulation, this constraint has been relaxed through the subsequent
depreciation of the peso which raised the peso value of Mexican reserves
pari passu. Nevertheless, Mexico has a clear need to build up its foreign
exchange reserves. This may be one reason why the Mexican authorities
are unconcerned about a possible excessive depreciation of the peso.
If, nevertheless, the Mexican authorities need additional
foreign exchange reserves to intervene in the exchange market or to
repay the Federal Reserve swap drawing, they might turn to the U.S.
Treasury or the International Monetary Fund.
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The Mexican stabilization agreement with the U.S. Treasury
is for $300 million. The first $50 million can be drawn
immediately. Another $100 million can be drawn upon certification by
the IMF management that the Mexican authorities have adopted a stabili-
zation program that would make Mexico eligible, in the IMF staff's view,
for a drawing from the upper IMF credit tranches. A final $150 million
can be activated but must remain on deposit with the Exchange Stabilization
Fund. A final provision in the Treasury's stabilization agreement with
Mexico is that Mexico must first have drawn on the Federal Reserve swap line.
It is not clear whether this means that a drawing on the ESF cannot be
outstanding when the Federal Reserve swap is repaid. It apparently is
clear that Mexico cannot draw on the ESF and immediately use the proceeds
to repay the Federal Reserve System.
Turning to the IMF, with which the Mexican authorities are
reportedly currently negotiating, Mexico could draw up to $730 million
under the IMF's regular credit facilities -- that is, not including the
Compensatory Financing Facility or the Extended Fund Facility. Mexico
could, first, draw $113 million (SDR 98 million at $1.15 per SDR) equal
to its reserve position in the IMF. To do this it would merely have to
declare that it has a "balance of payments need." Mexico could, next,
draw its first credit tranche of $154 million (one fourth -- SDR 92.5
million -- of its IMF quota of SDR 370 million enlarged by 45 per cent
according to the Jamaica agreement to SDR 134 million and valued at
$1.15 per SDR). To do this Mexico would have to outline for the IMF its
intentions to follow corrective domestic and balance-of-payments adjustment
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measures. Finally, Mexico could enter into a stand-by agreement involving
possible drawings on its three higher expanded IMF credit tranches
totaling $462 million. Under this stand-by agreement the IMF would have
to agree that Mexico had adopted an adequate balance-of-payments adjust-
ment program. The agreement would normally involve conditions placed on
Mexico's domestic economic policies. Any drawings under this agreement
would normally be spread out over as much as 12 months. Any of Mexico's
IMF drawings would have to be repaid in 3-5 years.
Prepared by Yves Maroni and Edwin M. Truman
Division of International Finance
September 15, 1976
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GERALD R. FORD
Table 1
Mexico - Gross Domestic Product
1965 - 75
GDP - Current Prices
GDP - Constant Prices
Billions of
Annual
Billions of
Annual
Pesos
Change (%)
1960 Pesos
Change (%)
1965
252.0
-
212.3
I
1966
280.1
+11.2
227.0
+6.9
1967
306.3
+. 9.4
241.3
+6.3
1968
339.1
+10.7
260.9
+8.1
1969
374.9
+10.6
277.4
+6.3
1970
418.7
+11.7
296.6
+6.9
1971
452.4
+ 8.1
306.8
+3.4
1972
512.3
+13.2
329.1
+7.3
1973
619.6
+20.9
354.1
+7.6
1974
812.9
+31.2
375.1
+5.9
1975₽/
972.2
+19.6
390.1
+4.0
p/ Preliminary.
Source: Bank of Mexico.
LIBRARY GERALD R. FORD
Table 2
Mexico Expenditure on
FORD is LIBRARY GERALD
Gross Domestic Product
1965-75
A Billions of Pesos
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975P
Current Prices
GDP
252.0
280.1
306.3
339.1
374.9
418.7
452.4
512.3
619.6
812.9
972.2
Consumption
210.1
231.1
251.0
278.3
305.4
344.9
375.2
416.2
496.5
660.4
798.3
Public
14.2
16.4
17.6
20.2
22.5
25.7
29.8
35.3
42.6
58.4
80.4
Private
195.9
214.7
233.4
258.1
282.9
319.2
345.4
380.9
453.9
602.0
717.9
Investment
44.1
50.4
59.4
65.8
72.7
82.2
82.2
101.2
131.0
173.7
205.8
Public
16.6
15.6
17.2
23.5
24.8
23.2
24.1
34.2
51.6
64.8
86.4
Private
27.5
34.8
42.2
42.3
47.0
59.0
58.1
67.0
79.4
108.9
119.4
Net Foreign Balance
-2.2
-1.4
-4.1
-5.0
-3.2
-8.4
-5.0
-5.1
-7.9
-21.2
-31.9
Imports
26.0
27.4
29.9
34.3
38.5
42.7
42.7
50.2
65.4
97.0
106.5
Exports
23.8
26.0
25.8
29.3
35.3
34.3
37.4
45.1
57.5
75.8
74.6
B As % of GDP
Consumption
83.4
82.5
81.9
82.1
81.4
82.4
82.9
81.2
80.2
81.2
82.1
Public
5.6
5.9
5.8
6.0
6.1
6.6
6.9
7.2
8.3
7.2
8.3
Private
77.7
76.7
76.1
76.1
75.4
76.3
76.3
74.3
73.3
74.0
73.8
Investment
17.5
18.0
19.4
19.4
19.4
19.6
18.2
19.8
21.1
21.4
21.2
Public
6.6
5.6
5.6
6.9
6.6
5.5
5.3
6.7
8.3
8.0
8.9
Private
10.9
12.4
13.8
12.5
12.8
14.1
12.9
13.1
12.8
13.4
12.3
Net Foreign Balance
-0.9
-0.5
-1.3
-1.5
-0.8
-2.0
-1.1
-1.0
-1.0
-2.6
-3.3
Preliminary.
1/
National income accounts definition.
Sources: Bank of Mexico and World Bank.
Table 3
Mexico - Consolidated Public Sector Accounts
1965 - 75
A - Billions of Pesos
1965
1966
1967
1968
1969
1970
1971
1972
1973₽/
1974P/
1975₽
Revenues
29.6
32.1
34.3
38.3
43.5
48.4
52.5
58.0
77.4
95.7
125.4
Expenditures
38.8
36.5
40.6
50.5
55.3
56.4
62.7
77.7
114.7
145.7
200.6
Budgetary Deficit(-)
-9.2
-4.4
-6.3
-12.2
-11.8
-8.0
-10.2
-19.7
-37.3
-50.0
-75.2
Other1/ Deficits (-)
or Surpluses (+)
n.a.
n.a.
n.a.
n.a.
n.a.
-0.7
0.2
-3.0
-2.5
-4.0
-12.0
Overall Deficit
-9.2
-4.4
-6.3
-12.2
-11.8
-8.7
-10.0
-22.7
-39.8
-54.0
-87.2
Internally Financed
7.7
2.5
6.6
15.6
7.8
6.5
11.2
21.8
27.0
25.6
52.9
Externally Financed
1.5
1.9
-0.3
-3.4
4.0
2.2
-1.2
0.9
12.8
28.4
34.3
B - As % of GDP
Revenues
11.7
11.5
11.2
11.3
11.6
11.5
11.6
11.4
12.5
11.8
13.0
Expenditures
15.4
13.1
13.2
14.9
14.7
13.4
13.8
15.2
18.5
19.0
20.7
Budgetary Deficit (-)
-3.7
-1.6
-2.0
-3.6
-3.1
-1.9
-2.2
-3.8
-6.0
-6.2
-7.7
Other- Deficits (-)
or Surpluses (+)
n.a.
n.a.
n.a.
n.a.
n.a.
-0.2
negl.
-0.6
-0.4
-0.5
-1.2
Overall Deficit
-3.7
-1.6
-2.0
-3.6
-3.1
-2.1
-2.2
-4.4
-6.4
-6.7
-8.9
Internally Financed
3.1
0.9
2.1
4.6
2.1
1.6
2.5
4.2
4.3
3.2
5.4
Externally Financed
0.6
0.7
-0.1
-1.0
1.0
-0.5
0.3
0.2
2.1
3.5
3.5
Preliminary.
1/ Refers to public enterprises not controlled through the budget.
NOTE: The number of budgetary controlled enterprises increased in 1973, so that the data for 1973-75 are
not strictly comparable with 1965-72.
Source: World Bank.
GERALD FORD LIBRARY
Table 4
Mexico - Revenues and Expenditures of
the Federal Government
Since 1970
(Annual Rates)
Revenues
Expenditures
Deficit
in billion
as % of
in billion
as % of
in billion
as % of
pesos
GDP
pesos
GDP
pesos
GDP
1970
33.9
8.1
40.2
9.6
-6.3
-1.5
1971
36.5
8.1
41.3
9.1
-4.8
-1.1
1972
42.3
8.3
59.1
11.5
-16.7
-3.3
1973
53.8
8.7
81.2
13.1
-27.4
-4.4
1974
72.9
9.0
104.1
12.8
-31.2
-3.8
1975
103.1
10.6
145.1
14.9
-42.0
-4.3
1974 - I
61.2
75.6
-14.4
II
71.2
85.2
-14.0
III
71.2
96.8
-25.6
IV
87.6
158.8
-71.2
1975 - I
91.2
125.6
-34.4
II
105.2
133.2
-28.0
III
100.0
138.4
-38.4
IV
116.0
183.2
-67.2
1976 - I
116.0
157.6
-41.6
Jan.
121.2
111.6
+ 9.6
Feb.
88.8
140.4
-51.6
Mar.
138.0
220.8
-82.8
Apr.
124.8
164.4
-39.6
May
164.4
174.0
- 9.6
Jan.-May
127.4
162.2
-34.8
Source: Bank of Mexico
FORD & LIBRARY GERALD
Table 5
Mexico - Index of Industrial Production
Since 1970
(1970 = 100)
Total
Manufacturing
Petroleum
Mining
Index
Change
Index
Change
Index
Change
Index
Change
From
From
From
From
Year
Year
Year
Year
Earlier
Earlier
Earlier
Earlier
(Percent)
(Percent)
(Percent)
(Percent)
1970
100.0
+6.3
100.0
+5.2
100.0
+16.0
100.0
+2.7
1971
102.0
+2.0
102.8
+2.8
102.4
+ 2.4
96.7
-3.3
1972
112.5
+10.3
112.7
+9.6
108.6
+ 6.1
101.2
+4.7
1973
123.4
+ 9.7
123.0
+9.1
110.0
+ 1.3
107.7
+6.4
1974
132.3
+ 7.2
131.5
+6.9
127.6
+16.0
119.2
+10.7
1975
137.7
+ 4.1
136.4
+3.7
141.0
+10.5
109.7
- 8.0
1974 - I
132.3
+11.5
132.7
+9.9
118.5
+17.9
122.9
+17.9
II
132.8
+ 9.0
134.0
+9.9
116.8
+ 7.7
117.4
+14.4
III
130.3
+ 4.7
127.7
+4.6
138.4
+22.4
121.6
+ 6.0
IV
133.9
+ 4.0
131.8
+3.4
136.8
+15.7
114.8
+ 4.8
1975 - I
131.5
- 0.6
129.9
-2.1
132.5
+11.8
118.3
- 3.7
II
141.3
+ 6.4
142.2
+6.1
139.2
+19.2
103.5
-11.8
III
137.8
+ 5.8
135.9
+6.4
141.3
+ 2.1
113.6
- 6.6
IV
140.0
+ 4.6
137.4
+4.2
151.2
+10.5
103.4
- 9.9
1976 - I
142.5
+ 8.4
142.4
+9.6
142.2
+ 7.3
103.3
-12.7
Jan.
138.5
+ 1.6
137.4
+1.0
138.4
+ 3.4
103.1
-13.2
Feb.
139.0
+ 7.5
139.0
+7.8
141.2
+12.6
94.7
-17.9
Mar.
150.1
+16.5
150.9
+20.9
147.0
+ 6.2
112.2
- 7.1
Apr.
141.9
- 2.7
139.2
-6.1
153.7
+10.8
102.3
- 3.9
May
147.2
+ 4.7
141.0
-0.6
172.8
+23.3
119.7
+31.3
Source: Bank of Mexico.
FORD is LIBRARY GERALD
Table 6
Mexico -- Money Supply (Coin and Currency plus Demand Deposits)
(1964 - May 1976)
1/
Percentage change
Amount outstanding
from previous
(billions of pesos)
year
1964 - December
24,793.5
--
1965 - December
26,486.7
+6.8
1966 - December
29,395.8
+11.0
1967 - December
31,760.4
+8.0
1968 - December
35,892.8
+13.0
1969 - December
39,804.4
+11.2
1970 - December
43,999.9
+10.5
1971 - December
47,633.1
+8.3
1972 - December
57,736.5
+21.2
1973 - December
71,658.2
+23.8
1974 - December
87,412.3
+22.0
1975 - December
105,971.5
+21.2
1974 - Quarter I
73,901.0
+22.9
Quarter II
77,644.2
+21.7
Quarter III
81,048.4
+19.9
Quarter IV
85,069.2
+19.5
1975 - Quarter I
89,802.4
+21.5
Quarter II
95,620.0
+23.2
Quarter III
98,744.2
+21.8
Quarter IV
103,880.5
+22.1
1976 - Quarter I
108,313.5
+20.6
1976 - January
107,049.9
+22.1
February
108,621.1
+21.5
March
109,269.4
+18.4
April
111,263.5
+19.8
May
114,707.5
+19.7
1/ Seasonally adjusted.
Source: Banco de Mexico, Indicadores Economicos.
FORD & 038870 LIBRARY
Table 7
Consumer Price Index in
1/
Mexico and the United States
Since 1968
Mexico
United States
Ratio of
Change from
Change from
Mexican Index
2/
Index
Year Earlier
Index
Year Earlier
to U.S. Index
(1970=100)
(Percent)
(1970=100)
(Percent)
(1970=100)
1968
91.7
89.6
102.2
1969
95.1
+3.7
94.4
+5.4
100.7
1970
100.0
+5.2
100.0
+5.9
100.0
1971
105.7
+5.7
104.3
+4.3
101.3
1972
111.0
+5.0
107.7
+3.3
103.1
1973
123.6
+11.4
114.4
+6.2
108.0
1974
151.3
+22.4
127.0
+11.0
119.1
1975
176.8
+16.9
138.6
+9.1
127.6
1974 - I
142.4
+22.2
121.6
+9.8
117.1
II
146.8
+22.2
125.0
+10.5
117.4
III
153.1
+21.9
128.9
+11.5
118.8
IV
162.8
+23.2
132.6
+12.1
122.8
1975 - I
168.5
+18.3
135.0
+11.0
124.8
II
173.4
+18.1
137.1
+9.7
126.5
III
179.9
+17.5
140.1
+8.7
128.4
IV
185.5
+13.9
142.3
+7.3
130.4
1976 - I
193.7
+15.0
143.7
+6.4
134.8
II
198.9
+14.7
145.5
+6.1
136.7
1976
Jan.
190.4
+13.3
143.3
+6.8
132.9
Feb.
194.1
+15.2
143.7
+6.3
135.1
Mar.
196.6
+16.3
144.0
+6.1
136.5
Apr.
197.7
+15.6
144.6
+6.0
136.7
May
199.2
+15.3
145.5
+6.2
136.9
June
199.7
+13.3
146.3
+5.9
136.5
July
200.5
+13.2
147.1
+5.4
136.3
1/ Indices are averages for periods shown.
2/ Refers to consumer prices in Mexico City.
Source: International Monetary Fund, International Financial Statistics.
GERALD FORD LIBRARY
Table 8
Mexico - Selected Interest Rates in Mexico
and the United States since 1970
(Gross Average Rates)
Mexico
United States
Promissory
Six Month Certificates
Six Month Certificates
Notes
of Deposit
of Deposit
One mil. pesos
Less than
1 mil.pesos
Less than
More than
or more
1 mil.pesos
or more
$100,000
$100,000
1970- I
12.22
--
--
5.00
6.75
II
12.22
--
--
5.00
6.75
III
12.22
--
--
5.00
6.75
IV
12.22
--
--
5.00
5.63
1971- I
11.48
--
--
5.00
4.19
II
11.11
--
--
5.00
4.91
III
11.11
--
--
5.00
5.52
IV
11.11
--
--
5.00
4.83
1972- I
10.60
--
--
5.00
4.10
II
10.60
--
--
5.00
4.82
III
10.60
--
--
5.00
5.08
IV
10.60
--
--
5.00
5.44
1973- I
10.60
--
--
5.00
6.27
II
10.88
--
--
5.00
7.38
III
12.70
--
--
5.50
9.22
IV
12.70
--
--
5.50
8.62
1974- I
12.78
10.94
11.94
5.50
8.10
II
13.74
11.21
12.48
5.50
10.08
III
14.20
11.44
12.94
5.50
10.80
IV
14.20
11.44
12.94
5.50
8.69
1975- I
14.20
11.44
12.94
5.50
6.60
II
14.20
11.44
12.94
5.50
6.73
III
14.20
11.44
12.94
5.50
7.19
IV
14.20
11.44
12.94
5.50
6.16
1976- I
13.91
11.30
13.11
5.50
5.58
II
13.91
11.30
13.11
5.50
5.85
January
13.91
11.30
13.11
5.50
5.44
February
13.91
11.30
13.11
5.50
5.54
March
13.91
11.30
13.11
5.50
5.77
April
13.91
11.30
13.11
5.50
5.48
May
13.91
11.30
13.11
5.50
5.88
June
13.91
11.30
13.11
5.50
6.18
July
13.91
11.30
13.11
5.50
5.86
Aug. (10)
n.a.
12.30
14.36
5.50
5.73
Source: Bank de Mexico, Indicadores Economicos.
FORD is 076839 LIBRARY
Table 9
Mexico -- Increases in Minimum Wages, Mexico City,
January 1966 - January 1976
Percent Increases
Index
Real
Real
Wage
GDP 1/
Nominal
Real
Real
Jan 64
1963=
1/
Wage
Wage
GDP
=100
100
January 1966
16.3
7.1
18.4
107.1
118.4
January 1968
13.0
8.3
13.7
115.9
134.6
January 1970
13.2
3.7
15.2
120.2
155.0
January 1972
19.7
7.5
10.6
129.2
171.4
January 1974 2/
34.4
1.7
15.4
131.4
197.8
October 1974
22.0
7.1
5.9
140.7
209.5
January 1976
24.0
5.4
4.0
148.3
217.8
1/
GPD changes are for intervals between wage changes except
for October 1964 and January 1976, for which GDP changes
for respectively all of 1974 and 1975 are shown because
GDP data are available only for full years.
2/ Wages were raised by 18 percent in Octover 1973 and by
14 percent in January 1974. The increase shown for January
1974 includes the October 1973 change.
GERALD FORD LIBRARY
Table 10
LIBRARY GERALD ? FORD
Mexico - Balance of Payments
Since 1970
(in million dollars)
Year
Year
Year
Year
Year
Year
1st half
1st half
1970
1971
1972
1973
1974
1975
1975
1976p/
I. Balance on Current Account
-879.9
-676.4
-707.2
-1,109.8
-2,458.3
-3,529.0
n.a.
n.a.
II.
Balance on goods and services
-945.9
-726.4
-761.5
-1,175.4
-2,558.1
-3,643.4
-1,614.3
-1,511
A. Exports of goods and
services
2,933.1
3,167.1
3,800.6
4,828.4
6,342.5
6,303.3
3,100.7
3,529
1. Merchandise 1/
1,347.7
1,410.3
1,716.4
2,140.3
2,998.9
2,998.7
1,495.3
1,730.5
2. Tourism
415.0
461.0
562.6
724.6
842.0
800.8
399.5
443.6
3. Passenger Fares
39.3
47.3
59.5
63.4
78.1
88.7
42.1
2/
4. Border transactions
878.9
966.9
1,057.0
1,207.7
1,372.9
1,518.8
732.9
796.3
5. Value added by border
indust
3/
80.9
101.9
164.7
277.6
443.5
445.9
199.7
279.6
6. Other
171.3
179.7
240.4
415.2
607.1
450.3
231.1
284.9
B. Imports of goods and
services
3,879.0
3,893.5
4,562.1
6,003.8
8,900.6
9,946.7
4,715.0
5,040.9
1. Merchandise
4/
2,326.8
2,254.0
2,717.9
3,813.4
6,056.7
6,580.2
3,088.3
3,090.2
2. Tourism
169.7
172.2
220.4
258.0
334.8
398.0
170.2
188.8
3. Passenger Fares
53.9
54.3
65.7
72.6
96.8
134.1
52.9
2/
4. Border transactions
585.0
612.5
649.3
695.0
819.2
933.6
444.3
522.2
5. Dividends, interests
and other remitt, by
foreign firms
357.5
383.0
451.5
528.4
633.7
699.0
344.6
403.4
6. Interest on official
debt
229.2
236.8
261.8
378.5
588.5
778.8
415.6
489.3
i) Nacional Finan-
ciera & others
210.6
219.3
241.5
357.6
560.3
680.6
365.6
n.a.
ii) Government
18.6
17.5
20.3
20.9
28.2
98.2
50.0
n.a.
156.9
180.7
195.5
257.9
370.9
423.0
7. Other
199.0
367.0
Table 10 (continued)
Year
Year
Year
Year
Year
Year
1st half
1st half
1970
1971
1972
1973
1974
1975
1975
1976P
III. Errors and Omission in
current and capital
accounts (net)
498.7
217.7
233.5
-378.4
-135.8
-82.0
199.2
-751.6
IV. Long-term capital (net)
503.9
669.1
723.5
1,676.1
2,730.8
3,890.5
1,337.2
2,152.2
1. Direct foreign investment
200.7
196.1
189.8
286.9
362.2
362.3
205.1
n.a.
2. Purchase of foreign firms
--
--
-10.0
-22.2
-2.1
-25.8
-1.0
n.a.
3. Bonds and stocks
-7.2
52.0
6.2
-10.3
-59.8
136.8
81.8
n.a.
4. Loans from abroad (net)
342.2
450.6
546.0
1,370.7
1,999.2
2,952.3
679.3
n.a.
a. Public (net) 5/
263.1
286.4
359.7
1,046.6
1,672.9
2,469.0
624.9
n.a.
i) Inflows
799.0
742.2
864.2
1,891.9
2,233.9
3,157.1
922.2
n.a.
ii) Amortization
-535.9
-455.8
-504.5
-845.3
-561.0
-688.1
-307.2
n.a.
b. Private (net)
61.1
164.2
186.3
345.1
326.3
483.3
64.4
n.a.
i) Firms with foreign
investment (net)
41.7
168.0
179.4
196.4
196.5
348.7
--
n.a.
ii) Other firms
(net)
19.4
-3.8
6.9
127.7
129.8
134.6
64.4
n.a.
5. Public debt (net) /
-2.3
-28.9
37.8
69.9
470.9
460.0
357.3
n.a.
6. Loans granted abroad
11.5
-0.7
-16.3
-18.9
-39.5
4.9
14.8
n.a.
V. SDRs
45.4
39.6
39.2
--
--
--
--
--
VI. Change in Reserves of the
Bank of Mexico (equals II +
III + IV + V) ; (- = increase)
-102.1
-200.0
-264.7
122.3
-36.9
-165.1
-0.3
+174.8
1/ Exports of border industries are excluded.
2/ Included in "other."
3/ Value added plus domestic inputs of goods exported by border industries.
4/ Imports of border industries are excluded. Valued c.i.f.
5/ These categories were redefined in 1974.
6/ Includes loans guaranteed by the government.
LIBRARY GERALD FORD
p/ Preliminary.
Source: Bank of Mexico.
RESTRICTED
Table 11
Mexico -- Level and Composition of International Reserves
(millions of U.S. dollars, 1970-1976)
Special
Reserve
Silver
Drawing
Position
and other
Foreign
Gold
Rights
in IMF
Assetsᵃ
Exchange
TOTAL
December 31, 1970
176ᵇ
48
135
n.a.
385
744
December 31, 1971
200ᶜ
96
106
n.a.
550
952
December 31, 1972
188ᶜ
139
106
n.a.
731
1,164
d
December 31, 1973
195
154
118
n.a.
888
1,355
December 31, 1974
154ᵈ
158
120
n.a.
960
1,392
December 31 1975
154ᵈ
101
114
n.a.
1,168
1,529
March 31, 1976
152ᵈ
100
113
n.a.
1,142
1,537
August 9, 1976
365ᶜ
98
113
20
537
1,133
August 31, 1976
337£
98
113
20
803
1,361
375⁸
est.
September 10, 1976
98
113
20
964
1,570
Sources: IMF, International Financial Statistics and Bank of Mexico.
a. The IMF does not count silver as part of Mexico's reserves. The estimated figures on
1976 holdings consist mostly, if not entirely. of silver.
b. Valued at $35 per ounce.
C. Valued at $38 per ounce. d. Valued at $42.22 per counce.
e. 3.6 million ounces valued at 90 per cent of the price at the second gold fixing on
August 9, $112.70 per ounce.
0803
f. 3.6 million ounces valued at 90 per cent of the price at the second gold fixing on
August 31, $104 per ounce.
g. 3.6 million ounces valued at 90 per cent of the price at the second gold fixing on
LIBRARY
September 10, $115.70 per ounce.
RESTRICTED
Table 12
MEXICO - Composition
of Merchandise Trade in 1975
Value
Share of
Value
Share of
(in million
Total
(in million
Total
dollars)
(per cent)
dollars)
(per cent)
Exports
Imports
Agriculture and Fishing
772
27.0
Consumer Goods
600
9.1
of which Cotton
(174)
(22.6)
of which Corn
(398)
(66.3)
Coffee
(184)
(23.8)
Other
(202)
(33.6)
Shrimp
(120)
(15.5)
Other
(294)
(38.1)
Semi-Processed Materials
2,903
44.1
of which Vegetable and Animal Oils (207)
( 7.1)
Extractive Industries
737
25.8
Fuels
(291)
(10.0)
of which Metals
(277)
(37.6)
Textiles
( 28)
( 1.0)
Petroleum
(460)
(62.4)
Paper Products
(158)
( 5.4)
Chemical Products
(773)
(26.6)
Manufactures
1,202
42.0
Unassembled Autos & Parts
(582)
(20.0)
of which Foods and Beverages
(214)
(17.8)
Steel Products
(536)
(18.5)
Textiles and Shoes
(141)
(11.7)
Other
(329)
(11.3)
Chemicals
(204)
(17.0)
Steel Products
( 38)
( 3.2)
Investment Goods
2,391
36.3
Machinery and Trans-
of which Machinery and Equipment (1,924)
(80.5)
port Equipment
(270)
(22.5)
Tools and Instruments
(204)
( 8.5)
Other
(335)
(27.9)
Transport Equipment
(264)
(11.0)
Unclassified Products
148
5.2
Unclassified Products
686
10.4
Total
2,859£
100.0
Total
6,5802/
100.0
1/ Excludes exports of silver and the operations of the border assembly plants.
2/ Excludes the operations of the border assembly plants.
Source: Bank of Mexico, Indicadores Economicos.
GERALD FORD LIBRANA
Table 13
Mexico - Geographic Distribution
of Merchandise Trade in 1975₽/
Exports
Imports
Value
Share of
Value
Share of
(in million
Total
(in million
Total
dollars)
(Percent)
dollars)
(Percent)
Total
2,858-
1/
100.0
6,580
100.0
United States
1,629
57.0
4,108
62.4
Canada
43
1.5
146
2.2
EEC Countries
258
9.0
1,091
16.6
United Kingdom
(28)
(1.0)
(193)
(2.9)
Germany
(87)
(3.0)
(480)
(7.3)
France
(21)
(0.7)
(184)
(2.8)
Other
(122)
(4.3)
(234)
(3.6)
Other Western Europe
61
2.1
250
3.8
Eastern Europe and USSR
13
0.5
36
0.5
Latin American and
Caribbean Countries
482
16.9
514
7.8
Argentina
(36)
(1.3)
(211)
(3.2)
Brazil
(92)
(3.2)
(96)
(1.5)
Venezuela
(57)
(2.0)
(59)
(0.9)
Central America
(82)
(2.9)
(19)
(0.3)
Other
(215)
(7.5)
(129)
(2.0)
Japan
109
3.8
298
4.5
Other Asian Countries
97
3.4
36
0.5
Africa
1
negl.
21
0.3
Australia and New Zealand
4
0.1
22
0.3
Other Countries
18
0.6
56
0.9
Unallocated
143
5.0
--
--
p/ Preliminary
1/ Excludes both exports of silver, which are included in line II.A.1 of
Table 10, and exports of border industries.
Source: Bank of Mexico, Indicadores Economicos.
GERALD FORD LIBRARY
RESTRICTED
Table 14
Mexico - Selected Data on External Debt
(in million dollars)
Public and Publicly Guaranteed
Claims on Mexico Reported by
Debt Reported by Mexico-
1/
Banks
Official
Long
Short
Banks in Major
United States Banks4/
Lending
Total
Term
Term
Total
Countries
37
Total
Head Offices
Institutions
5/
Others
1970
4,070
3,227
843
n.a.
n.a.
n.a.
1,276
n.a.
n.a.
1971
4,243
3,516
727
n.a.
n.a.
n.a.
1,306
n.a.
n.a.
1972
4,594
3,962
632
n.a.
n.a.
n.a.
1,591
n.a.
n.a.
1973
6,314
5,265
1,049
n.a.
n.a.
n.a.
1,836
n.a.
n.a.
1974
9,946
8,014
1,932
14,177
5,9706/
n.a.
2,673
2,003
6,2046/
1975
13,837
11,314
2,523
18,845
13,465
9,896
3,786
2,353
3,027
1976
March
15,081
12,406
2,675
19,747
14,599
10,509
4,068
2,382
2,766
June
16,402
13,258
3,1447
n.a.
n.a.
11,537
4,661
n.a.
n.a.
Excludes unguaranteed private debt which is not systematically reported, but which was reliably estimated to
amount to $6-8 billion at the end of 1975.
Amounts disbursed.
3/ Refers to claims reported by banks in the United States, other G-10 countries, and US bank branches in the
Bahamas, the Cayman Islands, Panama, Hong Kong, and Singapore.
4/ Includes claims reported by agencies and branches of foreign banks in the United States. To illustrate, these
claims totalled about $650 million at the end of 1975.
5/ Refers to the IBRD, IDB, AID, and Eximbank. Data not readily available prior to 1974.
6/ For this date only, the claims of US bank branches in the Bahamas, the Cayman Islands, Panama, Hong Kong, and
Singapore are included with the claims reported by Others. A year later, these claims totalled $5,366 million.
7/ Includes $360 million drawing on the Federal Reserve System under the swap arrangement.
Sources: World Bank, Bank for International Settlements, US Treasury Department, and Board of Governors
of the Federal Reserve System.
GERALD TRANSIT FORD
RESTRICTED
Table 15
Wholesale Price Index
in Mexico and the United States
/
Since 1968
Mexico
United States
Ratio of
Change from
Change from
Mexican Index
Index
Year Earlier
Index
Year Earlier
to U.S. Index
(1970=100)
(Percent)
(1970=100)
(Percent)
(1970=100)
1968
92.0
+1.9
92.8
+2.4
99.1
1969
94.4
+2.6
96.5
+4.0
97.8
1970
100.0
+5.9
100.0
+3.6
100.0
1971
103.7
+3.7
103.3
+3.3
100.4
1972
106.7
+2.9
107.9
+4.5
98.9
1973
123.4
+15.7
122.0
+13.1
101.1
1974
151.2
+22.5
145.0
+18.9
104.3
1975
167.1
+10.5
158.4
+9.2
105.5
1974 - I
146.0
+29.0
135.1
+17.4
108.1
II
150.5
+26.3
139.9
+15.9
107.6
III
153.0
+20.6
149.8
+19.3
102.1
IV
154.5
+15.0
155.1
+22.4
99.6
1975 - I
158.6
+8.6
155.1
+14.8
102.3
II
165.0
+9.6
156.7
+12.0
105.3
III
170.4
+11.4
160.1
+6.9
106.4
IV
174.3
+12.8
161.8
+4.3
107.7
1976 - I
184.0
+16.0
162.5
+4.8
113.2
II
189.9
+15.1
164.9
+5.2
115.2
1976
Jan.
181.6
+15.5
162.4
+4.4
111.8
Feb.
183.9
+15.7
162.4
+4.6
113.2
Mar.
186.6
+16.8
162.7
+5.4
114.7
Apr.
187.5
+16.0
164.2
+5.3
114.2
May
190.4
+15.6
164.7
+5.0
115.6
June
192.0P
+13.9
165.9
+5.5
115.7
July
196.8₱
+15.5
166.9 P
+4.9
117.9
/ Indices are averages for period shown.
Source: International Monetary Fund, International Financial Statistics.
FORD
GERALD
LIBRARY
Table 16
Mexico -- GDP/GNP Deflators in Mexico and the United States:
1968-75
(1968=100)
Mexico (GDP)
U.S.A. (GNP)
Relative Prices
(1)
(2)
(3) = (1) / (2) X 100
1968
100.0
100.0
100.0
1969
103.9
105.0
99.0
1970
108.6
110.6
98.2
1971
113.5
116.3
97.6
1972
119.8
121.1
98.9
1973
134.6
128.3
104.9
1974
166.7
140.7
118.5
1975
191.7
154.0
124.5
Source: Bank of Mexico, U.S. Department of Commerce.
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[9-17-76]
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HANDLE THE ATTACHED DOCUMENT IN ACCORDANCE WITH INTERNAL
INFORMATION SECURITY PROCEDURES FOR RESTRICTED INFORMATION
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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
September 17, 1976
TO: FROM: Chairman Ted Truman Burns ENT
Attached is the complete version of
the paper on the Mexican economic situation.
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Summary of Analytical Aspects of the Mexican Economic Situation
This paper is in two parts. Part I analyzes the macro-economic
setting of the Mexican economy in light of the recent sharp (37 per cent)
depreciation of the Mexican peso. Part II analyzes several aspects of the
peso depreciation itself.
Part I argues that prior to the September 1 depreciation of the
peso the Mexican economy was in a situation of excess demand accompanied
by very high inflation rates. This situation was largely stimulated by an
expansion in the size of the public sector and the public-sector deficit.
The expansion in the public sector led to a growing current-account deficit.
At the same time private investment was stagnating. Consequently, the
crucial objective of any Mexican economic stabilization program to complement
the peso's depreciation must be to shift resources into the external sector.
Part I analyzes, in turn, Mexican budget policy, monetary policy, investment,
and wages and prices. It concludes that domestic aggregate demand should
be restrained through a reduction in the size of the public-sector deficit.
This will allow a tightening of monetary policy that would both support
aggregate-demand policy and encourage a net inflow of capital. Finally,
real wages should be restrained, if not reduced, to curb private consumption.
The crucial issue in this last area is not how large the direct price
effects of the peso's depreciation will be but rather how much will be
passed through into increases in nominal wages. To date, we have little
specific information that the Mexican authorities are willing or able to
take the necessary policy actions in these areas.
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Part II first traces the cause of the peso's depreciation on
September 1 to a steady deterioration of the country's external trade and
financial position. The proximate cause was the low level of Mexico's
foreign exchange reserves. The size of the peso's depreciation is next
discussed. This section reaches the conclusion that the 37 per cent
depreciation of the peso that has occurred does not seem out of line with
what might reasonably be expected, although it is on the high side of that
range. The following section discusses the outlook for the Mexican Current
Account under the assumption that the Mexican authorities will adopt an
adequate economic stabilization program. It concludes that over the
shorter term of a year or so some improvement might be expected in three
specific areas: tourism, net earnings of border assembly plants, and net
earnings from border transactions. The outlook for the Mexican capital
account is also discussed briefly. Finally, a review of Mexico's reserves
and its prospects for borrowing from the U.S. Treasury or the International
Monetary Fund is presented.
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Analytical Aspects of the Mexican Economic Situation
CONTENTS
page
I. Analysis of the Macro-Economic Situation
1
A. Budget Policy
1
B. Monetary Policy
5
C. Investment
7
D. Wages and Prices
9
II. Analysis of the Peso Depreciation
11
A. The Balance-of-Payments Situation Prior to the
Peso's Depreciation
12
B. The Size of the Peso's Depreciation
14
C. The Outlook for the Current Account
18
D. The Outlook for the Capital Account
20
E. The Outlook for Mexico's Reserves and
Borrowing from Official Institutions
21
List of Tables -- All tables are at the end of the paper.
Table 1 -- Gross Domestic Product, 1965-1975
Table 2 -- Expenditure on Gross Domestic Product, 1965-1975
Table 3 -- Consolidated Public Sector Accounts, 1965-1975
Table 4 -- Revenues and Expenditures of the Federal Government
since 1970
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CONTENTS (Cont.)
Table 5 -- Index of Industrial Production since 1970
Table 6 -- Money Supply since 1964
Table 7 -- Consumer Price Index in Mexico and the United
States since 1968
Table 8 -- Selected Interest Rates in Mexico and the
United States since 1970
Table 9 -- Increases in Minimum Wages, Mexico City, 1966-1976
Table 10 -- Mexico's Balance of Payments since 1970
Table 11 -- Level and Composition of International Reserves
since 1970
Table 12 -- Composition of Merchandise Trade in 1975
Table 13 -- Geographic Distribution of Merchandise Trade in 1975
Table 14 -- Selected Data on External Debt
Table 15 -- Wholesale Price Index in Mexico and the United States
since 1968
Table 16 -- GNP/GDP Deflators in Mexico and the United States,
1968-1975
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Analytical Aspects of the Mexican Economic Situation
I. Analysis of The Macro-Economic Setting
The principal malady of the Mexican economy over the past 3-1/2
years has been excess demand originating in the public sector. Real GDP
increased at a historically high average rate of about 7-1/2 per cent per
year in 1972-73, but slackened off somewhat to 5.9 and 4.0 per cent in 1974
and 1975 respectively. (See Table 1.) A sharp rise in the relative size
of the public sector beginning in 1972 was incompletely offset by a rise
in public-sector revenues. Although a substantial proportion of the
consequent increase in the public-sector deficit was financed externally,
this added to the external debt, and the excess demand and accompanying
inflation added to the current-account deficit. Private and particularly
public consumption expanded rapidly. Public investment increased, while
private investment declined as a per cent of GDP. (See Table 2.) In large
part because of the reduced rates of private investment the Mexican economy,
at least in the short run, has by all reports, only limited unutilized
capacity available. Consequently, the crucial objective in any Mexican eco-
nomic stabilization program to complement the recent depreciation of the peso
is to shift resources into the external sector and away from other uses.
To accomplish this shift two adjustments will probably be required: reduction
in the size of the public-sector deficit as a percentage of GDP and mainte-
nance of a restored international competitive position. Both adjustments
will tend to reduce the real income of the Mexican population.
A. Budget Policy
In 1972, the size of the consolidated public sector began to
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increase from about 14 per cent of GDP before 1972 to above 20 per cent in
1975*/ (See Table 3.) This was the result of a deliberate policy to expand the
size of the public sector, which had been relatively small, and to increase
rates of public investment. While the share of public-sector revenues in
Mexican GDP also rose, the increase was not as large as the increase in
the share of expenditures. Hence the size of the public-sector deficit
rose from under 3 per cent of GDP before 1972 to almost 9 per cent in 1975.
Current data are available only for the revenues and expenditures
of the Federal Government, and the latest data are only for May, 1976.
(See Table 4.) These data suggest no substantial decline in the absolute
size of the public sector deficit in the first five months of this year,
through the rate of increase may have been arrested.
We see no evidence that the absolute size of the Mexican public-
sector deficit is related to the slowdown in Mexican real growth. But
the cyclical position of Mexico, or more accurately Mexico's relative
cyclical position, has contributed to Mexico's balance-of-payments problem.
Mexico was probably surprised and was certainly disadvantaged when it
experienced positive real growth of 5.9 per cent and 4.0 per cent in 1974
and 1975 at the same time that its major trading partner -- the United
As is the case for many countries, data on the size of the
public sector and its deficit can be compiled under many different defini-
tions. The definition used in the text includes the Federal Government,
Federal District, Social Security, budgetary controlled Decentralized
Agencies and Enterprises (the number of such units increased in 1973), and
the deficit financing of the largest non-budgetary controlled public
enterprises.
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States -- was experiencing negative real growth. The adverse cyclical
income effects on Mexico's balance of payments were substantial, on the
order of $500 million over the two years combined. The lagged effects of
sluggish external demand and, perhaps, high inflation rates on its
domestic economic growth are continuing. (See Table 5 showing the slug-
gish growth of industrial production through May (the latest month available)
except in the petroleum, petrochemical, and, more recently, the mining
sectors.)
One problem that has reportedly contributed to the expansion
of the public-sector deficit is a lack of adequate administrative controls
on the expenditure side, particularly regarding the Decentralized Agencies
and Enterprises. The consequences of this deficiency became particularly
acute as the public sector was allowed to expand after 1971. The Mexican
authorities apparently recognize the need for reform in this area.
President Echeverria's new program as outlined by Mr. Fernandez Hurtado,
refers to a planned reduction in the public sector deficit "through strict
programming and surveillance of public expenditure to attain quantitative
goals related to the adjustment process of the economy." But we do not
know the specifics of what the Mexican authorities have in mind, and any
results in this area will no doubt be slow in coming.
On the revenue side, roughly half of the Federal Government's
current revenues are raised through income taxes. But observers have com-
mented that the tax system is complex with important instances of inconsistent
treatment of the same form of income. It is badly in need of reform and
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rationalization. These characteristics of the tax system have contributed
to the Government's failure to achieve its revenue targets in recent years.
The Echeverria program mentions the need for increasing public sector
revenues but is not specific except in calling for (1) an export surtax,
(2) a reduction of tax rebates for exports, (3) a reduction of import taxes,
(4) an excess profits tax, and (5) special fiscal treatment of private enter-
prises seriously affected by the exchange-rate depreciation. The first
three types of measures are designed primarily to offset, in part, the effects
of the depreciation on the external sector and not for revenue purposes.
The only specifics on the fiscal program that have been revealed
are (1) a reduction in average import tariffs from 20 per cent to 9 per cent,
which will have a negligible effect on revenues since the peso price of im-
ports on which duties are levied will increase pari passu with the 58 per cent
depreciation; (2) a reduction in the import tariff to finance export
promotion from 2 to 1 per cent; (3) a one-year 20 per cent export tax on
fish and agricultural products, and a one-year 7.5 per cent export tax on
manufactured goods, which together might increase revenues by 5,000 million
pesos; and (4) a removal of subsidies on exports of manufactured goods, which
amounted to 1,861 million pesos in 1975. The net fiscal effects of these
actions might lower the public-sector deficit by about 7,000 million pesos
or about 0.7 per cent of GDP in 1976.
We understand that prior to the depreciation of the peso,
technicians at the Bank of Mexico were tentatively talking about lowering
the public-sector deficit from 9 per cent of GDP in 1975 to 3.5 per cent in
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1978. We do not know how firm these plans were, whether they have been
changed, or how they might be implemented.
B. Monetary Policy
The Bank of Mexico is required to help finance the Government's
deficit. Thus, it has little independent scope to exercise monetary
restraint. As the public-sector deficit grew, its financing placed an
increasingly heavy drain on the internal savings of the country. Table 3
shows that, in 1975, more than 50 billion pesos were raised from internal
sources to help finance the deficit, nearly five times as much as in 1971.
As a percentage of GDP, the internal financing of the deficit was over
twice as large in 1975 as in 1971. The Bank of Mexico had long been
forcing the banks to absorb large amounts of Government securities through
the reserve requirements, but this became increasingly difficult to accomplish
as the size of the fiscal deficit grew rapidly, and the Bank of Mexico
found itself obliged to hold increasing amounts of these securities. As a
result, the rate of growth of the money supply, which had been averaging about
11 per cent in the years 1966-71, jumped to over 20 per cent. This was
accompanied by increasing tightness of credit to the private sector, as
reserve requirements were raised drastically. Interest rates in Mexico
are administered and the process of changing them is cumbersome, often
involving the introduction of a new financial instrument. The principal
tool of monetary control is a complex set of reserve requirements. Never-
theless, it is useful to look at what has been happening over the past
several years to the course of monetary policy and the growth of the money
supply.
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Except for an explosion in the rate of growth of the Mexican
money supply -- defined as coin and currency plus demand deposits -- in
1972, which probably contributed substantially to the subsequent imbalances
that developed in the Mexican economy, the course of monetary policy --
judging by the behavior of the money supply -- has been at best neutral.
(See Table 6.) In 1973 and 1974, the growth in the money supply was
slightly more rapid than the rate of growth of consumer prices. (See
Tables 6 and 7.) In 1975, the growth in the money supply became marginally
more expansionary. Through May of this year, which is the last month for
which data are available, the growth of the money supply (year over year)
has edged down slightly from over 20 per cent to under 20 per cent, / while
consumer prices were rising at year-over-year rates around 15 per cent.
We do not know what has happened to Mexico's money supply between
May and August. The Echeverria program states that "a system of regulated
credit growth will be established by the Bank of Mexico for use by the
private and public sectors.' We do not know what this new system involves,
but as a practical matter, the Bank of Mexico cannot refuse credit to
the Government. Thus, success in tightening monetary policy depends upon
success in reducing the public-sector deficit and upon the amount of external
financing for the deficit that is available.
Interest rates on deposits in Mexican financial institutions are
administered by the Bank of Mexico. The fact that Mexican interest rates
/ The Bank of Mexico releases money supply data on a seasonally-
adjusted as well as a not-seasonally-adjusted basis. The seasonal factors
are apparently large. On a seasonally-adjusted basis the money supply in
May 1976, was 8.2 per cent above December, 1975. On a not-seasonally-adjusted
basis, the money supply shows a decline of 4.3 per cent. On both bases the
money supply in May was 19.7 per cent above the level a year earlier.
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were not permitted to rise in line with interest rates on dollar-denominated
assets in 1973-74 must have contributed to some net private capital outflow
in these years. (See Table 8.) Banks were authorized to issue six and
nine months certificates of deposits in early 1974. Initially, however,
these instruments had relatively unattractive yields. In 1975 the
interest-rate differential shifted more in favor of the large Mexican
CDs as U.S. interest rates declined, and in August of this year the maximum
interest rates payable on small CDs was raised by 1 percentage point while
that on large CDs was raised 1.25 percentage points.
The Mexican government cannot afford for balance-of-payments or
other reasons to lower interest rates. In fact, since real interest rates
on short-term assets appear to be negative in Mexico, there may be room to
raise them substantially. The only mention of interest-rate policy in the
Government's new program which was announced on September 1 was the state-
ment that "interest rates for small savers will be increased." At present
we have no further information about what the Bank of Mexico plans to do
with its interest-rate policy or monetary policy in general.
C. Investment
Between 1970 and 1975 real private investment increased only 12.5
per cent as real GDP rose 31 per cent. In 1975 real private investment
is estimated to have been less than in 1974*/ This stagnation in private
investment is due to several factors. Two are most prominent. (1) Private
entrepreneurs were distrustful of President Echeverria when he took office
in December, 1970. His administration was committed to adjusting Mexico's
Quarterly national income statistics are not available for
Mexico.
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severely skewed income distribution and, by implication, threatened the
continuation of the previous administrations' extremely favorable en-
vironment for private investment. (2) It seems clear that there was some
crowding out of private investment in 1975. Between 1970 and 1975 private
consumption rose 27 per cent in real terms, real public consumption rose
77 per cent, and real public investment rose by more than 100 per cent.
Some of these public investment projects were related to social
programs -- housing and rural development -- but many were designed to add
directly to the capital stock -- petroleum, petrochemicals, steel,
fertilizers. Unfortunately, except in petroleum, the payoff to these
large projects will not come until 1977 and later. In the meantime, these
projects absorb resources and place strains on the domestic economy and
the Mexican balance of payments.
The Government's new program announced on September 1 indicated
that there would be no reduction in the rate of public investment in
productive activities and social services. (Presumably, President Echeverria
meant that there would be no reduction in the real rate of public invest-
ment.) Two implications can be drawn from this aspect of the Government's
program: (1) These public investment projects will continue to contribute
to an expansion of the nominal size of public sector expenditures and
most of them are being undertaken by decentralized enterprises that are
*/ Data on the split between social and industrial investment
do not appear to be available.
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under only loose financial control by the Federal Government. (2) Until
these public investment projects begin to yield positive returns, the
productive capacity of the overall Mexican economy will be under strain.
There appears to be little slack available to reduce the external deficit
on current account (with the possible exception of the tourist industries
and the border assembly plants); consequently, the reduction in the current-
account deficit must occur through a reduction in real absorption rather
than through an increase in real output.
D. Wages and Prices
Data on wage rates and earnings rates in Mexico are not readily
available. The best proxy is the series for minimum wage rates in Mexico
City. (See Table 9.) Increases in official minimum wages tend to set the
standard for other wage settlements. Between January 1974 and January 1976,
when the most recent adjustment in minimum wages occurred, real wages in-
creased by almost 13 per cent, while real GDP increased by only 10 per cent.
An adjustment in wages for government workers is due on September
30. This, in turn, is likely to lead to an increase in minimum wages.
President Echeverria has promised that this adjustment would be designed
to compensate for the purchasing power lost since January. Mr. Fernandez
Hurtado has indicated privately that the Government does not feel it can
afford politically to enforce a reduction in real wages. In fact, union
leaders have threatened a general strike unless nominal wages are increased
by 65 per cent. If this is the case, then it will prove difficult to restrain
the growth of private consumption to the extent necessary to permit an expansion
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in private investment and a reduction in the current account deficit. A
successful depreciation leading to an improvement in the country's current
account requires a reduction in real absorption in the case where an economy
has little or no excess capacity.
On the price side, the situation is even more precarious. From
April through July, the month-to-month increase in the Mexican consumer
price index declined to under 1 per cent -- compared with month-to-month
increases of over 1 per cent in late 1975 and early 1976 -- and the year-
over-year increase declined to about 13 per cent from the early pattern of
over 15 per cent. (See Table 7.) Generalized price increases accompanying
the recent substantial depreciation of the peso will add to these infla-
tionary pressures.
The Mexican government has indicated its intention to hold down
the rate of inflation and mop up excess profits resulting from the depre-
ciation. It remains to be seen how successful it will be in this effort.
The crucial issue is probably not how large the direct price effects of
depreciation are but rather how much will be passed through into increases
in nominal wages. One step the Government can take and has indicated it
will take is in the area of prices of services supplied by the public sector.
Prices in this sector have tended to lag behind increases in the general
price level and increases in costs. Ceteris paribus, any tendency to hold
down these prices further would only add to the size of the public-sector
deficit and produce further distortions in the economy.
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II. Analysis of the Peso Depreciation
The Mexican current account position deteriorated rapidly
after 1972. (See Table 10.) Moreover, in 1973 the Mexican inflation
rate began to diverge substantially from that of the United States, to
whose currency the peso had been pegged at an unchanged rate since 1954.
This eumulative divergence continued through mid-1976. Thus, it became
increasingly clear to many observers that the peso would have to be
devalued or allowed to depreciate; the only question was when. Mexico's
gross reserves of foreign exchange declined from $1,142 million on
March 31, 1976, to an estimated $537 million on August 9 -- despite a
drawing of the full $360 million Federal Reserve swap line on April 9,
1976 and drawings on Euro-credits. (See Table 11.) Mexico was apparently
able to rebuild its foreign exchange reserves by over $250 million between
August 9 and August 31 through heavy official borrowing on the private
market. But the prospects of a significant underlying improvement in
Mexico's reserves over the following several months were dim.
Consequently, Mexico's Secretary of Finance and Public Credit,
Mr. Mario Ramon Beteta, announced late on August 31, that the fixed peso-
dollar exchange rate was being abandoned and that the peso would be
allowed to float subject to central bank intervention to prevent specu-
lative and erratic fluctuations. The peso quickly depreciated about 40
per cent to a price of over 20 pesos per U.S. dollar compared with 12.50
per dollar at the old parity. On September 13, the peso was appreciated
about 3 per cent and stabilized at 12.70/12.90 per dollar, equal to a
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58 per cent increase in the peso price of the U.S. dollar or to a 37
decline in the dollar value of the peso.
The analysis in Part I above indicated that if the depreciation
of the peso is to be successful in restoring a sustainable pattern to the
structure of Mexico's international transactions, it must be accom-
panied by a strong domestic economic stabilization program. Domestic
aggregate demand should be restrained through a reduction in the size of
the public sector deficit. Monetary policy should be tightened in support
of aggregate-demand policy and to encourage a net inflow of domestic and
foreign capital. Finally, real wages should be restrained, if not reduced,
to curb private consumption.
On the assumption that Mexico adopts an adequate domestic
economic stabilization policy in support of its new exchange-rate policy,
we can analyze how an improvement in Mexico's external accounts will
come about and over what time period. In the short run any improvement
in the current account should be the result of an increase in tourist
earnings and earnings on net border transactions and from border assembly
plants. In the longer run of a couple of years we can expect some pick
up in merchandise exports and reduction in merchandise imports.
A. The Balance of Payments Situation Prior to the Peso's Depreciation
The decision to let the Mexican peso depreciate was the culmina-
tion of a steady deterioration in the country's external trade and
financial position, caused partly by internally generated inflationary
pressures and partly by economic and financial developments in the rest
of the world. The Mexican deficit on current account rose from an
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average of about $750 million in 1970-72. to $1.1 billion in 1973,
and over $3.6 billion in 1975. (See Table 10.) The Mexican current
account deficit was not directly affected by the increase in petroleum
prices since Mexico, in 1973, was a only small net importer of petroleum
and has since become a net oil exporter. The value of merchandise imports
rose sharply partly because of the world-wide inflation and partly
because of excess demand in the Mexican economy. The value of exports
also rose, but less rapidly, The growth of Mexican exports was slowed
in the last part of 1974 and in 1975 by the world recession, which also
contributed to a 5 per cent decline in the country's important tourist earnings,
and by the deterioration of its competitive position. (See Table 12 for
data on the composition of Mexican exports and imports and Table 13 for
data on the geographic distribution of its trade.) The deterioration of
Mexico's competitive position and the influence of the U.S. recession was
also reflected in the reduced net contribution of border assembly plants
to the Mexican balance of payments and the reduction in the rate of
increase of the net surplus on so-called border transactions.
To cover this growing current account deficit and net errors
and omissions, which turned negative in 1973 -- presumably, reflecting
capital flight -- a substantial increase in external borrowings was
required. (See Table 14.) At the end of 1975, the external debt was
estimated at $20-22 billion, consisting of about $14 billion in debts
of the public sector (of which $11.3 billion carried an original maturity
of one year or more) and private sector debts of $6-8 billion. Mexico's
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total external debt may well have climbed by at least another $2.5 billion
since the end of 1975. Claims on Mexico by U.S. banks amounted to $11,537
million at the end of June, 1976, up $3,388 million from the end of
September, 1975, when comprehensive data were first collected.
Two features of the growing Mexican external debt are (1)
the growing coneentration of the debt in accounts of the public sector
and (2) the deterioration of the quality of the debt as a result of its
shorter average maturity. The debt service on public debt of maturity
of more than one year was 25 per cent of exports in 1975, having reached
a peak ratio of almost 30 per cent in 1968; it was 18 per cent in 1974.
For what the concept is worth, this ratio will definitely increase over
the next several years.
B. The Size of the Peso's Depreciation
The Mexican peso has been allowed to appreciate slightly after
its initial depreciation and has been effectively pegged at a rate
vis-a-vis the U.S. dollar at which the dollar is 58 per cent more
expensive in terms of pesos than it was from April 1954 through August 31,
1976. The question arises of how large a depreciation of the peso is
appropriate
One approach is to argue that the peso's value should be determined
primarily by market forces of supply and demand. However, the Mexican
authorities are unlikely to permit the peso to float freely for an
/ We have been told that the IMF has calculated that the peso
should depreciate by 40-50 per cent, but we do not know the basis of
this calculation.
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extended period of time. They argue that the peso market is not
extensive enough to operate without a substantial central bank presence
in the market. In fact, they have announced a new target rate (19.70-19.90
per dollar) for the peso without as yet declaring a new parity.
A second possible line of analysis is to apply (admittedly
crude) relative purchasing-power-parity concepts to the question. From
1960 to about 1972, the rate of increase of consumer prices and the GNP
deflator in the United States was roughly equal to the rate of increase
in these price measures in Mexico. On the other hand, the rate of increase.
in wholesale prices was much more rapid in Mexico over this period.
In 1975, however, using 1970 as a base, the Mexican wholesale
price index had increased 4 per cent more than the U.S. WPI (See Table
15.); over the same period, the Mexican consumer price index and
GDP deflator increased about 27 per cent more than the similar U.S. price
measures. (See Tables 7 and 16.) Moreover, by July 1976, the Mexican
WPI had increased 18 per cent more than the U.S. WPI on a 1970 base, and
the Mexican CPI had increased 36 per cent more on the same base.
Two conclusions can be drawn from these data. First, the 58
per cent rise in the peso price of the dollar has more than offset the
price differential with the United States that had opened up on any price
measure at the time of the depreciation. Second, the Mexican-U.S. price
differential was widening and could reasonably be expected to widen
further in the months ahead even without the depreciation.
A third possible line of analysis is to apply the price
elasticities approach to estimate how large a devaluation of the peso would
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be necessary to achieve a given improvement in the Mexican current account
over the same time period. However, estimates of the relevant price
elasticities are not available for Mexico, and, given the rapid rate of
inflation in Mexico, it would be necessary in any application of this
technique to calculate how much of a particular depreciation of the peso
would be eroded by subsequent price inflation.
The Treasury staff has made a crude calculation based on
estimates of price elasticities of the demand for exports and imports of
other countries and the assumption that the objective is to generate a
$2.1 billion improvement in the Mexican current-account balance by 1978.
In. this calculation it is estimated that a 40-50 per cent increase in
the peso price of dollars would be needed. This appears to be a realistic
estimate based upon this approach.
A more eclectic approach can also be considered. Under this
approach explicit recognition can be given to several important factors.
First, the underlying rate of Mexican inflation is likely to be at least
double that in the United States for at least the next two years. This
is because of the build up of inflationary pressures in Mexico, on the
one hand, and, on the other hand, the depreciation itself. Thus, under
the most optimistic scenario, the Mexican price level is likely to increase
10-12 per cent more over the next two years than the U.S. price level.
If the peso is to be fixed more or less permanently to the dollar again,
then this amount must be added to the estimate of the needed depreciation.
Second, it should be recognized that the Mexican authorities
have said that they would reduce some import restrictions and remove
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their export subsidies following the depreciation of the peso. These
actions are desirable in their own right and are a normal accompaniment
to devaluations by developing countries. They serve, however, to reduce
the size of the effective devaluation.
Third, given that the Mexican authorities have indicated their
intention to fix eventually a new parity with the U.S. dollar (for the
moment a rate of 19.70/19.90 per dollar has been chosen), given the
fact that their reserves have been severely depleted, and given the fact
that Mexico has built up a substantial external debt burden, it would be
prudent for the Mexican authorities to err on the side of too large
rather than too small a devaluation.
Finally, on a related point, the Mexican authorities have
apparently indicated an interest in seeing a substantial initial depre-
ciation of the peso that might be followed by a subsequent small
appreciation. The rationale of this strategy might be to encourage a
net capital inflow, since the expected appreciation would add to the
expected return on peso-denominated assets. Similarly, the actual small
appreciation of the peso subsequent to the initial depreciation may have
servedto increase confidence in the currency.
In summary, the depreciation of the peso that has occurred does
not seem out of line with what might reasonably be expected, although it
is on the high side of that range. This judgment is based, however, on
the premise that an appropriate domestic economic stabilization program
will be adopted in order to ensure that the effects of the depreciation
on the Mexican balance of payments will not be eroded.
RESTRICTED
GERALD FORD LIBRARY
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C. The Outlook for the Current Account
Under this heading it is reasonable to ask, first, what would
be a realistic target for the Mexican current account. As a developing
country it would be abnormal to expect Mexico to run a current-account
surplus. On the other hand, the country cannot expect to add to its
external debt at the rate it has over the past four years (1973-1976).
Given the increase in nominal magnitudes since Mexico last appeared to
be in balance-of-payments equilibrium in the early 1970s, one might take
as a starting point a target for the Mexican current account of, say a
deficit of $1-$1.5 billion, compared with the annual deficits in the
earlier period of about $750 million.
One might ask next where this improvement might come from. Over
the longer term of two to three years, one might expect it to come
generally from an increase in current account receipts, including those
from expanded oil exports, relative to current account payments. But,
as we have already stressed, this will require a domestic economic
stabilization program designed to restrain the growth of domestic demand
and hold down, if not reduce, the level of real wages and incomes.
Over the shorter term of a year, one might expect some improve-
ment in three specific areas aside from favorable cyclical effects as
a result of higher U.S. growth and, perhaps, lower Mexican growth. The
first area is tourism, where receipts declined by five per cent in 1975
and increased by only 16 per cent in 1974, compared with increases of
22 and 29 per cent in 1972 and 1973. (See Table 10.) On the payments
side, Mexican tourist payments rose by 30 per cent in 1974 and 19 per cent
RESTRICTED
GERALD FORD
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in 1975, compared with 17 per cent in 1973. It is reported that the
tourist industry is one sector where there definitely is excess capacity
in Mexico. It can be expected that the income and price effects of the
peso's depreciation will combine to produce a substantial increase in
Mexican tourist receipts and at least a decline in the rate of increase
in tourist payments.
The second area of possible immediate improvement is receipts
from border assembly plants. Receipts from these installations increased
by an average of over 50 per cent per year in 1972-74, but they stagnated
in 1975. With the dramatic change in relative costs as a result of the
peso's depreciation, it might be expected that there will be a revival
in this area. But a crucial factor will be what happens to nominal wages
in Mexico following the depreciation of the peso. If U.S. entrepreneurs
are not convinced that the rate of increase in nominal wages will be held
substantially below the increase in the peso price of the U.S. dollar,
then one can expect no substantial gain in this area.
The third area of possible immediate improvement is net receipts
from so-called border transactions. (There are the large volume of transactions
that occur as border residents cross over to make purchases or work.)
These net receipts had been increasing at around a 20 per cent annual
rate from 1971 to 1973, but the rate of increase declined to 8 per cent
in 1974 and under 6 per cent in 1975. As in the case of tourism, this
is an area where income and price effects can have a relatively dramatic
impact over a short period.
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GERALD R. FORD LIBRABA
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Over the longer term of a couple of years, one might expect a
pick up in regular merchandise exports and a reduction in imports compared
with what they otherwise might have been. Because many categories of
imports are now subject to quantitative restrictions (leading to Mexican
prices of imported goods -- prior to the depreciation -- that were as
much as 25 per cent above the world price), the price effect of the
devaluation on imports might be less than that on exports. On the other
hand, the demand for Mexican exports other than manufactures may be relatively
price inelastic; moreover, the value of imports is larger. On balance, we
would look for about an equal impact on both types of trade.
D. The Outlook for the Capital Account
The first item to notice with respect to capital account trans-
actions is that the Mexican authorities have wisely and pointedly declined
to institute capital controls. They said explicitly that the country's
tradition of free capital movements would be maintained and that Mexican
financial institutions would receive adequate liquidity to assure that
their commitments (to foreigners) would be met. This latter action might
lead to an unwanted expansion or the prevention of a reduction in domestic
liquidity, but it is the price that must be paid over the short run to
maintain stability and guard against attempted capital flight.
In addition to relying, as was mentioned earlier, on a possible
further small appreciation of the peso to add to the attractiveness of
peso-denominated assets, the Mexican authorities might also consider
tightening up on monetary policy and raising interest rates not only to
dampen domestic demand but also to encourage a net capital inflow.
R.
GERALD
DEOR
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LIBRAST
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Finally, the primary objective of Mexican policy should be to
reduce the rate of public-sector borrowing abroad and to replace it if
possible by private-sector borrowing for investment. But progress in this
area will depend on progress in reducing the current account deficit,
which, in turn will depend on the adoption of an adequate domestic
economic stabilization policy.
E. The Outlook for Mexico's Reserves and Borrowing from Official
Institutions
As is indicated in Table 11, Mexico has experienced in 1976 a
substantial decline in its foreign exchange reserves amounting to an
estimated $365 million from December 31, 1975, to August 31, 1976. In
addition it has acquired a $360 million short-term official debt under
the Federal Reserve swap network. Although at one point in August the
Mexican authorities were apparently concerned that they lacked adequate
international reserves to meet their reserve requirements against notes
in circulation, this constraint has been relaxed through the subsequent
depreciation of the peso which raised the peso value of Mexican reserves
pari passu. Nevertheless, Mexico has a clear need to build up its foreign
exchange reserves. This may be one reason why the Mexican authorities
are unconcerned about a possible excessive depreciation of the peso.
If, nevertheless, the Mexican authorities need additional
foreign exchange reserves to intervene in the exchange market or to
repay the Federal Reserve swap drawing, they might turn to the U.S.
Treasury or the International Monetary Fund.
RESTRICTED
R.
GERALD
FORD
LIBRARY
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-22-
The Mexican stabilization agreement with the U.S. Treasury
is for $300 million. The first $50 million can be drawn
immediately. Another $100 million can be drawn upon certification by
the IMF management that the Mexican authorities have adopted a stabili-
zation program that would make Mexico eligible, in the IMF staff's view,
for a drawing from the upper IMF credit tranches. A final $150 million
can be activated but must remain on deposit with the Exchange Stabilization
Fund. A final provision in the Treasury's stabilization agreement with
Mexico is that Mexico must first have drawn on the Federal Reserve swap line.
It is not clear whether this means that a drawing on the ESF cannot be
outstanding when the Federal Reserve swap is repaid. It apparently is
clear that Mexico cannot draw on the ESF and immediately use the proceeds
to repay the Federal Reserve System.
Turning to the IMF, with which the Mexican authorities are
reportedly currently negotiating, Mexico could draw up to $730 million
under the IMF's regular credit facilities -- that is, not including the
Compensatory Financing Facility or the Extended Fund Facility. Mexico
could, first, draw $113 million (SDR 98 million at $1.15 per SDR) equal
to its reserve position in the IMF. To do this it would merely have to
declare that it has a "balance of payments need." Mexico could, next,
draw its first credit tranche of $154 million (one fourth -- SDR 92.5
million -- of its IMF quota of SDR 370 million enlarged by 45 per cent
according to the Jamaica agreement to SDR 134 million and valued at
$1.15 per SDR). To do this Mexico would have to outline for the IMF its
intentions to follow corrective domestic and balance-of-payments adjustment
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184517 GERALD FORD
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measures. Finally, Mexico could enter into a stand-by agreement involving
possible drawings on its three higher expanded IMF credit tranches
totaling $462 million. Under this stand-by agreement the IMF would have
to agree that Mexico had adopted an adequate balance-of-payments adjust-
ment program. The agreement would normally involve conditions placed on
Mexico's domestic economic policies. Any drawings under this agreement
would normally be spread out over as much as 12 months. Any of Mexico's
IMF drawings would have to be repaid in 3-5 years.
Prepared by Yves Maroni and Edwin M. Truman
Division of International Finance
September 15, 1976
RESTRICTED
GERALD R. FORD
Table 1
Mexico - Gross Domestic Product
1965 - 75
GDP - Current Prices
GDP - Constant Prices
Billions of
Annual
Billions of
Annual
Pesos
Change (%)
1960 Pesos
Change (%)
1965
252.0
-
212.3
-
1966
280.1
+11.2
227.0
+6.9
1967
306.3
+ 9.4
241.3
+6.3
1968
339.1
+10.7
260.9
+8.1
1969
374.9
+10.6
277.4
+6.3
1970
418.7
+11.7
296.6
+6.9
1971
452.4
+ 8.1
306.8
+3.4
1972
512.3
+13.2
329.1
+7.3
1973
619.6
+20.9
354.1
+7.6
1974
812.9
+31.2
375.1
+5.9
1975₽/
972.2
+19.6
390.1
+4.0
p/ Preliminary.
Source: Bank of Mexico.
LIBRARY GERALD R. APORA
Table 2
Mexico - Expenditure on
FORD
LIBRARY
Gross Domestic Product
&
1965-75
07VR30
A - Billions of Pesos
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975₽
Current Prices
GDP
252.0
280.1
306.3
339.1
374.9
418.7
452.4
512.3
619.6
812.9
972.2
Consumption
210.1
231.1
251.0
278.3
305.4
344.9
375.2
416.2
496.5
660.4
798.3
Public
14.2
16.4
17.6
20.2
22.5
25.7
29.8
35.3
42.6
58.4
80.4
Private
195.9
214.7
233.4
258.1
282.9
319.2
345.4
380.9
453.9
602.0
717.9
Investment
44.1
50.4
59.4
65.8
72.7
82.2
82.2
101.2
131.0
173.7
205.8
Public
16.6
15.6
17.2
23.5
24.8
23.2
24.1
34.2
51.6
64.8
86.4
Private
27.5
34.8
42.2
42.3
47.0
59.0
58.1
67.0
79.4
108.9
119.4
Net Foreign Balance
-2.2
-1.4
-4.1
-5.0
-3.2
-8.4
-5.0
-5.1
-7.9
-21.2
-31.9
Imports
26.0
27.4
29.9
34.3
38.5
42.7
42.7
50.2
65.4
97.0
106.5
Exports
23.8
26.0
25.8
29.3
35.3
34.3
37.4
45.1
57.5
75.8
74.6
B - As % of GDP
Consumption
83.4
82.5
81.9
82.1
81.4
82.4
82.9
81.2
80.2
81.2
82.1
Public
5.6
5.9
5.8
6.0
6.1
6.6
6.9
7.2
8.3
7.2
8.3
Private
77.7
76.7
76.1
76.1
75.4
76.3
76.3
74.3
73.3
74.0
73.8
Investment
17.5
18.0
19.4
19.4
19.4
19.6
18.2
19.8
21.1
21.4
21.2
Public
6.6
5.6
5.6
6.9
6.6
5.5
5.3
6.7
8.3
8.0
8.9
Private
10.9
12.4
13.8
12.5
12.8
14.1
12.9
13.1
12.8
13.4
12.3
Net Foreign Balance.
-0.9
-0.5
-1.3
-1.5
-0.8
-2.0
-1.1
-1.0
-1.0
-2.6
-3.3
p/
Preliminary.
/ National income accounts definition.
Sources: Bank of Mexico and World Bank.
LIBRARY
Table 3
FORD
Mexico - Consolidated Public Sector Accounts
1965 - 75
GERALD
A - Billions of Pesos
1965
1966
1967
1968
1969
1970
1971
1972
1973₽/
1974P
/
1975P
/
Revenues
29.6
32.1
34.3
38.3
43.5
48.4
52.5
58.0
77.4
95.7
125.4
Expenditures
38.8
36.5
40.6
50.5
55.3
56.4
62.7
77.7
114.7
145.7
200.6
Budgetary Deficit(-)
-9.2
-4.4
-6.3
-12.2
-11.8
-8.0
-10.2
-19.7
-37.3
-50.0
-75.2
Other- / Deficits (-)
or Surpluses (+)
n.a.
n.a.
n.a.
n.a.
n.a.
-0.7
0.2
-3.0
-2.5
-4.0
-12.0
Overall Deficit
-9.2
-4.4
-6.3
-12.2
-11.8
-8.7
-10.0
-22.7
-39.8
-54.0
-87.2
Internally Financed
7.7
2.5
6.6
15.6
7.8
6.5
11.2
21.8
27.0
25.6
52.9
Externally Financed
1.5
1.9
-0.3
-3.4
4.0
2.2
-1.2
0.9
12.8
28.4
34.3
B - As % of GDP
Revenues
11.7
11.5
11.2
11.3
11.6
11.5
11.6
11.4
12.5
11.8
13.0
Expenditures
15.4
13.1
13.2
14.9
14.7
13.4
13.8
15.2
18.5
19.0
20.7
Budgetary Deficit (-)
-3.7
-1.6
-2.0
-3.6
-3.1
-1.9
-2.2
-3.8
-6.0
-6.2
-7.7
Other / Deficits (-)
or Surpluses (+)
n.a.
n.a.
n.a.
n.a.
n.a.
-0.2
negl.
-0.6
-0.4
-0.5
-1.2
Overall Deficit
-3.7
-1.6
-2.0
-3.6
-3.1
-2.1
-2.2
-4.4
-6.4
-6.7
-8.9
Internally Financed
3.1
0.9
2.1
4.6
2.1
1.6
2.5
4.2
4.3
3.2
5.4
Externally Financed
0.6
0.7
-0.1
-1.0
1.0
-0.5
0.3
0.2
2.1
3.5
3.5
/ Preliminary.
1/ Refers to public enterprises not controlled through the budget.
NOTE: The number of budgetary controlled enterprises increased in 1973, so that the data for 1973-75 are
not strictly comparable with 1965-72.
Source: World Bank.
Table 4
Mexico - Revenues and Expenditures of
the Federal Government
Since 1970
(Annual Rates)
Revenues
Expenditures
Deficit
in billion
as % of
in billion
as % of
in billion
as % of
pesos
GDP
pesos
GDP
pesos
GDP
1970
33.9
8.1
40.2
9.6
-6.3
-1.5
1971
36.5
8.1
41.3
9.1
-4.8
-1.1
1972
42.3
8.3
59.1
11.5
-16.7
-3.3
1973
53.8
8.7
81.2
13.1
-27.4
-4.4
1974
72.9
9.0
104.1
12.8
-31.2
-3.8
1975
103.1
10.6
145.1
14.9
-42.0
-4.3
1974 - I
61.2
75.6
-14.4
II
71.2
85.2
-14.0
III
71.2
96.8
-25.6
IV
87.6
158.8
-71.2
1975 I
91.2
125.6
-34.4
II
105.2
133.2
-28.0
III
100.0
138.4
-38.4
IV
116.0
183.2
-67.2
1976 I
116.0
157.6
-41.6
Jan.
121.2
111.6
+ 9.6
Feb.
88.8
140.4
-51.6
Mar.
138.0
220.8
-82.8
Apr.
124.8
164.4
-39.6
May
164.4
174.0
— 9.6
Jan.-May
127.4
162.2
-34.8
Source: Bank of Mexico
FORD & 9ERALD LIBRARY
Table 5
Mexico - Index of Industrial Production
Since 1970
(1970 = 100)
Total
Manufacturing
Petroleum
Mining
Index
Change
Index
Change
Index
Change
Index
Change
From
From
From
From
Year
Year
Year
Year
Earlier
Earlier
Earlier
Earlier
(Percent)
(Percent)
(Percent)
(Percent)
1970
100.0
+6.3
100.0
+5.2
100.0
+16.0
100.0
+2.7
1971
102.0
+2.0
102.8
+2.8
102.4
+ 2.4
96.7
-3.3
1972
112.5
+10.3
112.7
+9.6
108.6
+ 6.1
101.2
+4.7
1973
123.4
+ 9.7
123.0
+9.1
110.0
+ 1.3
107.7
+6.4
1974
132.3
+ 7.2
131.5
+6.9
127.6
+16.0
119.2
+10.7
1975
137.7
+ 4.1
136.4
+3.7
141.0
+10.5
109.7
- 8.0
1974 - I
132.3
+11.5
132.7
+9.9
118.5
+17.9
122.9
+17.9
II
132.8
+ 9.0
134.0
+9.9
116.8
+ 7.7
117.4
+14.4
III
130.3
+ 4.7
127.7
+4.6
138.4
+22.4
121.6
+ 6.0
IV
133.9
+ 4.0
131.8
+3.4
136.8
+15.7
114.8
+ 4.8
1975 - I
131.5
- 0.6
129.9
-2.1
132.5
+11.8
118.3
- 3.7
II
141.3
+ 6.4
142.2
+6.1
139.2
+19.2
103.5
-11.8
III
137.8
+ 5.8
135.9
+6.4
141.3
+ 2.1
113.6
- 6.6
IV
140.0
+ 4.6
137.4
+4.2
151.2
+10.5
103.4
- 9.9
1976 - I
142.5
+ 8.4
142.4
+9.6
142.2
+ 7.3
103.3
-12.7
Jan.
138.5
+ 1.6
137.4
+1.0
138.4
+ 3.4
103.1
-13.2
Feb.
139.0
+ 7.5
139.0
+7.8
141.2
+12.6
94.7
-17.9
Mar.
150.1
+16.5
150.9
+20.9
147.0
+ 6.2
112.2
- 7.1
Apr.
141.9
- 2.7
139.2
-6.1
153.7
+10.8
102.3
- 3.9
May
147.2
+ 4.7
141.0
-0.6
172.8
+23.3
119.7
+31.3
Source: Bank of Mexico.
GEBALO R. FORD LIBRARY
Table 6
Mexico -- Money Supply (Coin and Currency plus Demand Deposits)
(1964 - May 1976)
1/
Percentage change
Amount outstanding
from previous
(billions of pesos)
year
1964 - December
24,793.5
--
1965 - December
26,486.7
+6.8
1966 - December
29,395.8
+11.0
1967 - December
31,760.4
+8.0
1968 - December
35,892.8
+13.0
1969 - December
39,804.4
+11.2
1970 - December
43,999.9
+10.5
1971 - December
47,633.1
+8.3
1972 - December
57,736.5
+21.2
1973 - December
71,658.2
+23.8
1974 - December
87,412.3
+22.0
1975 - December
105,971.5
+21.2
1974 - Quarter I
73,901.0
+22.9
Quarter II
77,644.2
+21.7
Quarter III
81,048.4
+19.9
Quarter IV
85,069.2
+19.5
1975 - Quarter I
89,802.4
+21.5
Quarter II
95,620.0
+23.2
Quarter III
98,744.2
+21.8
Quarter IV
103,880.5
+22.1
1976 - Quarter I
108,313.5
+20.6
1976 - January
107,049.9
+22.1
February
108,621.1
+21.5
March
109,269.4
+18.4
April
111,263.5
+19.8
May
114,707.5
+19.7
1/ Seasonally adjusted.
Source: Banco de Mexico, Indicadores Economicos.
R.
GERATO
FORD
LIBRATA
Table 7
Consumer Price Index in
1/
Mexico and the United States
Since 1968
Mexico
United States
Ratio of
Change from
Change from
Mexican Index
2/
Index
Year Earlier
Index
Year Earlier
to U.S. Index
(1970=100)
(Percent)
(1970=100)
(Percent)
(1970=100)
1968
91.7
89.6
102.2
1969
95.1
+3.7
94.4
+5.4
100.7
1970
100.0
+5.2
100.0
+5.9
100.0
1971
105.7
+5.7
104.3
+4.3
101.3
1972
111.0
+5.0
107.7
+3.3
103.1
1973
123.6
+11.4
114.4
+6.2
108.0
1974
151.3
+22.4
127.0
+11.0
119.1
1975
176.8
+16.9
138.6
+9.1
127.6
1974 - I
142.4
+22.2
121.6
+9.8
117.1
II
146.8
+22.2
125.0
+10.5
117.4
III
153.1
+21.9
128.9
+11.5
118.8
IV
162.8
+23.2
132.6
+12.1
122.8
1975 - I
168.5
+18.3
135.0
+11.0
124.8
II
173.4
+18.1
137.1
+9.7
126.5
III
179.9
+17.5
140.1
+8.7
128.4
IV
185.5
+13.9
142.3
+7.3
130.4
1976 - I
193.7
+15.0
143.7
+6.4
134.8
II
198.9
+14.7
145.5
+6.1
136.7
1976
Jan.
190.4
+13.3
143.3
+6.8
132.9
Feb.
194.1
+15.2
143.7
+6.3
135.1
Mar.
196.6
+16.3
144.0
+6.1
136.5
Apr.
197.7
+15.6
144.6
+6.0
136.7
May
199.2
+15.3
145.5
+6.2
136.9
June
199.7
+13.3
146.3
+5.9
136.5
July
200.5
+13.2
147.1
45.4
136.3
1/ Indices are averages for periods shown.
2/ Refers to consumer prices in Mexico City.
Source: International Monetary Fund, International Financial Statistics.
8.
FORD
GERALD
LIBRA
Table 8
Mexico Selected Interest Rates in Mexico
and the United States since 1970
(Gross Average Rates)
Mexico
United States
Promissory
Six Month Certificates
Six Month Certificates
Notes
of Deposit
of Deposit
One mil. pesos
Less than
1 mil. pesos
Less than
More than
or more
1 mil. pesos
or more
$100,000
$100,000
1970- I
12.22
--
--
5.00
6.75
II
12.22
--
--
5.00
6.75
III
12.22
--
--
5.00
6.75
IV
12.22
--
--
5.00
5.63
1971- I
11.48
--
--
5.00
4.19
II
11.11
--
--
5.00
4.91
III
11.11
--
--
5.00
5.52
IV
11.11
--
:
5.00
4.83
1972- I
10.60
--
:
5.00
4.10
II
10.60
--
--
5.00
4.82
III
10.60
--
---
5.00
5.08
IV
10.60
--
--
5.00
5.44
1973- I
10.60
--
--
5.00
6.27
II
10.88
--
--
5.00
7.38
III
12.70
--
--
5.50
9.22
IV
12.70
--
--
5.50
8.62
1974- I
12.78
10.94
11.94
5.50
8.10
II
13.74
11.21
12.48
5.50
10.08
III
14.20
11.44
12.94
5.50
10.80
IV
14.20
11.44
12.94
5.50
8.69
1975- I
14.20
11.44
12.94
5.50
6.60
II
14.20
11.44
12.94
5.50
6.73
III
14.20
11.44
12.94
5.50
7.19
IV
14.20
11.44
12.94
5.50
6.16
1976- I
13.91
11.30
13.11
5.50
5.58
II
13.91
11.30
13.11
5.50
5.85
January
13.91
11.30
13.11
5.50
5.44
February
13.91
11.30
13.11
5.50
5.54
March
13.91
11.30
13.11
5.50
5.77
April
13.91
11.30
13.11
5.50
5.48
May
13.91
11.30
13.11
5.50
5.88
June
13.91
11.30
13.11
5.50
6.18
July
13.91
11.30
13.11
5.50
5.86
Aug. (10)
n.a.
12.30
14.36
5.50
5.73
Source: Bank de Mexico, Indicadores Economicos.
DEALD R. FORD
LISEAVE
Table 9
Mexico -- Increases in Minimum Wages, Mexico City,
January 1966 - January 1976
Percent Increases
Index
Real
Real
Wage
GDP 1/
Nominal
Real
Real
Jan 64
1963=
1/
Wage
Wage
GDP
=100
100
January 1966
16.3
7.1
18.4
107.1
118.4
January 1968
13.0
8.3
13.7
115.9
134.6
January 1970
13.2
3.7
15.2
120.2
155.0
January 1972
19.7
7.5
10.6
129.2
171.4
January 1974 2/
34.4
1.7
15.4
131.4
197.8
October 1974
22.0
7.1
5.9
140.7
209.5
January 1976
24.0
5.4
4.0
148.3
217.8
1/ GPD changes are for intervals between wage changes except
for October 1964 and January 1976, for which GDP changes
for respectively all of 1974 and 1975 are shown because
GDP data are available only for full years.
2/ Wages were raised by 18 percent in Octover 1973 and by
14 percent in January 1974. The increase shown for January
1974 includes the October 1973 change.
R.
GERALD
FOOM
LIBRARY
Table 10
LIBRARY
Mexico - Balance of Payments
FORD
Since 1970
(in million dollars)
976879
Year
Year
Year
Year
Year
Year
1st half
1st half
1970
1971
1972
1973
1974
1975
1975
1976p
I. Balance on Current Account
-879.9
-676.4
-707.2
-1,109.8
-2,458.3
-3,529.0
n.a.
n.a.
II. Balance on goods and services -945.9
-726.4
-761.5
-1,175.4
-2,558.1
-3,643.4
-1,614.3
-1,511
A. Exports of goods and
services
2,933.1
3,167.1
3,800.6
4,828.4
6,342.5
6,303.3
3,100.7
3,529
1. Merchandise 1/
1,347.7
1,410.3
1,716.4
2,140.3
2,998.9
2,998.7
1,495.3
1,730.5
2. Tourism
415.0
461.0
562.6
724.6
842.0
800.8
399.5
443.6
3. Passenger Fares
39.3
47.3
59.5
63.4
78.1
88.7
42.1
2/
4. Border transactions
878.9
966.9
1,057.0
1,207.7
1,372.9
1,518.8
732.9
796.3
5. Value added by border
indust.
3/
80.9
101.9
164.7
277.6
443.5
445.9
199.7
279.6
6. Other
171.3
179.7
240.4
415.2
607.1
450.3
231.1
284.9
B. Imports of goods and
services
3,879.0
3,893.5
4,562.1
6,003.8
8,900.6
9,946.7
4,715.0
5,040.9
1. Merchandise 4/
2,326.8
2,254.0
2,717.9
3,813.4
6,056.7
6,580.2
3,088.3
3,090.2
2. Tourism
169.7
172.2
220.4
258.0
334.8
398.0
170.2
188.8
3. Passenger Fares
53.9
54.3
65.7
72.6
96.8
134.1
52.9
2/
4. Border transactions
585.0
612.5
649.3
695.0
819.2
933.6
444.3
522.2
5. Dividends, interests
and other remitt, by
foreign firms
357.5
383.0
451.5
528.4
633.7
699.0
344.6
403.4
6. Interest on official
debt
229.2
236.8
261.8
378.5
588.5
778.8
415.6
489.3
i) Nacional Finan-
ciera & others
210.6
219.3
241.5
357.6
560.3
680.6
365.6
n.a.
ii) Government
18.6
17.5
20.3
20.9
28.2
98.2
50.0
n.a.
156.9
180.7
195.5
257.9
370.9
423.0
199.0
7. Other
367.0
FORD
LIBRARY
Table 10 (continued)
=
GERALD
Year
Year
Year
Year
Year
Year
1st half
1st half
1970
1971
1972
1973
1974
1975
1975
1976P
III. Errors and Omission in
current and capital
accounts (net)
498.7
217.7
233.5
-378.4
-135.8
-82.0
199.2
-751.6
IV. Long-term capital (net)
503.9
669.1
723.5
1,676.1
2,730.8
3,890.5
1,337.2
2,152.2
1. Direct foreign investment
200.7
196.1
189.8
286.9
362.2
362.3
205.1
n.a.
2. Purchase of foreign firms
--
--
-10.0
-22.2
-2.1
-25.8
-1.0
n.a.
3. Bonds and stocks
-7.2
52.0
6.2
-10.3
-59.8
136.8
81.8
n.a.
4. Loans from abroad (net)
342.2
450.6
546.0
1,370.7
1,999.2
2,952.3
679.3
n.a.
a. Public (net)
263.1
286.4
359.7
1,046.6
1,672.9
2,469.0
624.9
n.a.
i) Inflows
799.0
742.2
864.2
1,891.9
2,233.9
3,157.1
922.2
n.a.
ii) Amortization
535.9
-455.8
-504.5
-845.3
-561.0
-688.1
-307.2
n.a.
b. Private (net)
61.1
164.2
186.3
345.1
326.3
483.3
64.4
n.a.
i) Firms with foreign
investment (net)
41.7
168.0
179.4
196.4
196.5
348.7
--
n.a.
ii) Other firms
(net)
19.4
-3.8
6.9
127.7
129.8
134.6
64.4
n.a.
5. Public debt (net) /
-2.3
-28.9
37.8
69.9
470.9
460.0
357.3
n.a.
6. Loans granted abroad
11.5
-0.7
-16.3
-18.9
-39.5
4.9
14.8
n.a.
V. SDRs
45.4
39.6
39.2
--
--
--
--
--
VI. Change in Reserves of the
Bank of Mexico (equals II +
III + IV + V) (- = increase)
-102.1
-200.0
-264.7
122.3
-36.9
-165.1
-0.3
+174.8
1/ Exports of border industries are excluded.
2/ Included in "other."
3/ Value added plus domestic inputs of goods exported by border industries.
4/ Imports of border industries are excluded. Valued c.i.f.
5/ These categories were redefined in 1974.
6/ Includes loans guaranteed by the government.
p/ Preliminary.
Source: Bank of Mexico.
RESTRICTED
Table 11
Mexico Level and Composition of International Reserves
FORD
LIBRARY
(millions of U.S. dollars, 1970-1976)
is
Special
Reserve
Silver
03
Drawing
Position
and other
Foreign
Gold
Rights
in IMF
Assetsᵃ
Exchange
TOTAL
December 31, 1970
176ᵇ
48
135
n.a.
385
744
December 31, 1971
200ᶜ
96
106
n.a.
550
952
December 31, 1972
188ᶜ
139
106
n.a.
731
1,164
December 31, 1973
195ᵈ
154
118
n.a.
888
1,355
December 31, 1974
154ᵈ
158
120
n.a.
960
1,392
December 31 1975
154ᵈ
101
114
n.a.
1,168
1,529
March 31, 1976
152ᵈ
100
113
n.a.
1,142
1,537
August 9, 1976
365°
98
113
20
537
1,133
August 31, 1976
337£
98
113
20
803
1,361
September 10, 1976
375⁸
est.
98
113
20
964
1,570
Sources: IMF, International Financial Statistics and Bank of Mexico.
a. The IMF does not count silver as part of Mexico's reserves. The estimated figures on
1976 holdings consist mostly, if not entirely, of silver.
b. Valued at $35 per ounce.
c. Valued at $38 per ounce. d. Valued at $42'.22 per counce.
e. 3.6 million ounces valued at 90 per cent of the price at the second gold fixing on
August 9, $112.70 per ounce.
f. 3.6 million ounces valued at 90 per cent of the price at the second gold fixing on
August 31, $104 per ounce.
g. 3.6 million ounces valued at 90 per cent of the price at the second gold fixing on
September 10, $115.70 per ounce.
RESTRICTED
LIBRARY
Table 12
FORD
MEXICO - Composition
is
of Merchandise Trade in 1975
GERALD
Value
Share of
Value
Share of
(in million
Total
(in million
Total
dollars)
(per cent)
dollars)
(per cent)
Exports
Imports
Agriculture and Fishing
772
27.0
Consumer Goods
600
9.1
of which Cotton
(174)
(22.6)
of which Corn
(398)
(66.3)
Coffee
(184)
(23.8)
Other
(202)
(33.6)
Shrimp
(120)
(15.5)
Other
(294)
(38.1)
Semi-Processed Materials
2,903
44.1
of which Vegetable and Animal Oils
(207)
( 7.1)
Extractive Industries
737
25.8
Fuels
(291)
(10.0)
of which Metals
(277)
(37.6)
Textiles
( 28)
( 1.0)
Petroleum
(460)
(62.4)
Paper Products
(158)
( 5.4)
Chemical Products
(773)
(26.6)
Manufactures
1,202
42.0
Unassembled Autos & Parts
(582)
(20.0)
of which Foods and Beverages
(214)
(17.8)
Steel Products
(536)
(18.5)
Textiles and Shoes
(141)
(11.7)
Other
(329)
(11.3)
Chemicals
(204)
(17.0)
Steel Products
( 38)
( 3.2)
Investment Goods
2,391
36.3
Machinery and Trans-
of which Machinery and Equipment
(1,924)
(80.5)
port Equipment
(270)
(22.5)
Tools and Instruments
(204)
( 8.5)
Other
(335)
(27.9)
Transport Equipment
(264)
(11.0)
Unclassified Products
148
5.2
Unclassified Products
686
10.4
Total
2,859
/
100.0
Total
6,5802/
100.0
/ Excludes exports of silver and the operations of the border assembly plants.
2/ Excludes the operations of the border assembly plants.
Source: Bank of Mexico, Indicadores Economicos.
Table 13
Mexico - Geographic Distribution
of Merchandise Trade in 1975P
Exports
Imports
Value
Share of
Value
Share of
(in million
Total
(in million
Total
dollars)
(Percent)
dollars)
(Percent)
Total
2,858-
100.0
6,580
100.0
United States
1,629
57.0
4,108
62.4
Canada
43
1.5
146
2.2
EEC Countries
258
9.0
1,091
16.6
United Kingdom
(28)
(1.0)
(193)
(2.9)
Germany
(87)
(3.0)
(480)
(7.3)
France
(21)
(0.7)
(184)
(2.8)
Other
(122)
(4.3)
(234)
(3.6)
Other Western Europe
61
2.1
250
3.8
Eastern Europe and USSR
13
0.5
36
0.5
Latin American and
Caribbean Countries
482
16.9
514
7.8
Argentina
(36)
(1.3)
(211)
(3.2)
Brazil
(92)
(3.2)
(96)
(1.5)
Venezuela
(57)
(2.0)
(59)
(0.9)
Central America
(82)
(2.9)
(19)
(0.3)
Other
(215)
(7.5)
(129)
(2.0)
Japan
109
3.8
298
4.5
Other Asian Countries
97
3.4
36
0.5
Africa
1
negl.
21
0.3
Australia and New Zealand
4
0.1
22
0.3
Other Countries
18
0.6
56
0.9
Unallocated
143
5.0
--
--
p/ Preliminary
1/ Excludes both exports of silver, which are included in line II.A.1 of
Table 10, and exports of border industries.
Source: Bank of Mexico, Indicadores Economicos.
LIBRATA GERALD R. FORD
RESTRICTED
Table 14
FORD
LIBRARY
=
Mexico - Selected Data on External Debt
(in million dollars)
GERALD
Public and Publicly Guaranteed
Claims on Mexico Reported by
Debt Reported by Mexicol/
Banks
Official
Long
Short
Banks in Major
United States Banks
Lending
Total
Term
Term
Total
Countries:
37
Total
Head Offices
Institutions
5/
Others
1970
4,070
3,227
843
n.a.
n.a.
n.a.
1,276
n.a.
n.a.
1971
4,243
3,516
727
n.a.
n.a.
n.a.
1,306
n.a.
n.a.
1972
4,594
3,962
632
n.a.
n.a.
n.a.
1,591
n.a.
n.a.
1973
6,314
5,265
1,049
n.a.
n.a.
n.a.
1,836
n.a.
n.a.
1974
9,946
8,014
1,932
14,177
5,9706/
n.a.
2,673
2,003
6,204
1975
13,837
11,314
2,523
18,845
13,465
9,896
3,786
2,353
3,027
1976
March
15,081
12,406
2,675
19,747
14,599
10,509
4,068
2,382
2,766
June
16,402
13,258
3,144
n.a.
n.a.
11,537
4,661
n.a.
n.a.
1/ Excludes unguaranteed private debt which is not systematically reported, but which was reliably estimated to
amount to $6-8 billion at the end of 1975.
Amounts disbursed.
3/ Refers to claims reported by banks in the United States, other G-10 countries, and US bank branches in the
Bahamas, the Cayman Islands, Panama, Hong Kong, and Singapore.
4/ Includes claims reported by agencies and branches of foreign banks in the United States. To illustrate, these
claims totalled about $650 million at the end of 1975.
5/ Refers to the IBRD, IDB, AID, and Eximbank. Data not readily available prior to 1974.
6/ For this date only, the claims of US bank branches in the Bahamas, the Cayman Islands, Panama, Hong Kong, and
Singapore are included with the claims reported by Others. A year later, these claims totalled $5,366 million.
7/ Includes $360 million drawing on the Federal Reserve System under the swap arrangement.
Sources: World Bank, Bank for International Settlements, US Treasury Department, and Board of Governors
of the Federal Reserve System.
RESTRICTED
Table 15
Wholesale Price Index
in Mexico and the United States
/
Since 1968
Mexico
United States
Ratio of
Change from
Change from
Mexican Index
Index
Year Earlier
Index
Year Earlier
to U.S. Index
(1970=100)
(Percent)
(1970=100)
(Percent)
(1970=100)
1968
92.0
+1.9
92.8
+2.4
99.1
1969
94.4
+2.6
96.5
+4.0
97.8
1970
100.0
+5.9
100.0
+3.6
100.0
1971
103.7
+3.7
103.3
+3.3
100.4
1972
106.7
+2.9
107.9
+4.5
98.9
1973
123.4
+15.7
122.0
+13.1
101.1
1974
151.2
+22.5
145.0
+18.9
104.3
1975
167.1
+10.5
158.4
+9.2
105.5
1974 - I
146.0
+29.0
135.1
+17.4
108.1
II
150.5
+26.3
139.9
+15.9
107.6
III
153.0
+20.6
149.8
+19.3
102.1
IV
154.5
+15.0
155.1
+22.4
99.6
1975 - I
158.6
+8.6
155.1
+14.8
102.3
II
165.0
+9.6
156.7
+12.0
105.3
III
170.4
+11.4
160.1
+6.9
106.4
IV
174.3
+12.8
161.8
+4.3
107.7
1976 - I
184.0
+16.0
162.5
+4.8
113.2
II
189.9
+15.1
164.9
+5.2
115.2
1976
Jan.
181.6
+15.5
162.4
+4.4
111.8
Feb.
183.9
+15.7
162.4
+4.6
113.2
Mar.
186.6
+16.8
162.7
+5.4
114.7
Apr.
187.5
+16.0
164.2
+5.3
114.2
May
190.4
+15.6
164.7
+5.0
115.6
June
192.0P
+13.9
165.9
+5.5
115.7
July
196.8
+15.5
166.9
+4.9
117.9
1/ Indices are averages for period shown.
Source: International Monetary Fund, International Financial Statistics.
R.
FORD
GERALD
LIGRATA
Table 16
Mexico -- GDP/GNP Deflators in Mexico and the United States:
1968-75
(1968=100)
Mexico (GDP)
U.S.A. (GNP)
Relative Prices
(1)
(2)
(3) = (1) / (2) X 100
1968
100.0
100.0
100.0
1969
103.9
105.0
99.0
1970
108.6
110.6
98.2
1971
113.5
116.3
97.6
1972
119.8
121.1
98.9
1973
134.6
128.3
104.9
1974
166.7
140.7
118.5
1975
191.7
154.0
124.5
Source: Bank of Mexico, U.S. Department of Commerce.
FORD R. GERALD
LIBRATA
Department of th TREASURY
NEWS
OF THE
WASHINGTON, D.C. 20220
TELEPHONE W04-2041
THE TREASIRY
1789
FOR RELEASE 11 A.M.
MONDAY, SEPTEMBER 20, 1976
The Treasury Department and the Federal Reserve
System today announced arrangements with the Government
of Mexico whereby short-term drawings up to $600 million
will be available to the Bank of Mexico to counter
disorderly exchange market conditions during a transi-
tional period pending the receipt of medium-term financing
from the International Monetary Fund. Drawings under
these arrangements will have maturities of up to 90 days.
Of this amount, and at the option of the Government
of Mexico, the Federal Reserve System will make available
amounts repaid in advance of maturity under the existing
Federal Reserve System reciprocal currency arrangements
up to $180 million.
The remaining amounts will be made available by the
Treasury through the Exchange Stabilization Fund under
swap arrangements.
# # #
R.
GERALD
FORD
WS-1089
September 20, 1976
MEXICO ISSUES STATEMENT ON
FINANCIAL ARRANGEMENTS WITH
UNITED STATES-IMF
The Mexican Secretary of Finance and the Bank of
Mexico have agreed with the International Monetary Fund,
the United States Treasury and the Federal Reserve System
to obtain substantial resources in support of the program
to adjust the balance of payments announced September 1
by President Luis Echeverria.
The Managing Director of the IMF, Mr. Johannes
Witteveen, addressed a letter to the Secretary of Finance
of Mexico, informing him that he finds adequate and correct
the Mexican Government's economic program that was evaluated
by an International Monetary Fund Mission in order to deal
with the balance of payments problems on the basis of a
realistic exchange rate and free convertibility and
transferability of the Mexican peso. The Managing Director
of the Fund will present and recommend to the Executive
Directors of that institution the use of the Fund's resources
by Mexico for the objectives above-mentioned for a sum that
can reach approximately $1.2 billion.
On its part, the U.S. Treasury and the Federal Reserve
System today signed with the Government of Mexico and the
Bank of Mexico agreements for a total of $600 million to be
repaid upon receipt of the IMF credit tranche drawings in
order that the Bank of Mexico can deal with unforeseen and
diforderly situations in the exchange market for the Mexican
peso. These resources are additional to the Exchange
Stabilization Fund swap agreement of $300 million, which
is now in force between the above-mentioned institutions.
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R.
FORD
GERALD
LIBRARY