A stronger Mexico wins long-range grace to pay off foreign debt
When economist Javier Murcio ranked Mexico three years ago as the Latin American country with the lowest risk for foreign investment, some colleagues wondered if he was biased. Although he works for a Massachusetts consulting firm , Mr. Murcio is of Mexican origin.
Today the economist feels his judgment of Mexico's economic and political situation has been justified. Mexico has gone through some two years of stern economic retrenchment and is now enjoying a modest recovery. The political situation remains stable. Some 550 commercial banks are in the process of approving a long-term rescheduling agreement for almost $50 billion in ''public sector'' debts of Mexico's total of more than $95 billion in foreign debts.
That agreement, spreading out over 14 years the principal due on past loans, ''is very important and very positive for the country,'' says Murcio, an economist with Data Resources Inc., of Lexington, Mass. It will permit Mexico to plan payments better on its debts and provide financial room for economic expansion.
Many United States and Mexican economists share Murcio's confidence in the economic prospects of the Latin nation. This optimism is a sharp reversal from the gloom that prevailed in Toronto in August of 1982 when Finance Minister Jesus Silva Herzog announced that Mexico could not service its debts, setting off a world debt crisis.
These economists forecast that real growth in output in Mexico this year will be around 2 percent, moving up next year to between 3 and 4.5 percent. Mr. Herzog would like to see that growth rate accelerate gradually to 5 or 6 percent. That's a dramatic reversal from the decline in gross domestic product last year of some 4.7 percent.
Analyzing the $48.7 billion debt rescheduling package approved by an advisory committee of 13 leading banks last month, the economists interviewed made these points:
* The new terms of the loans will save Mexico about $400 million a year in interest charges - a result of using the lower London interbank rate or an adjusted certificate of deposit rate instead of the prime rate American banks quote. The package also involves no commission on the amount rescheduled.
* Other debtor nations may press for similar terms in the next few months. One banking economist called this trend ''a potentially dangerous spillover effect. It will be difficult for banks to resist.'' Another noted that ''pressure and acquiescence are two different things. I don't think the others merit the same terms.''
* The Mexico package signifies a new sober, long-term approach to the developing-country debt problem. It signals an end to short-term crisis management for at least one nation. In the past, the commercial banks negotiated the rescheduling of a year or 18 months of debt at a time. This provided the IMF and other lenders with some leverage for insisting on good economic policies. The Mexican package is considered a reward for economic virtue. No other major Latin American debtor nation has gone so far in adjusting its domestic economy to make more resources available for the exports that earn the foreign exchange needed to service external debts.
* Mexico's package eases somewhat the burden of an IMF austerity program on the nation's political and national sensibilities. The IMF program will end next year. Then early each year the Mexican government will devise its own economic program, without extensive IMF help. Soon thereafter an IMF team of experts will visit Mexico to review that program, and later in the year, it will look again at how much progress has been made on such self-imposed goals as reducing inflation, trimming government deficits, maintaining a realistic foreign-exchange rate, keeping wage increases reasonable, and so on.
Mexico also agreed to let commercial banks see normally confidential IMF reports. If Mexico does not live up to its own targets, the banks could refuse to proceed with part of the loan rescheduling.
The rescheduling agreement must now be reviewed and approved by at least the vast majority of the 550 commercial banks with loans outstanding to the Mexican government and its 50 or so entities. An agreement in principle is hoped for by the end of this month, but detailed agreement with all those government agencies or corporations could take up to a year.
Mexico will also be seeking some $20 billion in new money over the next six years, boosting its overall debt to $115 billion by 1990. But according to Mexican plans, much of this money will come from multilateral institutions, such as the World Bank or the Inter-American Development Bank, rather than commercial banks. Commercial bank indebtedness is expected to grow by about 4.2 percent a year on average, reaching $70 billion in 1990; it's $55 billion now.
That growth in debt, however, will be modest enough that Mexico should see an improvement in such crucial ratios as the amount of debt charges compared with the level of annual exports. In other words, Mexico should be able to service its debts with more ease.
Indeed, some of the economists are expecting banks to start ''voluntarily'' lending to Mexico (vs. involuntary lending in a debt rescheduling package that aims at protecting old loans) next year or in 1966. Mexico is reportedly ready to launch a modest loan of $50 million even before the new package is approved by the banks. But economists say that Mexico will have to continue with its economic progress if such loans are to be offered.
''The only nagging problem is inflation,'' says Harry E. Brautigam, an economist with the Bank of Boston. He expects prices to rise about 60 percent this year, compared with a government target of 40 percent. That's an improvement from 80.8 percent in 1983 and 98.9 percent in '82. Mr. Brautigam expects inflation next year of around 30 percent. Mario Salamanca, an economist at the National Bank of Mexico, says 40 percent.
One vital strategy of government policy is to encourage a shift in future investment from projects that use much capital and provide relatively few new jobs - such as the oil industry - to labor-intensive industries. This is crucial , because Mexico has a population growth of about 2.5 percent a year, an annual labor force growth of 3.6 percent, and high unemployment levels.
One key to this change is keeping the foreign-exchange rate at realistic levels in relation to the US dollar. Mr. Salamanca believes the peso is somewhat undervalued at the moment. It is being devalued by some 13 centavos (100 centavos equal one peso) per day. This cheap peso has encouraged exports, and the government has discouraged imports. Mexico's trade surplus was $13 billion last year and should be $10 billion this year. Combining trade and services, Salamanca forecasts a ''current account'' surplus of $2 billion to $3 billion this year, despite debt service charges of $12 billion.
Looking at the future, Mr. Murcio reckons that Mexico's economic growth should be strong enough to prevent political instability - provided the Mexican president ''is honest enough not to promise more than he can deliver.'' Mexico's economy may not grow at the 8 percent annual rate it did in the 1970s, he figures, but fast enough to provide some modest improvement in the average standard of living.