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04/14-76
[HiWallich
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Recent Economic and Financial Developments
in Mexico
and Prospects for 1976-77
Mexico's balance of payments deficit on current account
increased substantially in 1975, mainly as a result of the world re-
cession and a rise in interest payments on external obligations. As
shown in table 1, according to preliminary data, the current account
deficit exceeded $4 billion, up from about $2.9 billion in 1974. The
world recession was the principal reason why most traditional exports
declined, and it was only because of the steady rise in exports of
petroleum from wells opened in 1974 that the year ended with the value
of total exports virtually unchanged from 1974. In contrast, the value
of imports rose more than 8 per cent. The rise in imports in 1975 was
modest when compared with increases of more than 50 per cent in each of
the previous two years, and it was associated with a marked slowdown in
the country's rate of economic activity. The world recession also
brought about a 5 per cent drop in tourist earnings. The rise in interest
payments reflects the rapid increase in the country's external debt and
a rise in the average interest rate on outstanding obligations.
The current account deficit was financed by a net inflow of
medium- and long-term capital, as has been the case for many years.
Last year, this net inflow totalled about $4.3 billion, over $1.3 billion
more than in 1974. This was enough to allow an increase in net official
foreign assets of $151 million.
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Table 1
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Mexico - Balance of Payments
1973-75
(in million dollars)
1973
1974
1975P/
Merchandise Exports
+2,419
+3,443
+3,445
Merchandise Imports
-3,656
-5,754
-6,283
Trade Balance
-1,237
-2,311
-2,838
Services (net)
- 252
- 678
-1,344
Travel (net)
(+ 808)
(+ 902)
(+ 810)
Investment Income (net)
(-1,135)
(-1,599)
(-1,974)
Other (net)
(+ 150)
(+ 19)
(- 180)
Private Unrequited Transfers (net)
+ 66
+ 100
+ 114
Balance on Current Account
-1,423
-2,889
-4,068
Govt. Unrequited Transfers (net)
+ 8
+ 13
+ 12
Long-Term Capital (net)
+1,820
+3,048
+4,303
Direct Investment in Mexico (net)
(+ 457)
(+ 678)
(+ 749)
Other Long Term Private Capital (net)
(+ 119)
(+ 590)
(+ 854)
Public Sector Borrowings (net)
(+1,293)
(+1,780)
(+2,700)
Subscriptions to IBRD and IDB
(- 48)
( -- )
( -- )
Short-Term Capital (net)
- 308
+ 242
+ 486
Private Non-Bank Capital (net)
(- 178)
(- 441)
(+ 250)
Bank Capital (net)
(- 130)
(+ 683)
(+ 236)
Official Foreign Assets (net)- --
(increase:-)
- 144
- 32
- 151
Errors and Omissions (net)
+ 46
- 381
- 582
P/ Preliminary
Source: International Monetary Fund, International Financial
Statistics, and IMF staff.
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The country's real gross domestic product last year is
estimated at about 4 per cent more than in 1974. With population
rising at about 3.5 per cent per year, this represents little real
growth per capita. The 1975 growth rate was also well below the average
rate achieved in the past 20 years and below the 1974 rate--both about
6 per cent. With slower growth came a slower rate of increase in prices,
but the consumer price index late last year and early this year was
still showing a rise of more than 13 per cent over the year-earlier
levels, and the monthly percentage increase appeared to have begun to
turn up in January and February, after diminishing rather steadily during
1975. Recent price movements are summarized in table 2.
Until early 1973, the rate of inflation in Mexico was compa-
rable to that in the United States. Its subsequent acceleration is
only partly attributable to the impact of rising prices of many imported
products. More important, perhaps, were an accelerated growth of
domestic expenditures, chiefly by the public sector, an expansionary
incomes policy, and shortfalls in agricultural production owing to in-
clement weather.
Public spending began to increase faster late in 1972 as the
Government stepped up its rate of investment and the growth of its
welfare programs. As public sector revenues rose more slowly, reliance
on financing from the banking system grew. However, the ability of the
banks to channel non-inflationary resources into the purchase of public
sector securities was rising more slowly, and the Bank of Mexico itself
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ended up holding an increasing amount of these securities.
At the same time, the authorities undertook to compensate
workers for the rise in the cost of living and began to grant more
generous and more frequent increases in the minimum wage, setting the
pattern for significantly larger raises in other wage categories. The
latest increase in minimum wages, effective early this year, averages
about 21 per cent (with a range of 17 to 34 per cent). This was the
first increase in 15 months and, like earlier ones, it is fairly close
to the rate of inflation in this 15-month period. It is bound to make
it more difficult to reduce the inflation rate further in 1976.
Steps began to be taken to correct the internal financial
disequilibrium in the latter part of 1974. In September of that year,
the reserve requirements of the banks were raised substantially. Sub-
sequently, some administrative improvements were introduced to achieve
greater discipline on current government expenditures. In addition,
a number of taxes were substantially increased and a new 50 per cent
tax on gasoline sales was instituted. Rates for public services also
were raised. At the same time, the decline in world interest rates
beginning in the latter part of 1974 made Mexican interest rates rela-
tively more attractive, and this helped the financial institutions in
the country to attract a larger flow of funds than in the previous two
years, enabling them to absorb a greater volume of public sector se-
curities in 1975. Absorption of public securities by the financial
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Table 2
Mexico - Index of Consumer Prices
in Mexico City
in Selected Months Since December 1972
Average Monthly
Change from
General
Change Since
Same Month
Index
Last Month Shown
Previous Year
(1968 = 100)
(Per cent)
(Per cent)
1972 - December
124.1
1973 - March
128.2
+1.1
+ 7.4
June
132.6
+1.1
+ 9.8
September
139.6
+1.8
+13.8
December
149.5
+2.4
+20.5
1974 - March
156.7
+1.6
+22.0
June
161.2
+1.0
+21.6
September
169.3
+1.7
+21.3
December
180.6
+2.2
+20.8
1975 - March
184.6
+.7
+17.8
June
192.5
+1.4
+19.5
September
198.7
+1.1
+17.4
October
200.3
+.8
+15.2
November
202.8
+1.2
+13.3
December
204.6
+.9
+13.3
1976 - January
207.9
+1.6
+13.3
February
211.9
+1.9
+15.1
Source: Banco de México, Indicadores Económicos
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institutions was helped by the severe limitations on credit to the
private sector brought about by the tightening in reserve require-
ments.
However, the slowdown in economic activity as the year
progressed began to cause concern and, after mid-year, the Government
again stepped up the rate of public spending. For the year as a whole,
about 5 per cent of total public expenditures were financed directly
by the Central Bank, and this financing accounted for about 75 per cent
of the increase in the money supply (narrowly defined). The increase
in M₁ in 1975 was 23 per cent, somewhat more than in the two previous
years, and about twice the pre-1973 rates.
For 1976, public spending is projected by the authorities
to increase by only 10 per cent over the 1975 level. This compares
with a 30 per cent increase in public spending from 1974 to 1975. If
the recent rates of inflation continue unchanged during the year, this
would represent a cut in public sector spending in real terms. Even
so, the fiscal deficit would amount to about 27 per cent of total public
expenditures. The authorities hope that three-fourths of this can be
financed internally and without direct recourse to the Central Bank,
and the rest externally. To avoid recourse to the Central Bank, credit
to the private sector will have to remain tightly restricted. Under
such a projection, the rate of growth of real GDP for the year would
probably not exceed the 1975 rate, and there should be some improvement
in the balance. of payments on current account.
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There are reasons to question whether this projection will
be realized. The recent wage increases appear to exceed what would
have been consistent with a 10 per cent increase in public spending.
Moreover, it is likely that public spending will exceed the projection
if only because this is the last year of the term of office of the
President of Mexico, and the outgoing Administration, like its pre-
decessors, will want to complete as many of the projects which it
started as it possibly can. The American Embassy reports that private
sector economists generally tend to doubt that public spending will be
held down as much as is officially projected. Private forecasters
believe that there will be some recovery in real GDP growth, an in-
tensification of inflation, and a further deterioration of the balance
of payments on current account.
As regards the balance of payments, the worldwide economic
recovery should be reflected in an upturn in Mexican exports and tourist
earnings. However, Mexican industry may find itself increasingly at a
competitive disadvantage, after three years of inflation at rates in
excess of those in the United States, especially if this differential
widens in 1976. Also, some tourists may stay away because of Mexico's
stand on Israel in the United Nations. The principal hope for increased
current account earnings lies in the petroleum sector and this could make
a substantial contribution. Production from the rich wells of southern
Mexico began in 1974 and has not yet reached its full potential. It has
already turned the country's position from that of a net importer of
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petroleum to one of a net exporter, as shown in table 3. Official
policy is "to increase the rate of production /there/ to the highest
sustainable rate consistent with current conventional practices, in
order to make the maximum contribution to the current account of
Mexico's balance of payments.
At the same time, it will be difficult to hold down imports,
especially if it proves impossible to hold down public spending.
Equally important, interest payments on the external debt are bound to
rise as the debt increases. All told, any improvement this year in the
balance of payments on current account is likely, at best, to be rather
moderate, and there is a possibility that some further deterioration
may occur.
For the longer run, there are reasons for somewhat more optimism.
A new Administration will take office in December, following the expected
election of former Finance Minister José López Portillo as President in
July. The change in Administration may be the occasion for the adoption
of stronger anti-inflationary measures if, as seems likely, the new
President's Finance Ministry experience leads him to attach more im-
portance than his predecessor to the financial consequences of his
political decisions. In addition, in 1977, it is expected that a large
new copper mine now under development will begin to contribute substan-
tially to the export picture.
1/ Prospectus for $50 million Issue of Mexican Government Bonds, dated
February 19, 1976, p.14.
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Table 3
Mexico - Petroleum
Exports and Imports
(in million dollars)
1974
197 5 P/
Exports
Imports
Balance
Exports
Imports
Balance
Crude Oil
61.9
76.4
- 14.5
393.3
--
+393.3
Natural Gas
.1
- -
+ .1
--
--
--
Refined Products
62.0
240.5
-178.5
23.7
225.7
-202.0
Petrochemicals
9.5
74.4
- 64.9
4.3
57.5
- 53.2
Total
133.5
391.3
-257.8
421.3
283.2
+138.1
P/ preliminary
Source: Prospectus for $50 million Issue of Mexican Government Bonds,
dated February 19, 1976, P. 15.
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But until these developments occur, uncertainty will
continue to produce periods of nervousness in the Mexican foreign ex-
change market, heightened by questions as to whether Mexico can raise
enough financial resources in external markets to cover its needs.
The question whether the peso should be devalued is receiving increas-
ing attention in private circles. The principal argument in favor of
devaluation is that, over the last three years, the rate of inflation
in Mexico has exceeded the rate' prevailing in the United States by
an average of about 9 percentage points per year (as measured by the
respective consumer price indices) and a large differential is likely
to continue for at least another year, and that this is interfering
with the competitiveness of Mexican exports. On the other side, it
is argued that the dollar-peso rate has remained unchanged for 22 years,
that its alteration would be a shock to foreigners who have invested
large amounts in peso-denominated accounts in Mexican financial institu-
tions and would close this source of external financing for many years
(for fear of new devaluations), that the internal burden of servicing
the country's huge foreign debt would be greatly increased, that exports
of raw materials (still the bulk of the country's exports) are traded
at world prices which would not be affected by a devaluation, that
there is little or no excess industrial capacity with which to increase
manufactured exports, and that a devaluation would set off an upsurge
of inflation as prices of imported goods (in pesos) would increase and
prices of domestically produced articles would go up in sympathy
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(presumably more for psychological reasons than in response to cost
increases) in effect leading to what is called the "argentinization"
of the Mexican economy.
The authorities are determined to defend the current' dollar-
peso exchange rate. Their principal line of defense is the country's
reserves which amounted to more than $1.6 billion on March 29. The
country's credit tranches in the International Monetary Fund total
about $626 million (including the 45 per cent addition approved at
the recent Jamaica meeting of the IMF's Interim Committee), but not
all of it would be available without the adoption of corrective policy
measures acceptable to the Fund. The Bank of Mexico's swap arrangement
with the Federal Reserve System is for $360 million, having been doubled
in August 1975. Mexican drawings under the swap have occurred twice
before, in August 1974 and in September 1975. Both drawings, for
$180 million in 1974 and for $360 million in 1975, were repaid before
they came due at the end of three months. The Bank of Mexico also has
a swap arrangement with the US Treasury, the amount of which was in-
creased from $200 to $300 million at the end of 1975. But this cannot
be drawn upon until after the swap line with the System has been fully
drawn. The country appears to be able to continue to borrow in inter-
national markets, and this may be important in helping to repay short
term obligations.
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Whether the defense of the peso will ultimately succeed
is likely to depend importantly on the ability of the authorities to
prevent the fiscal position from getting out of hand, and eventually
to restore a sound fiscal and monetary policy.
Prepared by Yves Maroni
Division of the International Finance
April 14, 1976
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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date April 16, 1976
To
Board of Governors
Subject:
From John E. Reynolds
Attached for your information is a memorandum from Mr. Maroni
reporting on "Press Stories on the Possibility of Mexican Peso Devaluation.
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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date April 15, 1976
To
Mr. Reynolds
Subject: Press Stories on the Possibility
From
Yves Maroni yn
of Mexican Peso Devaluation
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On April 8, United Press International reported from
Washington that a confidential IBRD report was urging a Mexican de-
valuation. According to UPI, the IBRD report said that Mexico must
improve its private investment climate and undertake "radical changes
in economic policy," including a devaluation, no later than 1977 to
cope with its current severe fiscal and balance of payments deficits.
UPI quoted the IBRD report as saying: "While it may be unrealistic
to expect radical changes of policy--including a possible devaluation--
in the last year (1976) of the current administration, present indica-
tions are that such policy changes cannot be delayed beyond 1977."
Upon seeing this story, I called the U.S. Alternate Executive
Director in the IBRD, Mr. Hal Reynolds, who had not seen it and said
that he would investigate the matter. He later reported that the UPI
story was essentially correct, that the IBRD report in question was
a highly classified staff report intended for the exclusive use of the
IBRD management, that it was not being distributed to the Executive
Directors, and that the IBRD management was furious at this leak,
was looking for its source, and would fire whoever leaked the report
to UPI as soon as he or she could be identified.
Apart from this, there is another recent IBRD staff report
on the economy of Mexico which is generally critical of Mexican
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policies but which does not mention the possibility of devaluation.
This report seems to be available to private banks in Mexico, although
it is clearly labelled "for official use only." In an apparent attempt
to counter possible stories or rumors based on this report, the Bank
of Mexico is said by the U.S. Embassy to have planted an article in
most Mexican newspapers, summarizing the IBRD report and interpreting
it as highly laudatory of Mexico's ability to cope successfully with
its economic problems and to maintain its high reputation in inter-
national financial markets.
Several articles critical of Mexico and suggesting devalua-
tion have also appeared in the U.S. financial press. The most recent
is a three column piece on the editorial page of the Wall Street Journal
of April 13, 1976. This article is headlined: "Will Mexico Devalue
the Peso?". A boxed summary near the top of the second column says:
"The move, which many fear might happen this Easter, could hurt thousands
of Americans who have investments in Mexico." The Wall Street Journal
article is a well documented analysis of the factors which militate in
favor of a devaluation, without any discussion of the elements which
might enable the country to avoid it.
Apparently reacting to the Wall Street Journal article and
to similar pieces elsewhere, sources close to the Mexican Government
are said by Agence France Press, in an April 14 report, to have declared
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that the United States--presumably meaning influential private groups
in the United States--is embarked on a campaign against Mexico, attempt-
ing to create "artificial problems" in the economic field and particularly
to induce a devaluation of the peso.
No report of press stories based on the IBRD leak to UPI
has come to my attention.
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HANDLE THE ATTACHED DOCUMENT IN ACCORDANCE WITH INTERNAL
INFORMATION SECURITY PROCEDURES FOR RESTRICTED INFORMATION
LISEARY GERALD R. FORD
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Mexico Adopts Floating Exchange Rate and
Announces Economic and Financial Program
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 abandonned, that the peso would now float in order to let
market forces determine its level, subject to intervention to prevent
speculative and erratic fluctuations, and that the country's traditional
freedom of exchange would be maintained. He also announced that comple-
mentary measures in the economic and financial field would be taken to
help secure as many as possible of the potential advantages from the new
exchange policy, and to hold the unfavorable impacts to a minimum. A
telegram received by Chairman Burns from Mr. Ernesto Fernandez Hurtado,
Director General of the Bank of Mexico, summarizes the action taken and
the planned measures. (See Attachment.)
Background on Mexican Economic Situation
The Mexican action is the culmination of a steady deterioration
in the country's external financial position, in part as a result of
internally generated inflationary pressures and in part as a consequence
of economic and financial developments in the rest of the world. As shown
in table 1, the balance of payments deficit on current account rose very
sharply from 1972 to 1975. The value of imports surged partly because
of the world-wide inflation and partly because of overheating of the
economy. The value of exports also rose, but less rapidly. Export growth
was slowed in the last part of 1974 and in 1975 by the world recession
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which also brought about a drop in the country's important tourist
earnings. The service account deteriorated as interest payments on
the growing external debt rose. External borrowings were stepped up,
and, until this year, Mexico continued to add to its international re-
serves, as may be seen in table 2. At the end of 1975, the external
debt was estimated at $20-$22 billion, consisting of public sector debts
of about $14.3 billion (of which $11.3 billion had a maturity of one
year or more) and private sector debts of $6-$8 billion. The total
external debt may well have climbed by another $2 billion since the
end of 1975.
Doubts began to emerge this Spring as to whether the disequil-
ibrium could be corrected without a devaluation of the peso, and capital
flight began to occur. It seemed lilely that Mexico's exports would
turn up, reflecting the economic recovery in the industrial countries,
and that petroleum exports would continue to grow rapidly. But concern
appeared about the feasibility of holding down imports, especially if
public spending rose more than planned. Interest payments also were ex-
pected to go up as the external debt rose further. In addition, questions
were asked as to whether, after three years of inflation at rates in
excess of those in the United States (see table 3), Mexican industry
might find itself at a substantial competitive disadvantage, a condition
which might hamper some exports while encouraging imports In this
connection, it was noted that the dollar's appreciation against other
major currencies over the last year implied an effective appreciation of
the Mexican peso.
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At first, the Mexican authorities attempted to finance the
capital flight through new external borrowings, hoping for a return
of confidence and a reflow of capital as the performance of the
economy improved. But the performance did not improve sufficiently,
and in particular the fiscal situation remained precarious and the
rate of price increase failed to decline below the 13 per cent level
of 1975. Manufacturing production which rose more slowly in 1975, re-
mained somewhat sluggish in the first part of 1976 as well, except for
a good month in March, as may be seen in table 4.
The fiscal performance, which is shown in table 5, was
characterized by growing deficits of the Federal Government, and its
decentralized agencies. These deficits reflected a conscious policy,
through public spending, to maintain a rapid rate of economic growth
(see table 6). Since the last half of 1973, incomes policy based on
government wage actions fully compensated workers for the rise of the
cost of living. The rapid rise in wages sharply eroded the competitive
advantage that in-bond assembly plants located on the Mexican side of
the border with the United States had enjoyed. As a result, a substan-
tial number of such plants were shut down or their activities were trans-
ferred to other countries where relatively low wages continued to prevail.
While the Bank of Mexico undertook to tighten credit policy in
the latter part of 1974, the impact of the world recession on Mexico led
to a further stepping up of public spending around the middle of 1975.
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This year, while the authorities announced that they intended to limit
public spending, the consequences of a substantial increase in wages
granted in January and the impact of the politically motivated expendi-
tures traditionally associated with the end of a Presidential term appear
to have prevented the desired improvement from materializing.
Money supply, which rose at rates averaging about 11 per cent
per year in the period 1966-71, increased at more than 20 per cent a year
in the period 1972-75, as may be seen in table 7. In the first five
months of 1976, it rose by about 8.2 per cent, compared to an increase
of 9.4 per cent in the same months of 1975. In May, it was still about
20 per cent higher than a year earlier.
Assessment of the Exchange Rate Action and the Supporting 13-Point Program
President Echeverria, delivering his annual State of the Nation
address to the Mexican Congress on September 1, listed the following
objectives that the Government of Mexico hopes to achieve through the
floating of the peso and the accompanying measures:
(1) to recover and preserve the competitiveness of Mexico's
exports of goods and services,
(2) to protect the purchasing power of the popular classes,
(3) to prevent excess profits,
(4) to protect the financial health of enterprises so that
they may continue helping to create jobs,
(5) to control the public deficit, and
(6) to regulate the growth of credit.
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President Echeverria stressed that, to achieve the first
objective, Mexico must ensure that the increase in domestic prices
and costs would be substantially lower than the percentage change in the
exchange rate. He listed the adoption of export surtaxes, the reduction
of export tax rebates, the reduction of import tariffs and the elimination
of unnecessary import controls as contributing to this objective. But
the measures intended to protect the purchasing power of the popular
classes, particularly the adoption of a wage policy aimed mainly at main-
taining the real purchasing power of salaries, may make it impossible to
ensure that the increase in domestic prices and costs will in fact be sub-
stantially less than the percentage change in the exchange rate.
Elaborating on the wage policy in his State of the Nation address,
President Echeverria said that Government civilian and military pay and
pensions would be raised on September 30 in an amount sufficient to restore
their purchasing power to compensate for the deterioration since their last
adjustment (on January 1, 1976) and in the proportion in which their
purchasing power is affected by the increase in the price level since
that time. He added that his administration would promote the extension
of this salary increase as soon as possible to workers in the rest of the
economy.
If prices of imported goods rise substantially in spite of the
reduction of import tariffs, (and even more so if prices of domestic goods
and services rise in sympathy), the application of this wage policy over
a period of time could well severely erode the benefits from the initial
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currency depreciation and put new pressures on the exchange rate, leading
to a further depreciation. The new program calls for the imposition and
strict application of price controls for raw materials and basic consumption
articles, but if these controls involve fixing prices at unrealistically low
levels, a black market might develop and social unrest might cause the price
control arrangements to break down and induce the authorities to grant even
more generous wage and salary increases. (The official increase in the
minimum wage which sets the standard for many wage settlements early this
year exceeded the rate of increase in the price level since the previous
adjustment.) Recent reports from the U.S. Embassy in Mexico City also
indicated that privately negotiated wage settlements so far this year were
not as moderate as would have been needed to reduce the rate of inflation
to any significant extent. In the final analysis, the success of the new
program will depend on the attitude of the organized labor movement toward
it and on the determination of the Government to make the program effective.
The other key to whether the new program will achieve its objectives
lies in the ability of the authorities to reduce substantially the fiscal
deficit. While the cause of monetary policy will be important also, the
central bank is constrained in its policies by the actions of the govern-
ment, and, in practical terms, it cannot refuse the government credit.
The adoption of export surcharges and of an excess profits tax
and the elimination of the export tax rebates should work toward the fiscal
objective. However, the reduction of import tariffs may offset this gain,
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at least in part. (In 1975 import taxes accounted for about 7 per cent
of central government revenue and export taxes less than 2 per cent.)
More importantly, the efforts to hold down public spending will be crucial.
In his State of the Nation address, President Echeverria promised much
more strict budgeting and discipline in adhering to the budget than has
existed in the past. But he said that the reduction of the deficit must
not decrease the rate of public investment in productive activities and
social services. If, as seems likely, he was speaking of the real rate
of public investment, avoiding a reduction is certain to mean an absolute
increase in spending, in as much as the wage costs of investments are sure
to rise and so are the peso costs of their imported components.
In his speech President Echeverria also added that the deficit
must be held to non-inflationary limits so that financial institutions may
be encouraged to lend adequately to the private sector. The continuance of a
heavy role for the public sector in productive activities and in the
provision of social services, may therefore, make it difficult to limit the
size of the deficit. In fact, if adequate supplies of basic necessities--
primarily food -- through the state-controlled facilities are provided at
controlled prices, the decentralized agency involved (known as CONASUPO)
will in all probability run larger deficits than in the past and will require
larger Federal subsidies to cover them. The extent to which this will impinge
upon the effort to reduce the public sector deficit will largely depend on
the price response of the economy in general. It is noteworthy that, apart
RESTRICTED
GERALD FORD LIBRARY
RESTRICTED
- 8 -
from the new export surcharges and the excess profits tax, President
Echeverria did not mention the possibility of raising any other taxes.
It is possible that he wanted to leave this unpleasant task to his
successor- former Finance Minister Lopez Portillo--who is due to take
office on December 1. But given the unpleasant news with which he was
dealing, he might have at least alluded to the need to raise taxes in
case the efforts to hold down public spending proved to be insufficient.
As regards the balance of payments, a depreciated peso should
encourage exports and the inflow of foreign tourists, while discouraging
imports. The response of tourists is likely to be noticed more rapidly
than that of merchandise exports and imports. Indeed, tourists may be more
sensitive to exchange rate changes than traders in merchandise, A number
of Mexico's exports, especially of raw materials, may be facing a relatively
inelastic demand while Mexico's demand for many imports may also be
relatively inelastic. Excess capacity in export industries, other than the
border assembly plants, is also reportedly low. Therefore, any merchandise
trade improvement may be limited or, at least, delayed.
If Mexico succeeds in holding wage and price increases to substan-
tially smaller proportions than the rate of currency depreciation, one of
the benefits of the peso's depreciation and the accompanying program may be
a revival of the attractiveness of Mexico's border area as the possible site
for assembly plants to serve the U.S. market. If so, the earnings from these
assembly plants, which suffered in recent years, could once again experience
rapid growth.
FORD
RESTRICTED
GERALD
LIBRARY
RESTRICTED
- 9 -
Finally, as already mentioned, President Echeverria will
be succeeded by President-elect Lopez Portillo on December 1. While
Lopez Portillo appears likely to continue many of the policies of his
predecessor, he will surely want to develop his own policies and
orientation. This may mean that the early months of 1977 will be a
period of reorganization and design of new programs. Consequently,
the pace of public spending could slow down of its own accord, for
several months at least. As a former Minister of Finance, President-
elect Lopez Portillo is perhaps more aware than his predecessor of the
magnitude of the task ahead and of the kinds of efforts that are needed.
This may augur well for the recovery of the Mexican position. But the
past is seldom a sure guide to the future, and Mr. Lopez Portillo's
actions as President may diverge markedly from what he would have advo-
cated as Minister of Finance in the same circumstances. In particular,
the new 13-point program of the present Mexican government may prove to
be an imperfect guide to Mexican policy after December 1.
Prepared by: Yves Maroni
Division of International Finance
September 3, 1976
LIBRATY GERALD R. FORD
Table 1
MEXICO - Balance of Payments
1972-76
1972
1973
1974
19751/
19762/
19752/
19762/
Year
Year
Year
Year
Year
1st half
1st half
(in billion dollars)
(in million dollars)
Merchandise Exports
+1.9
-2.4
+3.4
+3.4
+4.0
1,705.0
2,012.8
(of which, petroleum)
(+ -)3/
(+ -)3/
(+0.1)
(+0.4)
(+0.7)
(n.a.)
(n.a.)
Merchandise Imports
-2.6
-3.6
-5.7
-6.3
-6.2
2,947.8
2,950.0
(of which, petroleum)
(-0.1)
(-0.3)
(-0.3)
(-0.2)
(-0.2)
(n.a.)
(n.a.)
Trade Balance
-0.7
-1.2
-2.3
-2.8
-2.2
-1,242.8
-937.2
Services (net)
-0.2
-0.3
-0.7
-1.3
-1.6
-271.5
-573.8
Travel (net)
(+0.6)
(+0.8)
(+0.9)
(+0.8)
(+0.9)
(n.a.)
(n.a.)
Investment Income (net)
(-0.8)
(-1.1)
(-1.6)
(-2.0)
(-2.3)
(n.a.)
(n.a.)
Other (net)
(+ -)3/
(+0.1)
(+ -)3/
(-0.2)
(-0.2)
(n.a.)
(n.a.)
Private Unrequited Transfers (net)
+0.1
+0.1
+0.1
+0.1
+0.1
+ _3/
+ _3/
Balance on Current Account
-0.8
-1.4
-2.9
-4.1
-3.7
-1,614.3
-1,511.0
Government Unrequited Transfers (net)
+ -3/
+ -3/
+ -3/
+ -3/
Long-Term Capital (net)
+0.8
+1.8
+3.0
+4.3
Direct Investment in Mexico (net)
(+0.3)
(+0.5)
(+0.7)
(+0.7)
Other Long Term Private Capital (net)
(+ -)3/
(+0.1)
(+0.6)
(+0.9)
Public Sector Borrowings (net)
(+0.5)
(+1.3)
(+1.8)
(+2.7)
Subscriptions to IBRD and IDB
(--)
(-.1)
(--)
(-)
Short-Term Capital (net)
+0.1
-0.3
+0.2
+0.5
Private Non-Bank Capital (net)
(+0.1)
(-0.2)
(-0.4
(+0.3)
Bank Capital (net)
(- -)3/
(-0.1)
(+0.7)
(+0.2)
Official Foreign Assets (net) ; (Increase:-)
-0.3
-0.1
- _3/
-0.2
Errors and Omissions (net)
+0.2
+ -3/
-0.4
-0.6
FORD LIBRAR
1/ Preliminary
2/ Projected
3/ Less than $50 million
Source: International Monetary Fund and Federal Reserve Board Staff estimates.
Table 2
MEXICO - International Reserves,
Foreign Trade and Tourist Earnings
(in million dollars)
International
Merchandise Trade
Net Tourist
Reserves
Exports
Imports
Balance
Earnings
(at end of
(for
(for
(for
(for
period)
period)
period)
period)
period)
1970
744
1,281.3
2,326.8
-1,045.5
+539.2
1971
952
1,363.4
2,254.0
- 890.6
+643.2
1972
1,164
1,665.3
2,717.9
-1,052.6
+749.9
1973
1,356
2,070.5
3,813.4
-1,742.9
+978.9
1974P/
1,395
2,850.0P/
6,056.7P/
-3,206.7₽/
+1,060.9
1975P/
1,533
2,858.6₽/
6,580.2P/
-3,721.6P/
+988.0
1974 - Q1
1,540
675.5P/
1,238.2P/
-562.7₽/
+296.6
Q2
1,547
696.2P/
1,523.5P/
-831.3P/
+261.0
Q3
1,354
669.4P/
1,508.02/
-838.6P/
+234.2
Q4
1,395
808.9P/
1,787.0P/
-978.1P/
+269.1
1975 - Q1
1,479
656.3P/
1,424.52/
-768.2₽/
+281.3
Q2
1,399
768.1P/
1,663.8P/
-895.7P/
+236.3
Q3
1,320
672.3₽/
1,602.6P/
-930.3P/
+217.3
Q4
1,533
761.9P/
1,889.3P/
-1,127.4P/
+252.9
1976 - Jan.
1,424
264.2P/
480.4P/
-216.2₽/
+ 94.5
Feb.
1,592
235.1P/
436.4P/
-201.3P/
+100.4
Mar.
1,501
281.7P/
485.2P/
-203.5P
+107.6
April
295.8P/
566.2P/
-270.4P/
+ 77.1
May
+ 75.1
- - -
Aug.
1,3611
1/ Figure announced by President Echeverria in his State of the Nation address
to the Mexican Congress on September 1, 1976. Includes an unspecified, but
probably small, amount of silver.
p/ Preliminary.
Sources: International Monetary Fund, International Financial Statistics,
and Bank of Mexico, Indicadores Economicos.
FORD
GERALD
LIBRARY
Table 3
MEXICO - Index of Consumer Prices
in Mexico City
in Selected Months Since December 1972
Average Monthly
Change from
General
Change Since
Same Month
Index
Last Month Shown
Previous Year
(1968 = 100)
(Per cent)
(Per cent)
1972 - December
124.1
1973 - March
128.2
+1.1
+ 7.4
June
132.6
+1.1
+ 9.8
September
139.6
+1.8
+13.8
December
149.5
+2.4
+20.5
1974 - March
156.7
+1.6
+22.0
June
161.2
+1.0
+21.6
September
169.3
+1.7
+21.3
December
180.6
+2.2
+20.8
1975 - March
184.6
+.7
+17.8
June
192.5
+1.4
+19.5
September
198.7
+1.1
+17.4
October
200.3
+.8
+15.2
November
202.8
+1.2
+13.3
December
204.6
+.9
+13.3
1976 - January
207.9
+1.6
+13.3
February
212.0
+2.0
+15.2
March
214.7
+1.3
+16.3
April
215.9
+.6
+15.6
May
217.5
+.7
+15.3
June
218.1
+.3
+13.3
July
219.8
+.8
+13.2
Source: Banco de Mexico, Indicadores Económicos
FORD & 07V835 LIBRARY
Table 4
MEXICO - Index of
Manufacturing Production in
Selected Months Since December 1972
Average Monthly
Change from
Index
Change Since
Same Month
1968 = 100
Last Month Shown
Previous Year
(per cent)
(per cent)
1972 - December
108.8
-4.1
+4.7
1973 - March
129.4
+13.1
+14.8
June
123.9
-3.6
+7.8
September
115.0
-8.95
+5.4
December
126.0
-1.0
+15.8
1974 - March
137.8
+9.2
+6.5
June
127.8
-9.9
+3.15
September
121.9
-6.6
+6.0
December
125.0
-2.65
-.8
1975 - March
124.8
-3.2
-9.4
June
136.4
-3.8
+6.7
September
131.5
-3.5
+7.9
December
130.6
-2.5
+4.5
1976 - January
137.4
+5.2
+10.1
February
139.0
+1.2
+1.9
March
150.9
+8.6
+14.75
April
139.2
-7.75
+6.6
Source: Banco de Mexico, Indicadores Economicos.
LIBRARY GERALD FORD
Table 5
MEXICO - Public Sector
Revenues and Expenditures
since 1971
(in billions of pesos)
Federal Government
Decentralized Agencies
Revenues
Expenditures
Deficit
Revenues
Expenditures
Deficit
1971
36.5
41.3
- 4.8
48.4
65.5
-17.1
1972
42.3
59.1
-16.7
56.6
71.5
-14.9
1973
53.8
81.2
-27.4
74.2
101.8
-27.6
1974
72.9
104.1
-31.2
107.4
140.7
-33.3
1975
103.1
145.1
-42.0
128.2
1/
160.6
1/
-32.4
1/
1974 - Q₁
15.3
18.9
- 3.6
Q₂
17.8
21.3
- 3.5
Q3
17.8
24.2
- 6.4
Q4
21.9
39.7
-17.8
1975 - Q₁
22.8
31.4
- 8.6
Q2
26.3
33.3
- 7.0
Q3
25.0
34.6
- 9.6
Q4
29.0
45.8
-16.8
1976 Jan.
10.1
9.3
+ 0.8
Feb.
7.4
11.7
- 4.3
Mar.
11.5
18.4
- 6.9
Apr.
10.4
13.7
- 3.3
May
13.7
14.5
- 0.8
1/ Budget.
Sources: Banco de Mexico, Indicadores Economicos, and Government of Mexico,
Prospectus on $50 million bond issue, dated February 19, 1976.
LIBRARY GERALD FORD
Table 6
MEXICO - Rate of Growth of
Real Gross Domestic Product
(Percentages)
1961-70 ave.
7.0
1967
6.3
1968
8.1
1969
6.3
1970
6.9
1971
3.4
1972
7.3
1973
7.6
1974
5.9
1975
4.0
Source: Bank of Mexico
GERALD R. FORD LIBRAPT
Table 7
MEXICO - Money Supply
at End of Selected Months
Since December 1972
Amount
1/
Percentage
Percentage
Outstanding
Change Since
Change Since
(in billions
Last Month
Same Month
of pesos)
Shown
Previous Year
1972 - December
57,859
+2.0
+21.2
1973 - March
61,956
+3.5
+24.1
June
64,701
+1.6
+24.6
September
68,391
+.4
+25.0
December
71,658
- .3
+23.85
1974 - March
75,150
+1.85
+21.3
June
79,540
+2.3
+22.9
September
82,691
+2.8
+20.9
December
87,412
+3.8
+22.0
1975 - March
92,300
+3.2
+22.8
June
98,151
+2.4
+23.4
September
99,232
- .4
+20.0
December
105,972
+3.2
+21.2
1976 - January
107,050
+1.0
+22.1
February
108,621
+1.5
+21.5
March
109,269
+.6
+18.4
April
111,264
+1.8
+19.85
May
114,708
+3.1
+19.7
1/ Seasonally adjusted
Source: Banco de Mexico, Indicadores Economicos.
FORD & LIBRARY 97V839
AT : HINGTON
1976
AUG
0009-966
AM 8 17
:14 EDI+
76643 FEDR U1+
146643 FEDR UI
BOARD U: GOVERNORS
1775806X1C0BME
OF THE
145 MEXICO DF AUGUST 31 1976 HS 26.47
FEDERAL IFEM RESERVE SYSTEM
TTN PR ARTHUR BURNS
CHAIRMAN OF THE FEDERAL RESERVE BOARD
WASHINGTON DC
LEASE 38 ADVISED THAT THE GOVERNMENT OF MEXICO HAS DECIDED TO
BANDON PRESENT RATE OF EACHANGE OF THE MEXICAN PESO WITH RESPECT
U THE U.S. DOLLAR (STOP)
HEREFORE, AS FROM 24 HOURS MEXICO CITY TIME AUGUST 31TH., 1976
HE BANK OF MEXICO WILL NO LONGER OBSERVE MARGINS AND WILL INTERVENE
AINLY TO PREVENT ERRATIC AND SPECULATIVE FLUCTUATIONS. STOP THE
DVERNENT OF MEXICO HAS ALSO DECIDED TO MAINTAIN THE TRADITIONAL
ITT World Communical
VIE CONVERTIBILITY 01 THE MEXICAN PESO (STOP)
100 REGULATED FLOATING OF THE MEXICAN PESU WILL BE ACCOMPANIED BY
SHORT AND LONG TERM ECONOMIC PROGRAM THAT WILL PRESERVE THE
OMPETITIVENESS OF MEXICAN ECONOMY (STOP) THE PROGRAM INCLUDES
OLLOWING MEASURES: 1) EXPORT SURTAX TO ABSURB MOST Ji. EACHANGE
ROFITS AND PREVENT INTERNAL INCREASE or PRICES (STOP) 2SUBSTANTIAL
REDUCTION OF TAX REBATE SYSTEM FOR EXPORTS (STOP) 3) ELIMINATION OF
INNECESSARY IMPORT CONTROLS AND REDUCTION Or IMPORT TAXES FOR RAW
ATERIALS AND BASIC IMPORTS TO REDUCE PRESSURES ON INTERNAL COSTS
IND PRICES (STOP) 4) A WAGE POLICY AIMED MAINLY AT MAINTAINING THE
REAL PURCHASING VALUE OF SALARIES (STOP) 5) PRICE CONTROLS FOR RAW
ATERIALS AND BASIC CONSUMPTION ARTICLES WILL BE STRICTLY APPLIED
(STOP) PRICES OF GOODS SOLD BY CONASUPO WILL NOT BE CHANGED BUT
BUARANTEE PRICES TO AGRICOLIURAL PRODUCERS WILL BE ADJUSTED BY
INCREASE IN COSTS (STOP) ()) INTEREST RATES FOR SMALL SAVERS WILL
SE INCREASED (STOP) 7) MEASURES WILL BE ADOPTED AND STRICTLY APPLIED
I'U PREVENT SPECULATION WITH BASIC ARTICLES AND RAW MATERIALS (STOP)
8) SPECIAL EXCESS PROFITS PAX WILL BE PROPOSED TO COMGRESS TO
ABSORBE EXTRAORDINARY OR EXCESS PROFITS DERIVED FROM EXCHANGE
MEASURES OR INCREASE IN PRICES (STOP) 9) SPECIAL FISCAL TREATMENT
TILL BE GIVEN TO PRIVATE ENTERPRISES THAT MAY BE SERIOUSLY AFFECTED
or EXCHANGE MEASURES AND THE CAPITAL STRUCTURE OF THE PUBLIC
INTERPRISES WILL BE SUPPORTED (STOP) 10) THE DEFICIT OF THE PUBLIC
SECTOR WILL BE REDUCED THROUGH STRICT PROGRAMMING AND SURVEILLANCE
JF PUBLIC EXPENDITURE TO ATTAIN WUANTITATIVE GOALS RELATED TO THE
ADJUSTMENT PROCESS OF THE ECONOMY, AS WELL AS BY AN INCREASE IN
REVENUES OF PUBLIC SECTOR (STOP) 11) A SYSTEM OF REGULATED CREDIT
GROWTH WILL BE ESTABLISHED BY THE BANK OF MEXICO FOR USE BY
PRIVATE AND PUBLIC SECTORS (STOP) 12) BANK OF MEXICO WILL GIVE
MEXICAN CREDIT INSTITUTIONS THE NECESSARY LIQUIDITY TO ASSURE THAT
ALL COMMITMENTS WILL AS USUAL BE TIMELY MET (STOP) 13) THE
MINANCIAL RESOURCES OF THE IMF AND U.S. TREASURY WILL SUPPORT
World naalaations Inc.
THE NEW ECONOMIC PROGRAM. (STOP)
WITH THE ABOVE MEASURES AND NEW EXCHANGE POLICY MEXICAN GOVERNMENT
HOPES TO ATTAIN ITS BASIC AND FUNDAMENTAL ECONOMIC OBJECTIVES
(STOP)
BEST
REGARDS (STOP) ERNESTO FERNANDEZ HURTADO
FORD
BANXICO
GERALD,
LIBRARY
WELL RECD??
+
446043 FEDR 01
ITT World Com
Hurtado
AT WASHINGTON
D.C. Phone 296-6200
1976 AUG AM 817
2244 EDT+
440043 FEDR UI+
440043 FEDR UI
1775806XICOBME
BOARD OF GOVERNORS
OF
T 145 MEXICO DF AUGUST 31 1976 HS 20.47 SYSTEM
FEDERAL IFEM RESERVE
ATTN MR ARTHUR BURNS
CHAIRMAN OF THE FEDERAL RESERVE BOARD
WASHINGTON DC
1709 L St. N.W. Washington D.C. Phone 296-6200
PLEASE BE ADVISED THAT THE GOVERNMENT OF MEXICO HAS DECIDED TO
ABANDON PRESENT RATE OF EXCHANGE OF THE MEXICAN PESO WITH RESPECT
TO THE U.S. DOLLAR (STOP)
THEREFORE, AS FROM 24 HOURS MEXICO CITY TIME AUGUST 31TH., 1976
THE BANK OF MEXICO WILL NO LONGER OBSERVE MARGINS AND WILL INTERVENE
MAINLY TO PREVENT ERRATIC AND SPECULATIVE FLUCTUATIONS. STOP THE
GOVERNMENT OF MEXICO HAS ALSO DECIDED TO MAINTAIN THE TRADITIONAL
FREE CONVERTIBILITY OF THE MEXICAN PESO (STOP)
THE REGULATED FLOATING OF THE MEXICAN PESO WILL BE ACCOMPANIED BY
SHORT AND LONG TERM ECONOMIC PROGRAM THAT WILL PRESERVE THE
COMPETITIVENESS OF MEXICAN ECONOMY (STOP) THE PROGRAM INCLUDES
ITT World Communications Inc.
FOLLOWING MEASURES: 1) EXPORT SURTAX TO ABSORB MOST OF EXCHANGE
PROFITS AND PREVENT INTERNAL INCREASE OF PRICES (STOP) 2)SUBSTANTIAL
REDUCTION OF TAX REBATE SYSTEM FOR EXPORTS (STOP) 3) ELIMINATION OF
UNNECESSARY IMPORT CONTROLS AND REDUCTION OF IMPORT TAXES FOR RAW
MATERIALS AND BASIC IMPORTS TO REDUCE PRESSURES ON INTERNAL COSTS
AND PRICES (STOP) 4) A WAGE POLICY AIMED MAINLY AT MAINTAINING THE
REAL PURCHASING VALUE OF SALARIES (STOP) 5) PRICE CONTROLS FOR RAW
MATERIALS AND BASIC CONSUMPTION ARTICLES WILL BE STRICTLY APPLIED
(STOP) PRICES OF GOODS SOLD BY CONASUPO WILL NOT BE CHANGED BUT
GUARANTEE PRICES TO AGRICULTURAL PRODUCERS WILL BE ADJUSTED BY
INCREASE IN COSTS (STOP) 6) INTEREST RATES FOR SMALL SAVERS WILL
BE INCREASED (STOP) 7) MEASURES WILL BE ADOPTED AND STRICTLY APPLIED
TO PREVENT SPECULATION WITH BASIC ARTICLES AND RAW MATERIALS (STOP)
8) SPECIAL EXCESS PROFITS TAX WILL BE PROPOSED TO CONGRESS TO
1709 L St. N.W. Washington D.C. Phone 296-6200
ABSORBE EXTRAORDINARY OR EXCESS PROFITS DERIVED FROM EXCHANGE
MEASURES OR INCREASE IN PRICES (STOP) 9) SPECIAL FISCAL TREATMENT
WILL BE GIVEN TO PRIVATE ENTERPRISES THAT MAY BE SERIOUSLY AFFECTED
BY EXCHANGE MEASURES AND THE CAPITAL STRUCTURE OF THE PUBLIC
ENTERPRISES WILL BE SUPPORTED (STOP) 10) THE DEFICIT OF THE PUBLIC
SECTOR WILL BE REDUCED THROUGH STRICT PROGRAMMING AND SURVEILLANCE
OF PUBLIC EXPENDITURE TO ATTAIN QUANT ITATIVE GOALS RELATED TO THE
ADJUSTMENT PROCESS OF THE ECONOMY, AS WELL AS BY AN INCREASE IN
REVENUES OF PUBLIC SECTOR (STOP) 11) A SYSTEM OF REGULATED CREDIT
GROWTH WILL BE ESTABLISHED BY THE BANK OF MEXICO FOR USE BY
PRIVATE AND PUBLIC SECTORS (STOP) 12) BANK OF MEXICO WILL GIVE
MEXICAN CREDIT INSTITUTIONS THE NECESSARY LIQUIDITY TO ASSURE THAT
ALL COMMITMENTS WILL AS USUAL BE TIMELY MET (STOP) 13) THE
FINANCIAL RESOURCES OF THE IMF AND U.S. TREASURY WILL SUPPORT
ITT World Communications Inc.
THE NEW ECONOMIC PROGRAM. (STOP)
WITH THE ABOVE MEASURES AND NEW EXCHANGE POLICY MEXICAN GOVERNMENT
HOPES TO ATTAIN ITS BASIC AND FUNDAMENTAL ECONOMIC OBJECTIVES
(STOP)
BEST
REGARDS (STOP) ERNESTO FERNANDEZ HURTADO
BANXICO
tions Inc.
WELL RECD??
GERALO FORD (18848)
*
440043 FEDR UI
1775 806XICOBME
1709 L St. N.W.
USTREAS 64131
1775886XICOBME
T 158 MEXICO DF AUGUST 31 1976 RHB HRS 23.50
MR EDWIN YEO
RH.2049-C HT Ril. 2049-C IT BLDG.
60 835 3786
UNDERSECRETARY OF THE TREASURY
SHOLLVO
DEPARTMENT OF TREASURY
WASHINGTON DC
IN ACCORDANCE WITH THE LETTER AND THE SPIRIT OF THE MONETARY
STABILIZATION AGREEMENT BETWEEN BANK OF MEXICO AND U.S. TREASURY
TO KEEP EACH OTHER INFORMED OF ECONOMIC MEASURES ADOPTED, I HEREBY
INFORM YOU THAT GOVERNMENT OF MEXICO HAS DECIDED TO ABANDON
PRESENT RATE OF EXCHANGE OF THE MEXICAN PESO WITH RESPECT TO THE
U.S. DOLLAR. (STOP)
THEREFORE, AS FROM 24 HOURS MEXICO CITY TIME AUGUST 31TH., 1976
THE BANK OF MEXICO WILL NO LONGER OBSERVE MARGINS AND WILL INTERVINE
MAINLY TO PREVENT ERRATIC AND SPECULATIVE FLUCTUATIONS. THE
GOVERNMENT OF MEXICO HAS ALSO DECIDED TO MAINTAIN THE TRADITIONAL
FREE CONVERTIBILITY AND TRANSFERABILITY OF THE MEXICAN PESO(STOP)
THE REGULATED FLOATING OF THE MEXICAN PESO WILL BE ACCOMPANIED BY
FORD
SHORT AND LONG TERM ECONOMIC PROGRAM THAT WILL PRESERVE THE
GERALD
LIBRARY
COMPETITIVENESS OF MEXICAN ECONOMY (STOP) THE PROGRAM UNCLUDES
FOLLOWING MEASURES: 1) EXPORT SURTAX TO ABSORB MOST OF EXCHANGE
PROFITS AND PREVENT INTERNAL INCREASE OF PRICES (STOP) DSUBSTANTIAL
REDUCTION OF TAX REBATE SYSTEM FOR EXPORTS (STOP) 3) ELIMINATION OF
UNNECESSARY IMPORT CONTROLS AND REDUCTION OF IMPORT TAXES FOR RAW
MATERIALS AND BASIC IMPORTS TO REDUCE PRESSURES ON INTERNAL COSTS
AND PRICES (STOP) 4) A WAGE POLICY AIMED MAINLY AT MAINTAINING THE
REAL PURCHASING VALUE OF SALARIES (STOP) 5) PRICE CONTROLS FOR RAW
MATERIALS AND BASIC U SUMPTION ARTICLES WILL BL STRICTLY APPLIED
(STOP) PRICES OF GOODS SOLD BY CONASUPO WILL NOT BE CHANGED BUT
GUARANTEE PRICES TO AGRICULTURAL PRODUCERS WILL BE ADJUSTED BY
INCREASE IN COSTS (STOP) o) INTEREST RATES FOR SMALL SAVERS WILL
BE INCREASED (STOP) 7) MEASURES WILL BE ADOPTED AND STRICTLY APPLIED
TO PREVENT SPECULATION WITH BASIC ARTICLES AND RAW MATERIALS (STOP)
8) SPECIAL EXCESS PROFITS TAX WILL BE PROPOSED TO CONGRESS TO
ABSORBE EXTRAORDINARY OR EXCESS PROFITS DERIVED FROM EXCHANGE
MEASURES OR INCREASE IN PRICES (STOP) 9) SPECIAL FISCAL TREATMENT
WILL BE GIVEN TO PRIVATE ENTERPRICES THAT MAY BE SERIOUSLY AFFECTED
BY EXCHANGE MEASURES AND THE CAPITAL STRUCTURE OF THE PUBLIC
ENTERPRICES WILL BE SUPPORTED (STOP) 10) THE DEFICIT OF THE PUBLIC
SECTOR WILL BE REDUCED THROUGH STRICT PROGRAMMING AND SURVELLANCE
OF PUBLIC EXPENDITURE TO ATTAIN QUANTITATIVE GOALS RELATED TO THE
ADJUSTMENT PROCESS OF THE ECONOMY, AS WELL AS BY AN INCREASE IN
REVENUES OF PUBLIC SECTOR (STOP) 11) A SYSTEM OF REGULATED CREDIT
GROWTH WILL BE ESTABLISHED BY THE BANK OF MEXICO FOR USE BY
PRIVATE AND PUBLIC SECTORS (STOP) 12) BANK OF MEXICO WILL GIVE
MEXICAN CREDIT INSTITUTIONS THE NECESSARY LIQUIDITY TO ASSURE THAT
ALL COMMITTMENTS WILL AS USUAL BE TIMELY MET (STOP) 13) THE
FINANCIAL RESOURCES OF THE IMF AND U.S. TREASURY WILL SUPPORT
THE NEW ECONOMIC PROGRAM. (STOP)
WITH THE ABOVE MEASURES AND NEW EXCHANGE POLICY MEXICAN GOVERNMENT
HOPES TO ATTAIN ITS BASIC AND FUNDAMENTAL ECONOMIC OBJECTIVES
(STOP)
WITH WARM PERSONAL REGARDS (STOP) ERNESTO FERNANDEZ HURTADO
BANXICO
USTREAS 64131
GERALD FORD LIBRARY
17758J6XIC0BME
HRS 24.00
Reuter Wire New Service
MEXICO ALLOWS PESO TO FLOAT
Mexico City, Sept. 1 -- Mexico decided to let its peso float freely
against the U.S. dollar for the first time in history. Finance Minister
Mario Ramon Betata said the peso had been fixed at 12. 58 to the dollar
for 22 years.
Betata said the Government hopes to re-establish a fixed rate
when the peso has floated to a stable level. He set no target date for
the abandonment of the new float. The Bank of Mexico will intervene
in the market when necessary to counter short-term speculation but
will not attempt to maintain a long term parity at a predetermined
level. The Government has decided not to attempt to restrict the
traditional free exchange ability of the peso against the dollar nor to
try to control the existing free movement of funds across the frontier
with the U.S.
Betata also announced a four-part programme of export taxes,
credit controls, wage and price restrictions and lower import barriers
designed to increase Government revenues, avoid strong inflation and
curb profiteering after the decision to float. Increased commercial
revenues from exports would be cut by an ad valorem tax, the abolition
of tax concessions and a special profits tax -- all still to be worked out
in detail. At the same time imports of investment goods andbbasic
necessities would be given easier entry terms in order to maintain
growth and stabilize prices.
GERALD FORD LIBRARY
-2-
Betata also promised without giving details to cut the inflationary
section of the Government deficits and to tighteneexisting price controls
to the point where the percentage fall in the exchange rate exce eds the
inflation figure.
Public sector wages increases will be kept strictly in line with
the cost of living and private enterprise will be pressed to follow suit.
The central bank will strictly limit credits but banks heavily
committed in the foreign exchange markets will get as much liquid
support as they need to weather the float.
Betata said the float and the other measures are intended to
meet "the deterioration in our external competitivity, our need to
create more jobs and to take better advantage of the bases we have
already established for our development. "
Mexico's balance-of-trade deficit reached a record 3.8 billion
dollars last year, most of it with the U.S. This year exports have
declined in real terms and the deficit has been kept in trim only
due to sluggish imports of capital goods.
The Government and state-owned companies have been borrowing
heavily overseas; inflation has been at an annual rate of 15 per cent and
unemployment is at 45 per cent.
The announcement of the decision to allow the peso to float was
made on the eve of a public holiday. All banks in Mexico are closed
today. Reopening on Thursday.
GERALD FORD LIBRARY
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"ocrText": "The original documents are located in Box B80, folder \"Mexico 4/76 - 10/77 (1)\" of the\nArthur F. Burns Papers at the Gerald R. Ford Presidential Library.\nCopyright Notice\nThe copyright law of the United States (Title 17, United States Code) governs the making of\nphotocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United\nStates of America his copyrights in all of his unpublished writings in National Archives collections.\nWorks prepared by U.S. Government employees as part of their official duties are in the public\ndomain. The copyrights to materials written by other individuals or organizations are presumed to\nremain with them. If you think any of the information displayed in the PDF is subject to a valid\ncopyright claim, please contact the Gerald R. Ford Presidential Library.\nRes-$1,6 P.ll\n04/14-76\n[HiWallich\nRESTRICTED\nRecent Economic and Financial Developments\nin Mexico\nand Prospects for 1976-77\nMexico's balance of payments deficit on current account\nincreased substantially in 1975, mainly as a result of the world re-\ncession and a rise in interest payments on external obligations. As\nshown in table 1, according to preliminary data, the current account\ndeficit exceeded $4 billion, up from about $2.9 billion in 1974. The\nworld recession was the principal reason why most traditional exports\ndeclined, and it was only because of the steady rise in exports of\npetroleum from wells opened in 1974 that the year ended with the value\nof total exports virtually unchanged from 1974. In contrast, the value\nof imports rose more than 8 per cent. The rise in imports in 1975 was\nmodest when compared with increases of more than 50 per cent in each of\nthe previous two years, and it was associated with a marked slowdown in\nthe country's rate of economic activity. The world recession also\nbrought about a 5 per cent drop in tourist earnings. The rise in interest\npayments reflects the rapid increase in the country's external debt and\na rise in the average interest rate on outstanding obligations.\nThe current account deficit was financed by a net inflow of\nmedium- and long-term capital, as has been the case for many years.\nLast year, this net inflow totalled about $4.3 billion, over $1.3 billion\nmore than in 1974. This was enough to allow an increase in net official\nforeign assets of $151 million.\nGERALD FORD LIBRARY\nRESTRICTED\nRESTRICTED\n- 2 -\nTable 1\n-\nMexico - Balance of Payments\n1973-75\n(in million dollars)\n1973\n1974\n1975P/\nMerchandise Exports\n+2,419\n+3,443\n+3,445\nMerchandise Imports\n-3,656\n-5,754\n-6,283\nTrade Balance\n-1,237\n-2,311\n-2,838\nServices (net)\n- 252\n- 678\n-1,344\nTravel (net)\n(+ 808)\n(+ 902)\n(+ 810)\nInvestment Income (net)\n(-1,135)\n(-1,599)\n(-1,974)\nOther (net)\n(+ 150)\n(+ 19)\n(- 180)\nPrivate Unrequited Transfers (net)\n+ 66\n+ 100\n+ 114\nBalance on Current Account\n-1,423\n-2,889\n-4,068\nGovt. Unrequited Transfers (net)\n+ 8\n+ 13\n+ 12\nLong-Term Capital (net)\n+1,820\n+3,048\n+4,303\nDirect Investment in Mexico (net)\n(+ 457)\n(+ 678)\n(+ 749)\nOther Long Term Private Capital (net)\n(+ 119)\n(+ 590)\n(+ 854)\nPublic Sector Borrowings (net)\n(+1,293)\n(+1,780)\n(+2,700)\nSubscriptions to IBRD and IDB\n(- 48)\n( -- )\n( -- )\nShort-Term Capital (net)\n- 308\n+ 242\n+ 486\nPrivate Non-Bank Capital (net)\n(- 178)\n(- 441)\n(+ 250)\nBank Capital (net)\n(- 130)\n(+ 683)\n(+ 236)\nOfficial Foreign Assets (net)- --\n(increase:-)\n- 144\n- 32\n- 151\nErrors and Omissions (net)\n+ 46\n- 381\n- 582\nP/ Preliminary\nSource: International Monetary Fund, International Financial\nStatistics, and IMF staff.\nRESTRICTED\nBERALD FORD LIBRARY\nR.\nGERALD\nFORD\nRESTRICTED\nLIBRARY\n- 3 -\nThe country's real gross domestic product last year is\nestimated at about 4 per cent more than in 1974. With population\nrising at about 3.5 per cent per year, this represents little real\ngrowth per capita. The 1975 growth rate was also well below the average\nrate achieved in the past 20 years and below the 1974 rate--both about\n6 per cent. With slower growth came a slower rate of increase in prices,\nbut the consumer price index late last year and early this year was\nstill showing a rise of more than 13 per cent over the year-earlier\nlevels, and the monthly percentage increase appeared to have begun to\nturn up in January and February, after diminishing rather steadily during\n1975. Recent price movements are summarized in table 2.\nUntil early 1973, the rate of inflation in Mexico was compa-\nrable to that in the United States. Its subsequent acceleration is\nonly partly attributable to the impact of rising prices of many imported\nproducts. More important, perhaps, were an accelerated growth of\ndomestic expenditures, chiefly by the public sector, an expansionary\nincomes policy, and shortfalls in agricultural production owing to in-\nclement weather.\nPublic spending began to increase faster late in 1972 as the\nGovernment stepped up its rate of investment and the growth of its\nwelfare programs. As public sector revenues rose more slowly, reliance\non financing from the banking system grew. However, the ability of the\nbanks to channel non-inflationary resources into the purchase of public\nsector securities was rising more slowly, and the Bank of Mexico itself\nRESTRICTED\nRESTRICTED\n- 4 -\nended up holding an increasing amount of these securities.\nAt the same time, the authorities undertook to compensate\nworkers for the rise in the cost of living and began to grant more\ngenerous and more frequent increases in the minimum wage, setting the\npattern for significantly larger raises in other wage categories. The\nlatest increase in minimum wages, effective early this year, averages\nabout 21 per cent (with a range of 17 to 34 per cent). This was the\nfirst increase in 15 months and, like earlier ones, it is fairly close\nto the rate of inflation in this 15-month period. It is bound to make\nit more difficult to reduce the inflation rate further in 1976.\nSteps began to be taken to correct the internal financial\ndisequilibrium in the latter part of 1974. In September of that year,\nthe reserve requirements of the banks were raised substantially. Sub-\nsequently, some administrative improvements were introduced to achieve\ngreater discipline on current government expenditures. In addition,\na number of taxes were substantially increased and a new 50 per cent\ntax on gasoline sales was instituted. Rates for public services also\nwere raised. At the same time, the decline in world interest rates\nbeginning in the latter part of 1974 made Mexican interest rates rela-\ntively more attractive, and this helped the financial institutions in\nthe country to attract a larger flow of funds than in the previous two\nyears, enabling them to absorb a greater volume of public sector se-\ncurities in 1975. Absorption of public securities by the financial\nRESTRICTED\nQERALD FORD LIBRARY\nRESTRICTED\n- 5 -\nTable 2\nMexico - Index of Consumer Prices\nin Mexico City\nin Selected Months Since December 1972\nAverage Monthly\nChange from\nGeneral\nChange Since\nSame Month\nIndex\nLast Month Shown\nPrevious Year\n(1968 = 100)\n(Per cent)\n(Per cent)\n1972 - December\n124.1\n1973 - March\n128.2\n+1.1\n+ 7.4\nJune\n132.6\n+1.1\n+ 9.8\nSeptember\n139.6\n+1.8\n+13.8\nDecember\n149.5\n+2.4\n+20.5\n1974 - March\n156.7\n+1.6\n+22.0\nJune\n161.2\n+1.0\n+21.6\nSeptember\n169.3\n+1.7\n+21.3\nDecember\n180.6\n+2.2\n+20.8\n1975 - March\n184.6\n+.7\n+17.8\nJune\n192.5\n+1.4\n+19.5\nSeptember\n198.7\n+1.1\n+17.4\nOctober\n200.3\n+.8\n+15.2\nNovember\n202.8\n+1.2\n+13.3\nDecember\n204.6\n+.9\n+13.3\n1976 - January\n207.9\n+1.6\n+13.3\nFebruary\n211.9\n+1.9\n+15.1\nSource: Banco de México, Indicadores Económicos\nFORD & 071839 LIBRARY\nRESTRICTED\nRESTRICTED\n- 6 -\ninstitutions was helped by the severe limitations on credit to the\nprivate sector brought about by the tightening in reserve require-\nments.\nHowever, the slowdown in economic activity as the year\nprogressed began to cause concern and, after mid-year, the Government\nagain stepped up the rate of public spending. For the year as a whole,\nabout 5 per cent of total public expenditures were financed directly\nby the Central Bank, and this financing accounted for about 75 per cent\nof the increase in the money supply (narrowly defined). The increase\nin M₁ in 1975 was 23 per cent, somewhat more than in the two previous\nyears, and about twice the pre-1973 rates.\nFor 1976, public spending is projected by the authorities\nto increase by only 10 per cent over the 1975 level. This compares\nwith a 30 per cent increase in public spending from 1974 to 1975. If\nthe recent rates of inflation continue unchanged during the year, this\nwould represent a cut in public sector spending in real terms. Even\nso, the fiscal deficit would amount to about 27 per cent of total public\nexpenditures. The authorities hope that three-fourths of this can be\nfinanced internally and without direct recourse to the Central Bank,\nand the rest externally. To avoid recourse to the Central Bank, credit\nto the private sector will have to remain tightly restricted. Under\nsuch a projection, the rate of growth of real GDP for the year would\nprobably not exceed the 1975 rate, and there should be some improvement\nin the balance. of payments on current account.\nBERALD FORD LIBRARY\nRESTRICTED\nRESTRICTED\n- 7 -\n-\nThere are reasons to question whether this projection will\nbe realized. The recent wage increases appear to exceed what would\nhave been consistent with a 10 per cent increase in public spending.\nMoreover, it is likely that public spending will exceed the projection\nif only because this is the last year of the term of office of the\nPresident of Mexico, and the outgoing Administration, like its pre-\ndecessors, will want to complete as many of the projects which it\nstarted as it possibly can. The American Embassy reports that private\nsector economists generally tend to doubt that public spending will be\nheld down as much as is officially projected. Private forecasters\nbelieve that there will be some recovery in real GDP growth, an in-\ntensification of inflation, and a further deterioration of the balance\nof payments on current account.\nAs regards the balance of payments, the worldwide economic\nrecovery should be reflected in an upturn in Mexican exports and tourist\nearnings. However, Mexican industry may find itself increasingly at a\ncompetitive disadvantage, after three years of inflation at rates in\nexcess of those in the United States, especially if this differential\nwidens in 1976. Also, some tourists may stay away because of Mexico's\nstand on Israel in the United Nations. The principal hope for increased\ncurrent account earnings lies in the petroleum sector and this could make\na substantial contribution. Production from the rich wells of southern\nMexico began in 1974 and has not yet reached its full potential. It has\nalready turned the country's position from that of a net importer of\nBERALD FORD LIBRARY\nRESTRICTED\nRESTRICTED\n- 8 -\npetroleum to one of a net exporter, as shown in table 3. Official\npolicy is \"to increase the rate of production /there/ to the highest\nsustainable rate consistent with current conventional practices, in\norder to make the maximum contribution to the current account of\nMexico's balance of payments.\nAt the same time, it will be difficult to hold down imports,\nespecially if it proves impossible to hold down public spending.\nEqually important, interest payments on the external debt are bound to\nrise as the debt increases. All told, any improvement this year in the\nbalance of payments on current account is likely, at best, to be rather\nmoderate, and there is a possibility that some further deterioration\nmay occur.\nFor the longer run, there are reasons for somewhat more optimism.\nA new Administration will take office in December, following the expected\nelection of former Finance Minister José López Portillo as President in\nJuly. The change in Administration may be the occasion for the adoption\nof stronger anti-inflationary measures if, as seems likely, the new\nPresident's Finance Ministry experience leads him to attach more im-\nportance than his predecessor to the financial consequences of his\npolitical decisions. In addition, in 1977, it is expected that a large\nnew copper mine now under development will begin to contribute substan-\ntially to the export picture.\n1/ Prospectus for $50 million Issue of Mexican Government Bonds, dated\nFebruary 19, 1976, p.14.\nRESTRICTED\nGERALD FORD LIBRARY\nRESTRICTED\n- 9 --\nTable 3\nMexico - Petroleum\nExports and Imports\n(in million dollars)\n1974\n197 5 P/\nExports\nImports\nBalance\nExports\nImports\nBalance\nCrude Oil\n61.9\n76.4\n- 14.5\n393.3\n--\n+393.3\nNatural Gas\n.1\n- -\n+ .1\n--\n--\n--\nRefined Products\n62.0\n240.5\n-178.5\n23.7\n225.7\n-202.0\nPetrochemicals\n9.5\n74.4\n- 64.9\n4.3\n57.5\n- 53.2\nTotal\n133.5\n391.3\n-257.8\n421.3\n283.2\n+138.1\nP/ preliminary\nSource: Prospectus for $50 million Issue of Mexican Government Bonds,\ndated February 19, 1976, P. 15.\nFORD is GERALD LIBRARY\nRESTRICTED\nRESTRICTED\n- 10 -\nBut until these developments occur, uncertainty will\ncontinue to produce periods of nervousness in the Mexican foreign ex-\nchange market, heightened by questions as to whether Mexico can raise\nenough financial resources in external markets to cover its needs.\nThe question whether the peso should be devalued is receiving increas-\ning attention in private circles. The principal argument in favor of\ndevaluation is that, over the last three years, the rate of inflation\nin Mexico has exceeded the rate' prevailing in the United States by\nan average of about 9 percentage points per year (as measured by the\nrespective consumer price indices) and a large differential is likely\nto continue for at least another year, and that this is interfering\nwith the competitiveness of Mexican exports. On the other side, it\nis argued that the dollar-peso rate has remained unchanged for 22 years,\nthat its alteration would be a shock to foreigners who have invested\nlarge amounts in peso-denominated accounts in Mexican financial institu-\ntions and would close this source of external financing for many years\n(for fear of new devaluations), that the internal burden of servicing\nthe country's huge foreign debt would be greatly increased, that exports\nof raw materials (still the bulk of the country's exports) are traded\nat world prices which would not be affected by a devaluation, that\nthere is little or no excess industrial capacity with which to increase\nmanufactured exports, and that a devaluation would set off an upsurge\nof inflation as prices of imported goods (in pesos) would increase and\nprices of domestically produced articles would go up in sympathy\nRESTRICTED\nFORD s LIBRARY 076839\nRESTRICTED\n- 11 -\n(presumably more for psychological reasons than in response to cost\nincreases) in effect leading to what is called the \"argentinization\"\nof the Mexican economy.\nThe authorities are determined to defend the current' dollar-\npeso exchange rate. Their principal line of defense is the country's\nreserves which amounted to more than $1.6 billion on March 29. The\ncountry's credit tranches in the International Monetary Fund total\nabout $626 million (including the 45 per cent addition approved at\nthe recent Jamaica meeting of the IMF's Interim Committee), but not\nall of it would be available without the adoption of corrective policy\nmeasures acceptable to the Fund. The Bank of Mexico's swap arrangement\nwith the Federal Reserve System is for $360 million, having been doubled\nin August 1975. Mexican drawings under the swap have occurred twice\nbefore, in August 1974 and in September 1975. Both drawings, for\n$180 million in 1974 and for $360 million in 1975, were repaid before\nthey came due at the end of three months. The Bank of Mexico also has\na swap arrangement with the US Treasury, the amount of which was in-\ncreased from $200 to $300 million at the end of 1975. But this cannot\nbe drawn upon until after the swap line with the System has been fully\ndrawn. The country appears to be able to continue to borrow in inter-\nnational markets, and this may be important in helping to repay short\nterm obligations.\nFORD FIBRARY\nRESTRICTED\nRESTRICTED\n- 12 -\nWhether the defense of the peso will ultimately succeed\nis likely to depend importantly on the ability of the authorities to\nprevent the fiscal position from getting out of hand, and eventually\nto restore a sound fiscal and monetary policy.\nPrepared by Yves Maroni\nDivision of the International Finance\nApril 14, 1976\nFORD & GERALD LIBRARY\nRESTRICTED\nBOARD OF GOVERNORS\nOF THE\nFEDERAL RESERVE SYSTEM\nOffice Correspondence\nDate April 16, 1976\nTo\nBoard of Governors\nSubject:\nFrom John E. Reynolds\nAttached for your information is a memorandum from Mr. Maroni\nreporting on \"Press Stories on the Possibility of Mexican Peso Devaluation.\nFORD & LIBRARY 976839\nBOARD OF GOVERNORS\nOF THE\nFEDERAL RESERVE SYSTEM\nOffice Correspondence\nDate April 15, 1976\nTo\nMr. Reynolds\nSubject: Press Stories on the Possibility\nFrom\nYves Maroni yn\nof Mexican Peso Devaluation\nRESTRICTED\nOn April 8, United Press International reported from\nWashington that a confidential IBRD report was urging a Mexican de-\nvaluation. According to UPI, the IBRD report said that Mexico must\nimprove its private investment climate and undertake \"radical changes\nin economic policy,\" including a devaluation, no later than 1977 to\ncope with its current severe fiscal and balance of payments deficits.\nUPI quoted the IBRD report as saying: \"While it may be unrealistic\nto expect radical changes of policy--including a possible devaluation--\nin the last year (1976) of the current administration, present indica-\ntions are that such policy changes cannot be delayed beyond 1977.\"\nUpon seeing this story, I called the U.S. Alternate Executive\nDirector in the IBRD, Mr. Hal Reynolds, who had not seen it and said\nthat he would investigate the matter. He later reported that the UPI\nstory was essentially correct, that the IBRD report in question was\na highly classified staff report intended for the exclusive use of the\nIBRD management, that it was not being distributed to the Executive\nDirectors, and that the IBRD management was furious at this leak,\nwas looking for its source, and would fire whoever leaked the report\nto UPI as soon as he or she could be identified.\nApart from this, there is another recent IBRD staff report\non the economy of Mexico which is generally critical of Mexican\nRESTRICTED\nLISBARY GERALD\nMR 95-1,\nKBH 4/12/96\nRESTRICTED\n- 2 -\npolicies but which does not mention the possibility of devaluation.\nThis report seems to be available to private banks in Mexico, although\nit is clearly labelled \"for official use only.\" In an apparent attempt\nto counter possible stories or rumors based on this report, the Bank\nof Mexico is said by the U.S. Embassy to have planted an article in\nmost Mexican newspapers, summarizing the IBRD report and interpreting\nit as highly laudatory of Mexico's ability to cope successfully with\nits economic problems and to maintain its high reputation in inter-\nnational financial markets.\nSeveral articles critical of Mexico and suggesting devalua-\ntion have also appeared in the U.S. financial press. The most recent\nis a three column piece on the editorial page of the Wall Street Journal\nof April 13, 1976. This article is headlined: \"Will Mexico Devalue\nthe Peso?\". A boxed summary near the top of the second column says:\n\"The move, which many fear might happen this Easter, could hurt thousands\nof Americans who have investments in Mexico.\" The Wall Street Journal\narticle is a well documented analysis of the factors which militate in\nfavor of a devaluation, without any discussion of the elements which\nmight enable the country to avoid it.\nApparently reacting to the Wall Street Journal article and\nto similar pieces elsewhere, sources close to the Mexican Government\nare said by Agence France Press, in an April 14 report, to have declared\nRESTRICTED\nGERALD FORD LIBRARY\nRESTRICTED\n- 3 -\nthat the United States--presumably meaning influential private groups\nin the United States--is embarked on a campaign against Mexico, attempt-\ning to create \"artificial problems\" in the economic field and particularly\nto induce a devaluation of the peso.\nNo report of press stories based on the IBRD leak to UPI\nhas come to my attention.\nRESTRICTED\nLIBRARY GERALD S\nRESTRICTED\n[8-76?]\nRESTRICTED\nHANDLE THE ATTACHED DOCUMENT IN ACCORDANCE WITH INTERNAL\nINFORMATION SECURITY PROCEDURES FOR RESTRICTED INFORMATION\nLISEARY GERALD R. FORD\nRESTRICTED\nRESTRICTED\nMexico Adopts Floating Exchange Rate and\nAnnounces Economic and Financial Program\nMexico's Secretary of Finance and Public Credit, Mr. Mario Ramon\nBeteta, announced late on August 31 that the fixed peso-dollar exchange\nrate was being abandonned, that the peso would now float in order to let\nmarket forces determine its level, subject to intervention to prevent\nspeculative and erratic fluctuations, and that the country's traditional\nfreedom of exchange would be maintained. He also announced that comple-\nmentary measures in the economic and financial field would be taken to\nhelp secure as many as possible of the potential advantages from the new\nexchange policy, and to hold the unfavorable impacts to a minimum. A\ntelegram received by Chairman Burns from Mr. Ernesto Fernandez Hurtado,\nDirector General of the Bank of Mexico, summarizes the action taken and\nthe planned measures. (See Attachment.)\nBackground on Mexican Economic Situation\nThe Mexican action is the culmination of a steady deterioration\nin the country's external financial position, in part as a result of\ninternally generated inflationary pressures and in part as a consequence\nof economic and financial developments in the rest of the world. As shown\nin table 1, the balance of payments deficit on current account rose very\nsharply from 1972 to 1975. The value of imports surged partly because\nof the world-wide inflation and partly because of overheating of the\neconomy. The value of exports also rose, but less rapidly. Export growth\nwas slowed in the last part of 1974 and in 1975 by the world recession\nRESTRICTED\nLIBRARY GERALD R. FORD\nRESTRICTED\n- 2 -\nwhich also brought about a drop in the country's important tourist\nearnings. The service account deteriorated as interest payments on\nthe growing external debt rose. External borrowings were stepped up,\nand, until this year, Mexico continued to add to its international re-\nserves, as may be seen in table 2. At the end of 1975, the external\ndebt was estimated at $20-$22 billion, consisting of public sector debts\nof about $14.3 billion (of which $11.3 billion had a maturity of one\nyear or more) and private sector debts of $6-$8 billion. The total\nexternal debt may well have climbed by another $2 billion since the\nend of 1975.\nDoubts began to emerge this Spring as to whether the disequil-\nibrium could be corrected without a devaluation of the peso, and capital\nflight began to occur. It seemed lilely that Mexico's exports would\nturn up, reflecting the economic recovery in the industrial countries,\nand that petroleum exports would continue to grow rapidly. But concern\nappeared about the feasibility of holding down imports, especially if\npublic spending rose more than planned. Interest payments also were ex-\npected to go up as the external debt rose further. In addition, questions\nwere asked as to whether, after three years of inflation at rates in\nexcess of those in the United States (see table 3), Mexican industry\nmight find itself at a substantial competitive disadvantage, a condition\nwhich might hamper some exports while encouraging imports In this\nconnection, it was noted that the dollar's appreciation against other\nmajor currencies over the last year implied an effective appreciation of\nthe Mexican peso.\nRESTRICTED\nGERALD FORD LIBRARY\nRESTRICTED\n- 3 -\nAt first, the Mexican authorities attempted to finance the\ncapital flight through new external borrowings, hoping for a return\nof confidence and a reflow of capital as the performance of the\neconomy improved. But the performance did not improve sufficiently,\nand in particular the fiscal situation remained precarious and the\nrate of price increase failed to decline below the 13 per cent level\nof 1975. Manufacturing production which rose more slowly in 1975, re-\nmained somewhat sluggish in the first part of 1976 as well, except for\na good month in March, as may be seen in table 4.\nThe fiscal performance, which is shown in table 5, was\ncharacterized by growing deficits of the Federal Government, and its\ndecentralized agencies. These deficits reflected a conscious policy,\nthrough public spending, to maintain a rapid rate of economic growth\n(see table 6). Since the last half of 1973, incomes policy based on\ngovernment wage actions fully compensated workers for the rise of the\ncost of living. The rapid rise in wages sharply eroded the competitive\nadvantage that in-bond assembly plants located on the Mexican side of\nthe border with the United States had enjoyed. As a result, a substan-\ntial number of such plants were shut down or their activities were trans-\nferred to other countries where relatively low wages continued to prevail.\nWhile the Bank of Mexico undertook to tighten credit policy in\nthe latter part of 1974, the impact of the world recession on Mexico led\nto a further stepping up of public spending around the middle of 1975.\nRESTRICTED\nGERRALO FORD LIBRARY\nRESTRICTED\n- 4 -\nThis year, while the authorities announced that they intended to limit\npublic spending, the consequences of a substantial increase in wages\ngranted in January and the impact of the politically motivated expendi-\ntures traditionally associated with the end of a Presidential term appear\nto have prevented the desired improvement from materializing.\nMoney supply, which rose at rates averaging about 11 per cent\nper year in the period 1966-71, increased at more than 20 per cent a year\nin the period 1972-75, as may be seen in table 7. In the first five\nmonths of 1976, it rose by about 8.2 per cent, compared to an increase\nof 9.4 per cent in the same months of 1975. In May, it was still about\n20 per cent higher than a year earlier.\nAssessment of the Exchange Rate Action and the Supporting 13-Point Program\nPresident Echeverria, delivering his annual State of the Nation\naddress to the Mexican Congress on September 1, listed the following\nobjectives that the Government of Mexico hopes to achieve through the\nfloating of the peso and the accompanying measures:\n(1) to recover and preserve the competitiveness of Mexico's\nexports of goods and services,\n(2) to protect the purchasing power of the popular classes,\n(3) to prevent excess profits,\n(4) to protect the financial health of enterprises so that\nthey may continue helping to create jobs,\n(5) to control the public deficit, and\n(6) to regulate the growth of credit.\nRESTRICTED\nFORD is LIBRARY 937839\nRESTRICTED\n- 5 -\nPresident Echeverria stressed that, to achieve the first\nobjective, Mexico must ensure that the increase in domestic prices\nand costs would be substantially lower than the percentage change in the\nexchange rate. He listed the adoption of export surtaxes, the reduction\nof export tax rebates, the reduction of import tariffs and the elimination\nof unnecessary import controls as contributing to this objective. But\nthe measures intended to protect the purchasing power of the popular\nclasses, particularly the adoption of a wage policy aimed mainly at main-\ntaining the real purchasing power of salaries, may make it impossible to\nensure that the increase in domestic prices and costs will in fact be sub-\nstantially less than the percentage change in the exchange rate.\nElaborating on the wage policy in his State of the Nation address,\nPresident Echeverria said that Government civilian and military pay and\npensions would be raised on September 30 in an amount sufficient to restore\ntheir purchasing power to compensate for the deterioration since their last\nadjustment (on January 1, 1976) and in the proportion in which their\npurchasing power is affected by the increase in the price level since\nthat time. He added that his administration would promote the extension\nof this salary increase as soon as possible to workers in the rest of the\neconomy.\nIf prices of imported goods rise substantially in spite of the\nreduction of import tariffs, (and even more so if prices of domestic goods\nand services rise in sympathy), the application of this wage policy over\na period of time could well severely erode the benefits from the initial\nFORD\nRESTRICTED\nGERALD\nLIBRARY\nRESTRICTED\n- 6 -\ncurrency depreciation and put new pressures on the exchange rate, leading\nto a further depreciation. The new program calls for the imposition and\nstrict application of price controls for raw materials and basic consumption\narticles, but if these controls involve fixing prices at unrealistically low\nlevels, a black market might develop and social unrest might cause the price\ncontrol arrangements to break down and induce the authorities to grant even\nmore generous wage and salary increases. (The official increase in the\nminimum wage which sets the standard for many wage settlements early this\nyear exceeded the rate of increase in the price level since the previous\nadjustment.) Recent reports from the U.S. Embassy in Mexico City also\nindicated that privately negotiated wage settlements so far this year were\nnot as moderate as would have been needed to reduce the rate of inflation\nto any significant extent. In the final analysis, the success of the new\nprogram will depend on the attitude of the organized labor movement toward\nit and on the determination of the Government to make the program effective.\nThe other key to whether the new program will achieve its objectives\nlies in the ability of the authorities to reduce substantially the fiscal\ndeficit. While the cause of monetary policy will be important also, the\ncentral bank is constrained in its policies by the actions of the govern-\nment, and, in practical terms, it cannot refuse the government credit.\nThe adoption of export surcharges and of an excess profits tax\nand the elimination of the export tax rebates should work toward the fiscal\nobjective. However, the reduction of import tariffs may offset this gain,\nRESTRICTED\nBERALD FORD LIBRARY\nRESTRICTED\n- 7 -\nat least in part. (In 1975 import taxes accounted for about 7 per cent\nof central government revenue and export taxes less than 2 per cent.)\nMore importantly, the efforts to hold down public spending will be crucial.\nIn his State of the Nation address, President Echeverria promised much\nmore strict budgeting and discipline in adhering to the budget than has\nexisted in the past. But he said that the reduction of the deficit must\nnot decrease the rate of public investment in productive activities and\nsocial services. If, as seems likely, he was speaking of the real rate\nof public investment, avoiding a reduction is certain to mean an absolute\nincrease in spending, in as much as the wage costs of investments are sure\nto rise and so are the peso costs of their imported components.\nIn his speech President Echeverria also added that the deficit\nmust be held to non-inflationary limits so that financial institutions may\nbe encouraged to lend adequately to the private sector. The continuance of a\nheavy role for the public sector in productive activities and in the\nprovision of social services, may therefore, make it difficult to limit the\nsize of the deficit. In fact, if adequate supplies of basic necessities--\nprimarily food -- through the state-controlled facilities are provided at\ncontrolled prices, the decentralized agency involved (known as CONASUPO)\nwill in all probability run larger deficits than in the past and will require\nlarger Federal subsidies to cover them. The extent to which this will impinge\nupon the effort to reduce the public sector deficit will largely depend on\nthe price response of the economy in general. It is noteworthy that, apart\nRESTRICTED\nGERALD FORD LIBRARY\nRESTRICTED\n- 8 -\nfrom the new export surcharges and the excess profits tax, President\nEcheverria did not mention the possibility of raising any other taxes.\nIt is possible that he wanted to leave this unpleasant task to his\nsuccessor- former Finance Minister Lopez Portillo--who is due to take\noffice on December 1. But given the unpleasant news with which he was\ndealing, he might have at least alluded to the need to raise taxes in\ncase the efforts to hold down public spending proved to be insufficient.\nAs regards the balance of payments, a depreciated peso should\nencourage exports and the inflow of foreign tourists, while discouraging\nimports. The response of tourists is likely to be noticed more rapidly\nthan that of merchandise exports and imports. Indeed, tourists may be more\nsensitive to exchange rate changes than traders in merchandise, A number\nof Mexico's exports, especially of raw materials, may be facing a relatively\ninelastic demand while Mexico's demand for many imports may also be\nrelatively inelastic. Excess capacity in export industries, other than the\nborder assembly plants, is also reportedly low. Therefore, any merchandise\ntrade improvement may be limited or, at least, delayed.\nIf Mexico succeeds in holding wage and price increases to substan-\ntially smaller proportions than the rate of currency depreciation, one of\nthe benefits of the peso's depreciation and the accompanying program may be\na revival of the attractiveness of Mexico's border area as the possible site\nfor assembly plants to serve the U.S. market. If so, the earnings from these\nassembly plants, which suffered in recent years, could once again experience\nrapid growth.\nFORD\nRESTRICTED\nGERALD\nLIBRARY\nRESTRICTED\n- 9 -\nFinally, as already mentioned, President Echeverria will\nbe succeeded by President-elect Lopez Portillo on December 1. While\nLopez Portillo appears likely to continue many of the policies of his\npredecessor, he will surely want to develop his own policies and\norientation. This may mean that the early months of 1977 will be a\nperiod of reorganization and design of new programs. Consequently,\nthe pace of public spending could slow down of its own accord, for\nseveral months at least. As a former Minister of Finance, President-\nelect Lopez Portillo is perhaps more aware than his predecessor of the\nmagnitude of the task ahead and of the kinds of efforts that are needed.\nThis may augur well for the recovery of the Mexican position. But the\npast is seldom a sure guide to the future, and Mr. Lopez Portillo's\nactions as President may diverge markedly from what he would have advo-\ncated as Minister of Finance in the same circumstances. In particular,\nthe new 13-point program of the present Mexican government may prove to\nbe an imperfect guide to Mexican policy after December 1.\nPrepared by: Yves Maroni\nDivision of International Finance\nSeptember 3, 1976\nLIBRATY GERALD R. FORD\nTable 1\nMEXICO - Balance of Payments\n1972-76\n1972\n1973\n1974\n19751/\n19762/\n19752/\n19762/\nYear\nYear\nYear\nYear\nYear\n1st half\n1st half\n(in billion dollars)\n(in million dollars)\nMerchandise Exports\n+1.9\n-2.4\n+3.4\n+3.4\n+4.0\n1,705.0\n2,012.8\n(of which, petroleum)\n(+ -)3/\n(+ -)3/\n(+0.1)\n(+0.4)\n(+0.7)\n(n.a.)\n(n.a.)\nMerchandise Imports\n-2.6\n-3.6\n-5.7\n-6.3\n-6.2\n2,947.8\n2,950.0\n(of which, petroleum)\n(-0.1)\n(-0.3)\n(-0.3)\n(-0.2)\n(-0.2)\n(n.a.)\n(n.a.)\nTrade Balance\n-0.7\n-1.2\n-2.3\n-2.8\n-2.2\n-1,242.8\n-937.2\nServices (net)\n-0.2\n-0.3\n-0.7\n-1.3\n-1.6\n-271.5\n-573.8\nTravel (net)\n(+0.6)\n(+0.8)\n(+0.9)\n(+0.8)\n(+0.9)\n(n.a.)\n(n.a.)\nInvestment Income (net)\n(-0.8)\n(-1.1)\n(-1.6)\n(-2.0)\n(-2.3)\n(n.a.)\n(n.a.)\nOther (net)\n(+ -)3/\n(+0.1)\n(+ -)3/\n(-0.2)\n(-0.2)\n(n.a.)\n(n.a.)\nPrivate Unrequited Transfers (net)\n+0.1\n+0.1\n+0.1\n+0.1\n+0.1\n+ _3/\n+ _3/\nBalance on Current Account\n-0.8\n-1.4\n-2.9\n-4.1\n-3.7\n-1,614.3\n-1,511.0\nGovernment Unrequited Transfers (net)\n+ -3/\n+ -3/\n+ -3/\n+ -3/\nLong-Term Capital (net)\n+0.8\n+1.8\n+3.0\n+4.3\nDirect Investment in Mexico (net)\n(+0.3)\n(+0.5)\n(+0.7)\n(+0.7)\nOther Long Term Private Capital (net)\n(+ -)3/\n(+0.1)\n(+0.6)\n(+0.9)\nPublic Sector Borrowings (net)\n(+0.5)\n(+1.3)\n(+1.8)\n(+2.7)\nSubscriptions to IBRD and IDB\n(--)\n(-.1)\n(--)\n(-)\nShort-Term Capital (net)\n+0.1\n-0.3\n+0.2\n+0.5\nPrivate Non-Bank Capital (net)\n(+0.1)\n(-0.2)\n(-0.4\n(+0.3)\nBank Capital (net)\n(- -)3/\n(-0.1)\n(+0.7)\n(+0.2)\nOfficial Foreign Assets (net) ; (Increase:-)\n-0.3\n-0.1\n- _3/\n-0.2\nErrors and Omissions (net)\n+0.2\n+ -3/\n-0.4\n-0.6\nFORD LIBRAR\n1/ Preliminary\n2/ Projected\n3/ Less than $50 million\nSource: International Monetary Fund and Federal Reserve Board Staff estimates.\nTable 2\nMEXICO - International Reserves,\nForeign Trade and Tourist Earnings\n(in million dollars)\nInternational\nMerchandise Trade\nNet Tourist\nReserves\nExports\nImports\nBalance\nEarnings\n(at end of\n(for\n(for\n(for\n(for\nperiod)\nperiod)\nperiod)\nperiod)\nperiod)\n1970\n744\n1,281.3\n2,326.8\n-1,045.5\n+539.2\n1971\n952\n1,363.4\n2,254.0\n- 890.6\n+643.2\n1972\n1,164\n1,665.3\n2,717.9\n-1,052.6\n+749.9\n1973\n1,356\n2,070.5\n3,813.4\n-1,742.9\n+978.9\n1974P/\n1,395\n2,850.0P/\n6,056.7P/\n-3,206.7₽/\n+1,060.9\n1975P/\n1,533\n2,858.6₽/\n6,580.2P/\n-3,721.6P/\n+988.0\n1974 - Q1\n1,540\n675.5P/\n1,238.2P/\n-562.7₽/\n+296.6\nQ2\n1,547\n696.2P/\n1,523.5P/\n-831.3P/\n+261.0\nQ3\n1,354\n669.4P/\n1,508.02/\n-838.6P/\n+234.2\nQ4\n1,395\n808.9P/\n1,787.0P/\n-978.1P/\n+269.1\n1975 - Q1\n1,479\n656.3P/\n1,424.52/\n-768.2₽/\n+281.3\nQ2\n1,399\n768.1P/\n1,663.8P/\n-895.7P/\n+236.3\nQ3\n1,320\n672.3₽/\n1,602.6P/\n-930.3P/\n+217.3\nQ4\n1,533\n761.9P/\n1,889.3P/\n-1,127.4P/\n+252.9\n1976 - Jan.\n1,424\n264.2P/\n480.4P/\n-216.2₽/\n+ 94.5\nFeb.\n1,592\n235.1P/\n436.4P/\n-201.3P/\n+100.4\nMar.\n1,501\n281.7P/\n485.2P/\n-203.5P\n+107.6\nApril\n295.8P/\n566.2P/\n-270.4P/\n+ 77.1\nMay\n+ 75.1\n- - -\nAug.\n1,3611\n1/ Figure announced by President Echeverria in his State of the Nation address\nto the Mexican Congress on September 1, 1976. Includes an unspecified, but\nprobably small, amount of silver.\np/ Preliminary.\nSources: International Monetary Fund, International Financial Statistics,\nand Bank of Mexico, Indicadores Economicos.\nFORD\nGERALD\nLIBRARY\nTable 3\nMEXICO - Index of Consumer Prices\nin Mexico City\nin Selected Months Since December 1972\nAverage Monthly\nChange from\nGeneral\nChange Since\nSame Month\nIndex\nLast Month Shown\nPrevious Year\n(1968 = 100)\n(Per cent)\n(Per cent)\n1972 - December\n124.1\n1973 - March\n128.2\n+1.1\n+ 7.4\nJune\n132.6\n+1.1\n+ 9.8\nSeptember\n139.6\n+1.8\n+13.8\nDecember\n149.5\n+2.4\n+20.5\n1974 - March\n156.7\n+1.6\n+22.0\nJune\n161.2\n+1.0\n+21.6\nSeptember\n169.3\n+1.7\n+21.3\nDecember\n180.6\n+2.2\n+20.8\n1975 - March\n184.6\n+.7\n+17.8\nJune\n192.5\n+1.4\n+19.5\nSeptember\n198.7\n+1.1\n+17.4\nOctober\n200.3\n+.8\n+15.2\nNovember\n202.8\n+1.2\n+13.3\nDecember\n204.6\n+.9\n+13.3\n1976 - January\n207.9\n+1.6\n+13.3\nFebruary\n212.0\n+2.0\n+15.2\nMarch\n214.7\n+1.3\n+16.3\nApril\n215.9\n+.6\n+15.6\nMay\n217.5\n+.7\n+15.3\nJune\n218.1\n+.3\n+13.3\nJuly\n219.8\n+.8\n+13.2\nSource: Banco de Mexico, Indicadores Económicos\nFORD & 07V835 LIBRARY\nTable 4\nMEXICO - Index of\nManufacturing Production in\nSelected Months Since December 1972\nAverage Monthly\nChange from\nIndex\nChange Since\nSame Month\n1968 = 100\nLast Month Shown\nPrevious Year\n(per cent)\n(per cent)\n1972 - December\n108.8\n-4.1\n+4.7\n1973 - March\n129.4\n+13.1\n+14.8\nJune\n123.9\n-3.6\n+7.8\nSeptember\n115.0\n-8.95\n+5.4\nDecember\n126.0\n-1.0\n+15.8\n1974 - March\n137.8\n+9.2\n+6.5\nJune\n127.8\n-9.9\n+3.15\nSeptember\n121.9\n-6.6\n+6.0\nDecember\n125.0\n-2.65\n-.8\n1975 - March\n124.8\n-3.2\n-9.4\nJune\n136.4\n-3.8\n+6.7\nSeptember\n131.5\n-3.5\n+7.9\nDecember\n130.6\n-2.5\n+4.5\n1976 - January\n137.4\n+5.2\n+10.1\nFebruary\n139.0\n+1.2\n+1.9\nMarch\n150.9\n+8.6\n+14.75\nApril\n139.2\n-7.75\n+6.6\nSource: Banco de Mexico, Indicadores Economicos.\nLIBRARY GERALD FORD\nTable 5\nMEXICO - Public Sector\nRevenues and Expenditures\nsince 1971\n(in billions of pesos)\nFederal Government\nDecentralized Agencies\nRevenues\nExpenditures\nDeficit\nRevenues\nExpenditures\nDeficit\n1971\n36.5\n41.3\n- 4.8\n48.4\n65.5\n-17.1\n1972\n42.3\n59.1\n-16.7\n56.6\n71.5\n-14.9\n1973\n53.8\n81.2\n-27.4\n74.2\n101.8\n-27.6\n1974\n72.9\n104.1\n-31.2\n107.4\n140.7\n-33.3\n1975\n103.1\n145.1\n-42.0\n128.2\n1/\n160.6\n1/\n-32.4\n1/\n1974 - Q₁\n15.3\n18.9\n- 3.6\nQ₂\n17.8\n21.3\n- 3.5\nQ3\n17.8\n24.2\n- 6.4\nQ4\n21.9\n39.7\n-17.8\n1975 - Q₁\n22.8\n31.4\n- 8.6\nQ2\n26.3\n33.3\n- 7.0\nQ3\n25.0\n34.6\n- 9.6\nQ4\n29.0\n45.8\n-16.8\n1976 Jan.\n10.1\n9.3\n+ 0.8\nFeb.\n7.4\n11.7\n- 4.3\nMar.\n11.5\n18.4\n- 6.9\nApr.\n10.4\n13.7\n- 3.3\nMay\n13.7\n14.5\n- 0.8\n1/ Budget.\nSources: Banco de Mexico, Indicadores Economicos, and Government of Mexico,\nProspectus on $50 million bond issue, dated February 19, 1976.\nLIBRARY GERALD FORD\nTable 6\nMEXICO - Rate of Growth of\nReal Gross Domestic Product\n(Percentages)\n1961-70 ave.\n7.0\n1967\n6.3\n1968\n8.1\n1969\n6.3\n1970\n6.9\n1971\n3.4\n1972\n7.3\n1973\n7.6\n1974\n5.9\n1975\n4.0\nSource: Bank of Mexico\nGERALD R. FORD LIBRAPT\nTable 7\nMEXICO - Money Supply\nat End of Selected Months\nSince December 1972\nAmount\n1/\nPercentage\nPercentage\nOutstanding\nChange Since\nChange Since\n(in billions\nLast Month\nSame Month\nof pesos)\nShown\nPrevious Year\n1972 - December\n57,859\n+2.0\n+21.2\n1973 - March\n61,956\n+3.5\n+24.1\nJune\n64,701\n+1.6\n+24.6\nSeptember\n68,391\n+.4\n+25.0\nDecember\n71,658\n- .3\n+23.85\n1974 - March\n75,150\n+1.85\n+21.3\nJune\n79,540\n+2.3\n+22.9\nSeptember\n82,691\n+2.8\n+20.9\nDecember\n87,412\n+3.8\n+22.0\n1975 - March\n92,300\n+3.2\n+22.8\nJune\n98,151\n+2.4\n+23.4\nSeptember\n99,232\n- .4\n+20.0\nDecember\n105,972\n+3.2\n+21.2\n1976 - January\n107,050\n+1.0\n+22.1\nFebruary\n108,621\n+1.5\n+21.5\nMarch\n109,269\n+.6\n+18.4\nApril\n111,264\n+1.8\n+19.85\nMay\n114,708\n+3.1\n+19.7\n1/ Seasonally adjusted\nSource: Banco de Mexico, Indicadores Economicos.\nFORD & LIBRARY 97V839\nAT : HINGTON\n1976\nAUG\n0009-966\nAM 8 17\n:14 EDI+\n76643 FEDR U1+\n146643 FEDR UI\nBOARD U: GOVERNORS\n1775806X1C0BME\nOF THE\n145 MEXICO DF AUGUST 31 1976 HS 26.47\nFEDERAL IFEM RESERVE SYSTEM\nTTN PR ARTHUR BURNS\nCHAIRMAN OF THE FEDERAL RESERVE BOARD\nWASHINGTON DC\nLEASE 38 ADVISED THAT THE GOVERNMENT OF MEXICO HAS DECIDED TO\nBANDON PRESENT RATE OF EACHANGE OF THE MEXICAN PESO WITH RESPECT\nU THE U.S. DOLLAR (STOP)\nHEREFORE, AS FROM 24 HOURS MEXICO CITY TIME AUGUST 31TH., 1976\nHE BANK OF MEXICO WILL NO LONGER OBSERVE MARGINS AND WILL INTERVENE\nAINLY TO PREVENT ERRATIC AND SPECULATIVE FLUCTUATIONS. STOP THE\nDVERNENT OF MEXICO HAS ALSO DECIDED TO MAINTAIN THE TRADITIONAL\nITT World Communical\nVIE CONVERTIBILITY 01 THE MEXICAN PESO (STOP)\n100 REGULATED FLOATING OF THE MEXICAN PESU WILL BE ACCOMPANIED BY\nSHORT AND LONG TERM ECONOMIC PROGRAM THAT WILL PRESERVE THE\nOMPETITIVENESS OF MEXICAN ECONOMY (STOP) THE PROGRAM INCLUDES\nOLLOWING MEASURES: 1) EXPORT SURTAX TO ABSURB MOST Ji. EACHANGE\nROFITS AND PREVENT INTERNAL INCREASE or PRICES (STOP) 2SUBSTANTIAL\nREDUCTION OF TAX REBATE SYSTEM FOR EXPORTS (STOP) 3) ELIMINATION OF\nINNECESSARY IMPORT CONTROLS AND REDUCTION Or IMPORT TAXES FOR RAW\nATERIALS AND BASIC IMPORTS TO REDUCE PRESSURES ON INTERNAL COSTS\nIND PRICES (STOP) 4) A WAGE POLICY AIMED MAINLY AT MAINTAINING THE\nREAL PURCHASING VALUE OF SALARIES (STOP) 5) PRICE CONTROLS FOR RAW\nATERIALS AND BASIC CONSUMPTION ARTICLES WILL BE STRICTLY APPLIED\n(STOP) PRICES OF GOODS SOLD BY CONASUPO WILL NOT BE CHANGED BUT\nBUARANTEE PRICES TO AGRICOLIURAL PRODUCERS WILL BE ADJUSTED BY\nINCREASE IN COSTS (STOP) ()) INTEREST RATES FOR SMALL SAVERS WILL\nSE INCREASED (STOP) 7) MEASURES WILL BE ADOPTED AND STRICTLY APPLIED\nI'U PREVENT SPECULATION WITH BASIC ARTICLES AND RAW MATERIALS (STOP)\n8) SPECIAL EXCESS PROFITS PAX WILL BE PROPOSED TO COMGRESS TO\nABSORBE EXTRAORDINARY OR EXCESS PROFITS DERIVED FROM EXCHANGE\nMEASURES OR INCREASE IN PRICES (STOP) 9) SPECIAL FISCAL TREATMENT\nTILL BE GIVEN TO PRIVATE ENTERPRISES THAT MAY BE SERIOUSLY AFFECTED\nor EXCHANGE MEASURES AND THE CAPITAL STRUCTURE OF THE PUBLIC\nINTERPRISES WILL BE SUPPORTED (STOP) 10) THE DEFICIT OF THE PUBLIC\nSECTOR WILL BE REDUCED THROUGH STRICT PROGRAMMING AND SURVEILLANCE\nJF PUBLIC EXPENDITURE TO ATTAIN WUANTITATIVE GOALS RELATED TO THE\nADJUSTMENT PROCESS OF THE ECONOMY, AS WELL AS BY AN INCREASE IN\nREVENUES OF PUBLIC SECTOR (STOP) 11) A SYSTEM OF REGULATED CREDIT\nGROWTH WILL BE ESTABLISHED BY THE BANK OF MEXICO FOR USE BY\nPRIVATE AND PUBLIC SECTORS (STOP) 12) BANK OF MEXICO WILL GIVE\nMEXICAN CREDIT INSTITUTIONS THE NECESSARY LIQUIDITY TO ASSURE THAT\nALL COMMITMENTS WILL AS USUAL BE TIMELY MET (STOP) 13) THE\nMINANCIAL RESOURCES OF THE IMF AND U.S. TREASURY WILL SUPPORT\nWorld naalaations Inc.\nTHE NEW ECONOMIC PROGRAM. (STOP)\nWITH THE ABOVE MEASURES AND NEW EXCHANGE POLICY MEXICAN GOVERNMENT\nHOPES TO ATTAIN ITS BASIC AND FUNDAMENTAL ECONOMIC OBJECTIVES\n(STOP)\nBEST\nREGARDS (STOP) ERNESTO FERNANDEZ HURTADO\nFORD\nBANXICO\nGERALD,\nLIBRARY\nWELL RECD??\n+\n446043 FEDR 01\nITT World Com\nHurtado\nAT WASHINGTON\nD.C. Phone 296-6200\n1976 AUG AM 817\n2244 EDT+\n440043 FEDR UI+\n440043 FEDR UI\n1775806XICOBME\nBOARD OF GOVERNORS\nOF\nT 145 MEXICO DF AUGUST 31 1976 HS 20.47 SYSTEM\nFEDERAL IFEM RESERVE\nATTN MR ARTHUR BURNS\nCHAIRMAN OF THE FEDERAL RESERVE BOARD\nWASHINGTON DC\n1709 L St. N.W. Washington D.C. Phone 296-6200\nPLEASE BE ADVISED THAT THE GOVERNMENT OF MEXICO HAS DECIDED TO\nABANDON PRESENT RATE OF EXCHANGE OF THE MEXICAN PESO WITH RESPECT\nTO THE U.S. DOLLAR (STOP)\nTHEREFORE, AS FROM 24 HOURS MEXICO CITY TIME AUGUST 31TH., 1976\nTHE BANK OF MEXICO WILL NO LONGER OBSERVE MARGINS AND WILL INTERVENE\nMAINLY TO PREVENT ERRATIC AND SPECULATIVE FLUCTUATIONS. STOP THE\nGOVERNMENT OF MEXICO HAS ALSO DECIDED TO MAINTAIN THE TRADITIONAL\nFREE CONVERTIBILITY OF THE MEXICAN PESO (STOP)\nTHE REGULATED FLOATING OF THE MEXICAN PESO WILL BE ACCOMPANIED BY\nSHORT AND LONG TERM ECONOMIC PROGRAM THAT WILL PRESERVE THE\nCOMPETITIVENESS OF MEXICAN ECONOMY (STOP) THE PROGRAM INCLUDES\nITT World Communications Inc.\nFOLLOWING MEASURES: 1) EXPORT SURTAX TO ABSORB MOST OF EXCHANGE\nPROFITS AND PREVENT INTERNAL INCREASE OF PRICES (STOP) 2)SUBSTANTIAL\nREDUCTION OF TAX REBATE SYSTEM FOR EXPORTS (STOP) 3) ELIMINATION OF\nUNNECESSARY IMPORT CONTROLS AND REDUCTION OF IMPORT TAXES FOR RAW\nMATERIALS AND BASIC IMPORTS TO REDUCE PRESSURES ON INTERNAL COSTS\nAND PRICES (STOP) 4) A WAGE POLICY AIMED MAINLY AT MAINTAINING THE\nREAL PURCHASING VALUE OF SALARIES (STOP) 5) PRICE CONTROLS FOR RAW\nMATERIALS AND BASIC CONSUMPTION ARTICLES WILL BE STRICTLY APPLIED\n(STOP) PRICES OF GOODS SOLD BY CONASUPO WILL NOT BE CHANGED BUT\nGUARANTEE PRICES TO AGRICULTURAL PRODUCERS WILL BE ADJUSTED BY\nINCREASE IN COSTS (STOP) 6) INTEREST RATES FOR SMALL SAVERS WILL\nBE INCREASED (STOP) 7) MEASURES WILL BE ADOPTED AND STRICTLY APPLIED\nTO PREVENT SPECULATION WITH BASIC ARTICLES AND RAW MATERIALS (STOP)\n8) SPECIAL EXCESS PROFITS TAX WILL BE PROPOSED TO CONGRESS TO\n1709 L St. N.W. Washington D.C. Phone 296-6200\nABSORBE EXTRAORDINARY OR EXCESS PROFITS DERIVED FROM EXCHANGE\nMEASURES OR INCREASE IN PRICES (STOP) 9) SPECIAL FISCAL TREATMENT\nWILL BE GIVEN TO PRIVATE ENTERPRISES THAT MAY BE SERIOUSLY AFFECTED\nBY EXCHANGE MEASURES AND THE CAPITAL STRUCTURE OF THE PUBLIC\nENTERPRISES WILL BE SUPPORTED (STOP) 10) THE DEFICIT OF THE PUBLIC\nSECTOR WILL BE REDUCED THROUGH STRICT PROGRAMMING AND SURVEILLANCE\nOF PUBLIC EXPENDITURE TO ATTAIN QUANT ITATIVE GOALS RELATED TO THE\nADJUSTMENT PROCESS OF THE ECONOMY, AS WELL AS BY AN INCREASE IN\nREVENUES OF PUBLIC SECTOR (STOP) 11) A SYSTEM OF REGULATED CREDIT\nGROWTH WILL BE ESTABLISHED BY THE BANK OF MEXICO FOR USE BY\nPRIVATE AND PUBLIC SECTORS (STOP) 12) BANK OF MEXICO WILL GIVE\nMEXICAN CREDIT INSTITUTIONS THE NECESSARY LIQUIDITY TO ASSURE THAT\nALL COMMITMENTS WILL AS USUAL BE TIMELY MET (STOP) 13) THE\nFINANCIAL RESOURCES OF THE IMF AND U.S. TREASURY WILL SUPPORT\nITT World Communications Inc.\nTHE NEW ECONOMIC PROGRAM. (STOP)\nWITH THE ABOVE MEASURES AND NEW EXCHANGE POLICY MEXICAN GOVERNMENT\nHOPES TO ATTAIN ITS BASIC AND FUNDAMENTAL ECONOMIC OBJECTIVES\n(STOP)\nBEST\nREGARDS (STOP) ERNESTO FERNANDEZ HURTADO\nBANXICO\ntions Inc.\nWELL RECD??\nGERALO FORD (18848)\n*\n440043 FEDR UI\n1775 806XICOBME\n1709 L St. N.W.\nUSTREAS 64131\n1775886XICOBME\nT 158 MEXICO DF AUGUST 31 1976 RHB HRS 23.50\nMR EDWIN YEO\nRH.2049-C HT Ril. 2049-C IT BLDG.\n60 835 3786\nUNDERSECRETARY OF THE TREASURY\nSHOLLVO\nDEPARTMENT OF TREASURY\nWASHINGTON DC\nIN ACCORDANCE WITH THE LETTER AND THE SPIRIT OF THE MONETARY\nSTABILIZATION AGREEMENT BETWEEN BANK OF MEXICO AND U.S. TREASURY\nTO KEEP EACH OTHER INFORMED OF ECONOMIC MEASURES ADOPTED, I HEREBY\nINFORM YOU THAT GOVERNMENT OF MEXICO HAS DECIDED TO ABANDON\nPRESENT RATE OF EXCHANGE OF THE MEXICAN PESO WITH RESPECT TO THE\nU.S. DOLLAR. (STOP)\nTHEREFORE, AS FROM 24 HOURS MEXICO CITY TIME AUGUST 31TH., 1976\nTHE BANK OF MEXICO WILL NO LONGER OBSERVE MARGINS AND WILL INTERVINE\nMAINLY TO PREVENT ERRATIC AND SPECULATIVE FLUCTUATIONS. THE\nGOVERNMENT OF MEXICO HAS ALSO DECIDED TO MAINTAIN THE TRADITIONAL\nFREE CONVERTIBILITY AND TRANSFERABILITY OF THE MEXICAN PESO(STOP)\nTHE REGULATED FLOATING OF THE MEXICAN PESO WILL BE ACCOMPANIED BY\nFORD\nSHORT AND LONG TERM ECONOMIC PROGRAM THAT WILL PRESERVE THE\nGERALD\nLIBRARY\nCOMPETITIVENESS OF MEXICAN ECONOMY (STOP) THE PROGRAM UNCLUDES\nFOLLOWING MEASURES: 1) EXPORT SURTAX TO ABSORB MOST OF EXCHANGE\nPROFITS AND PREVENT INTERNAL INCREASE OF PRICES (STOP) DSUBSTANTIAL\nREDUCTION OF TAX REBATE SYSTEM FOR EXPORTS (STOP) 3) ELIMINATION OF\nUNNECESSARY IMPORT CONTROLS AND REDUCTION OF IMPORT TAXES FOR RAW\nMATERIALS AND BASIC IMPORTS TO REDUCE PRESSURES ON INTERNAL COSTS\nAND PRICES (STOP) 4) A WAGE POLICY AIMED MAINLY AT MAINTAINING THE\nREAL PURCHASING VALUE OF SALARIES (STOP) 5) PRICE CONTROLS FOR RAW\nMATERIALS AND BASIC U SUMPTION ARTICLES WILL BL STRICTLY APPLIED\n(STOP) PRICES OF GOODS SOLD BY CONASUPO WILL NOT BE CHANGED BUT\nGUARANTEE PRICES TO AGRICULTURAL PRODUCERS WILL BE ADJUSTED BY\nINCREASE IN COSTS (STOP) o) INTEREST RATES FOR SMALL SAVERS WILL\nBE INCREASED (STOP) 7) MEASURES WILL BE ADOPTED AND STRICTLY APPLIED\nTO PREVENT SPECULATION WITH BASIC ARTICLES AND RAW MATERIALS (STOP)\n8) SPECIAL EXCESS PROFITS TAX WILL BE PROPOSED TO CONGRESS TO\nABSORBE EXTRAORDINARY OR EXCESS PROFITS DERIVED FROM EXCHANGE\nMEASURES OR INCREASE IN PRICES (STOP) 9) SPECIAL FISCAL TREATMENT\nWILL BE GIVEN TO PRIVATE ENTERPRICES THAT MAY BE SERIOUSLY AFFECTED\nBY EXCHANGE MEASURES AND THE CAPITAL STRUCTURE OF THE PUBLIC\nENTERPRICES WILL BE SUPPORTED (STOP) 10) THE DEFICIT OF THE PUBLIC\nSECTOR WILL BE REDUCED THROUGH STRICT PROGRAMMING AND SURVELLANCE\nOF PUBLIC EXPENDITURE TO ATTAIN QUANTITATIVE GOALS RELATED TO THE\nADJUSTMENT PROCESS OF THE ECONOMY, AS WELL AS BY AN INCREASE IN\nREVENUES OF PUBLIC SECTOR (STOP) 11) A SYSTEM OF REGULATED CREDIT\nGROWTH WILL BE ESTABLISHED BY THE BANK OF MEXICO FOR USE BY\nPRIVATE AND PUBLIC SECTORS (STOP) 12) BANK OF MEXICO WILL GIVE\nMEXICAN CREDIT INSTITUTIONS THE NECESSARY LIQUIDITY TO ASSURE THAT\nALL COMMITTMENTS WILL AS USUAL BE TIMELY MET (STOP) 13) THE\nFINANCIAL RESOURCES OF THE IMF AND U.S. TREASURY WILL SUPPORT\nTHE NEW ECONOMIC PROGRAM. (STOP)\nWITH THE ABOVE MEASURES AND NEW EXCHANGE POLICY MEXICAN GOVERNMENT\nHOPES TO ATTAIN ITS BASIC AND FUNDAMENTAL ECONOMIC OBJECTIVES\n(STOP)\nWITH WARM PERSONAL REGARDS (STOP) ERNESTO FERNANDEZ HURTADO\nBANXICO\nUSTREAS 64131\nGERALD FORD LIBRARY\n17758J6XIC0BME\nHRS 24.00\nReuter Wire New Service\nMEXICO ALLOWS PESO TO FLOAT\nMexico City, Sept. 1 -- Mexico decided to let its peso float freely\nagainst the U.S. dollar for the first time in history. Finance Minister\nMario Ramon Betata said the peso had been fixed at 12. 58 to the dollar\nfor 22 years.\nBetata said the Government hopes to re-establish a fixed rate\nwhen the peso has floated to a stable level. He set no target date for\nthe abandonment of the new float. The Bank of Mexico will intervene\nin the market when necessary to counter short-term speculation but\nwill not attempt to maintain a long term parity at a predetermined\nlevel. The Government has decided not to attempt to restrict the\ntraditional free exchange ability of the peso against the dollar nor to\ntry to control the existing free movement of funds across the frontier\nwith the U.S.\nBetata also announced a four-part programme of export taxes,\ncredit controls, wage and price restrictions and lower import barriers\ndesigned to increase Government revenues, avoid strong inflation and\ncurb profiteering after the decision to float. Increased commercial\nrevenues from exports would be cut by an ad valorem tax, the abolition\nof tax concessions and a special profits tax -- all still to be worked out\nin detail. At the same time imports of investment goods andbbasic\nnecessities would be given easier entry terms in order to maintain\ngrowth and stabilize prices.\nGERALD FORD LIBRARY\n-2-\nBetata also promised without giving details to cut the inflationary\nsection of the Government deficits and to tighteneexisting price controls\nto the point where the percentage fall in the exchange rate exce eds the\ninflation figure.\nPublic sector wages increases will be kept strictly in line with\nthe cost of living and private enterprise will be pressed to follow suit.\nThe central bank will strictly limit credits but banks heavily\ncommitted in the foreign exchange markets will get as much liquid\nsupport as they need to weather the float.\nBetata said the float and the other measures are intended to\nmeet \"the deterioration in our external competitivity, our need to\ncreate more jobs and to take better advantage of the bases we have\nalready established for our development. \"\nMexico's balance-of-trade deficit reached a record 3.8 billion\ndollars last year, most of it with the U.S. This year exports have\ndeclined in real terms and the deficit has been kept in trim only\ndue to sluggish imports of capital goods.\nThe Government and state-owned companies have been borrowing\nheavily overseas; inflation has been at an annual rate of 15 per cent and\nunemployment is at 45 per cent.\nThe announcement of the decision to allow the peso to float was\nmade on the eve of a public holiday. All banks in Mexico are closed\ntoday. Reopening on Thursday.\nGERALD FORD LIBRARY"
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