Mexico: Brighter economic skies as spending is cut in half

There are signs that Mexico is doing something right in dealing with its mammoth foreign debt and related economic crisis. The country owes more than $80 billion - one of the highest foreign debts in the world - but the austerity steps it slapped into place last December appear to have started the country on the road to sounder economic footing.

The best signal of the improvement so far: the news that Mexico will not immediately have to draw on the $1.1 billion second installment of its ''jumbo'' loan worked out with the International Monetary Fund (IMF).

''It shows Mexico was not as desperate for money as everyone expected it to be at this point,'' says one analyst of the Mexican economy.

He and others here caution, however, that the financial world should not read too much into the announcement. A banker close to the situation observes: ''The loan is available throughout the quarter (July through September) and we would certainly expect Mexico to use it.''

A Mexican Treasury source confirms that the $1.1 billion will be drawn eventually. ''It's just a matter of timing,'' he says. The money is needed to repay another loan that comes due shortly from the Bank for International Settlements.

One of the biggest steps toward smoothing economic chaos was the Mexican government's budget-slashing. President Miguel de la Madrid Hurtado's economic recuperation program calls for cutting government spending in half - from almost 18 percent to 8.5 percent of gross domestic product.

''I would say that level has been achieved,'' says one government official. He and others point out that the ending of subsidies for basic products has been a key factor.

A banker observes: ''We have definitely seen more disciplined financial management.''

Other factors in the improved Mexican situation: a trade surplus for the first six months of 1983, maintenance of crude oil exports at a level just over 1.5 million barrels per day, and a pickup in tourism.

Also, when President de la Madrid took office last December, he reduced the exchange controls imposed by former President Jose Lopez Portillo. By allowing the peso to float to its market level of 150 pesos to the dollar from the controlled rate of 70, Mexico became a very competitive tourist destination. The fears associated with exchange controls that had kept many tourists away were reduced.

There are indications that efforts to control the ravaging inflation are starting to take effect. The average monthly rate of more than 7 percent during the first four months of this year was down to 4.3 percent in June. By the standards of the ''developed'' world, this is still high. But to a country that experienced an official inflation rate of 98.8 percent in 1982, it is good news.

To achieve this decrease, the government has kept interest rates high to attract money into the banking system (nationalized last December) and then taken significant amounts out of circulation to produce a contraction in money supply.

Mexico also sharply reduced its imports during the first half of 1983. The government adopted a restrictive import policy that makes foreign exchange available only for priority items, although companies that export are allowed to use the foreign exchange they earn for import purposes.

The current dollar-peso rate makes importing very costly. The restrictive policy and the cost factor have had a decidedly dampening effect on industry. Many companies have been unable to import needed materials, machinery, and spare parts. Nevertheless, they have had a positive effect on the balance-of-payments picture.

The $1.1 billion loan installment is part of an unprecedented $5 billion loan agreement, syndicated by nearly 800 private banks. And that is part of an $11 billion economic rescue package negotiated between the IMF and the Mexican government.

By no means is Mexico's financial crisis close to being over. But as one banker stated, ''Performance is better than anticipated. We can only hope that will continue.''

A Mexican Treasury official indicated that the somewhat overstated US account of Mexico's financial progress was perhaps a nudge to Venezuela and Brazil to take the route of negotiating with the IMF as Mexico has. An IMF mission is headed for Venezuela July 10 and Brazil's renegotiation of its heavy external debt is still pending.

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