No. E 42A RESTRICTF.D CONFIDENTfAC Th i 5 report is restr i cted to use wi th i n the Bank 66888 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT • MEXICO'S ABILITY TO INCUR ADDITIONAL DEBT May 31~ 1949 • Economic Department Copy No. Prepared by G. de Fleurieu MEgg,Q Basic statistic~!I 758,258 square miles Population (19481: 24 million ~ional Income (1947): Around US$ 4,000 million Income per Capita: Around US$ 150 Currenox: Unit: Peso (official sign $) Ex£hange ~ate (May 291-1949): 8$50" pesos per dollar • ~na.l Trade: ExpQ,!:ts, US$ mill.:,: ImEortsz,US$ mill£: Balance of PaYffientst US$ mill.: 1947 447 704 1947 1948 455 597 194a Trade Balance: -257 -142 Travel: ~ 83 .,. 90 (es'ttf,l}')! Other non-trade items: -f 20 -154 - 10 (est.)g; - - 62 (est.) Foreign ~eserves2 end of period: 1941 1948 Feb. '49, Banco de Mexico, US$ mill,: 124.2 64.2 46.6 41.0 • External Debt, US$ mill.: " Settlement of old debts: Expropriations: New capital: ' q February 2g, 100 127 223 19l~ Total outstanding: 450 Prospective debt to IBRD and Eximbank: i 2S Peak Service (on US~.478 mill,): 52 (1950) Q2vernmen't Finance, Mill. Pesos: 1949 (est.) Receipts: 2,331 2,372 Expenditures: 2,681 2,550 Jncrease in Federal Internal Debt:, 316 Continued on following page 1I Pesos converted at 4.85 per dolrar-for 1947 and 5.70 for 1948 ~ It has been assumed that exports of non-monetarj gold stayed at their 1947 level as the exact figure is not yet available. Basic Statistics - Continued ...... ' .... Public Debt, Million Pe.§.2§: 1m 1942 \ :'~/",*-f. 19L)3 Federal and states: 569 893 1,:L88 l~490 Money Supply, Mil.!ion Pesos: 19i2 ~ 1948 Ap~.~ Currency and Deposit Money 887 3,351 3,978 3~ >t,:".~. Prices (1937 =lOO}: !2£ 1945 !2lrZ 1948 Feb. 149 Wholesale: 114 208 254 267 271 • Retail: 121 247 348 369 377 • Q.Q !:Ml~ I. SUMl'llARY OF FACTS AND CONCLUSION ••••••••••••••••• \1 • • • • • • • • 1 II. REAPPRAISAL OF THE MEXICAN CREDIT SITUf\TION ••••• '......... 3 a) Production, Prices and Wages......................... 3 b) Foreign Trade and Balance of Payments................ 5 • 1) Exports •••••••••••••••••••••••••••••• f •••••••••• ~ 5 2) Imports •••••••••••••••••••••••••••• • • • • • • • • • • • • • • 12 c) Internal Monetary Supp1y ••••••••••••••• ~ ••••••••••••• 13 1) Public Finance •••••••••••••••••••••••••••• o...... 13 2) Credit........................................... 15 d) Exchange situation and prospects for stabilization of the peso ••••••••••••••••••••••• ~................ 16 1) The exchange market ••••••••••••••••••••••••••••• ~ 16 2) Reserves......................................... 16 • e) 3) Prospects for stabilization •••••••••••••••••••••• The Present External Debt of Mexico •••• Il • • • • • ,....... 17 18 DEVELOPlv~NTS AFFECTING LiEXICO' S ABILITY TO INCUR ADDIT! aNAL DEBT I. SUMMARY OF FACTS AND CONCLUSION The fundamental elements of Mexico's credit worthiness have been assessed by a Bank Mission in the summer of 1948 after the first devaluation of the Mexican peso. The Mission had arrived at the main following conclusions: 1) Mexico has already reached a relatively advanced stage in its social and economic structure. Education is vddespread; industry is diversif.ied; and agriculture, though less developed, is .improv- • 2) ing. The country has great potential riches, principally 0il • However, in the absence of a drast-i,c int..:rease in the rate of nevI{ oil well drilling, Mexico's foreign exchange receipts are fairly rigid, in some cases vulnerable, and expenditures will have to be adjusted to these receipts. 3) The essential factor for determining the rate of foreign exchange expenditures is the internal money supply. If expenditures abroad are to be reduced, and the balance of payments deficit eliminated, ~ it is necessary to balance the budget and enforce credit restrictions. 4) The foreign debt of Mexico is heavy; the yearly service amounting to 7% of all time high 1947 exchange receipts. The Mission's appraisal of I~iexico' s credit v-rorthiness was thus defini t,ely guarded, though not discouraging. Since these conclusions were formulated, 8 months have elapsed and two major developments have occurred: a fall in the value of the peso, which dropped from the level of 6.80 to 6.90 that had been maintained since the devalu- ation of July, 1948, to above 7 in February 1949 and ovnr 8 in Llay, and a drop in NeVI Yorl{ metal IT ices, attaining 307; in some cases. -2-· In a summary reappraisal of the Mexican situation, made in \Ilashington by the Economio Department, in the light of new developments, the following c0~~lusions have tentatively been reached: They do not indicate a fundamental deterioration in Mexican finances or eeonomy: 1) Mexican produotion has been increasing. Prices and wages have baen fairly stable. It is difficult to assess at this time the effects of a new devaluation, but past experience does not suggest that • Mexican prices are rigidly tied to the exchange rate. While a rise in many imported goods is inevitable, it is not certain that the whole price and wage structure will be thrown out of balance. The fact is that no significant price changes have occurred at present, after the exchange rate h9S dtopped by 60%. 2) The trade deficit has been cut by over 40%, according to preliminary figures. A drop in exchange receipts is to be expeotdd in 1949 and later, but a number of offsetting factors exist so that the Mexican • present balance of payments situation is no worse and indeed better than in 1947. Internal monetary expansion would, of course, upset this picture .. 3) So far, the money supply has not increased but has even diminished. The results of public finance have been rather better than expected. Some credit expansion has taken place, but has been kept under control. Nobody, nowever, knows if the increased costs r(~sulting from devaluation (probably around 200 million pe~os) will be met with increased receipts, 4) As a result of speBtilation, encouraged by the long delay in formulat- ing a monetary policy, the rate of exchange has dropped to 8.50 to the dollar and Mexican reserves are near exhaustion. ~egotiations -.3 - are in progress for stabilization. It is believed that, vvith adequate reserves, the peso could be stabilized at a somewhat lower rate than its present level. S) The debt burden o£ Mexico is heaVlJ but an addition of ~16 million in principal is not, in itself, significant. It appears that, after this tentative reappraisal, the general conclusions of the 1948 Nlission are still valid, and that recent events have not decisively .' indicated such a discouraging turn to the worse in the Mexican economy, that it would be necessary to depart from the Bank's original inten·~ions. Prospects remain, of course, very uncertain, particularly ins ofar as the effects of the) recent depreciation of the peso cannot yet be fully assessed. II. REAPPRAISAL OF THE l'fiEXICAN CREDIT SITUATION a) Production) Prices and Wages Mexico has enjoyed a particularly good agricultural year in 1948. These satisfying results were partly due to a favorable rainy season, but also to the .~ fact that 93,000 hectares of new land and 63,000 of improved land were opened to cultivation, and that improved seeds for corn and wheat were available in larger quantities than before. While it is impossible not to consider 1948 as ~~ ex- ceptionally favorable year, prospEicts for agri cultural production are generally encouraging for the future as permanent technical improvements are being secured, and yields are likely to inclease. Estimates for 1949 for winter vegetables, fruit, sugar and coffee are favorable. Prospects for cattle raising also improved as the meat packing industry developed considerably. Ten ca~~ing plants were established in 1948 J exporting more than double of the dollar value of live cattle exports in 1948 before the outbreak of the "aftoDa." These exports canno'~ be expected to continue at thiS: high level,' but one part definitely can be considered as a permanent income to Mexico. ·A contract for $7 million has been concluded wi th the UK for 1949 .. Production of manufactured goods increased as the domestic markat expanded, following a reduction in imports of foreign products. Textile industry produc- tion rose by 6%; beer and liquors 5%; clothing 12% and other industries, among which, canned foods, wearing apparel, vegetab~e oils and matches rose 15%. The overall. ~ise in production was probably higher than that registered by the general • production index, or 2.6%, as some of the industries, shovdng the largest increases, are not included in this index. The increased costs of imported raw material and equipment were largely absorbed in the profit margins of manufacturers. From the point of view of in- ternal prices, these developments have been of great importance. The price index remained remarkably stable due to the good supply in food and domestic manu- factures. The general cost of living index in March, 1949 had increased by only 6% over the level of January, 1948. • This tends to prove that there is less con- nection between prices in Mexico and prices in the United states that would be imagined, a priori, and that the recent devaluation will not necessarily throw the structure of Mexican cost and prices out of balance. Of course, the fact that the margin of profits are now lower will make it more difficult to absorb further increases in costs E!hould the peso drop further. The labor situation has been generally satisfactory j with few major strikes. The revision of labor contracts which occurred in 1948 resulted in an increase ot' from 10 to 25% in wages. It has been seen that neither these wage i.ncreases,· nor the strikes, have r,esul ted in reduction of production or considerable increases in prices. Two important unions have presented their request for higher wages: oil and railways. The government intends to resist the pressure for wage -5- increases as it is aware of the consequence of a rise both internally and exter- nally. How far this pressure can be resisted remains to be seen. So far, the piotare of Mexican production, prices and wages has been rather encouraging. b) Foreign Trade and Balance of~yments In 1948, aocording to preliminary figures, the trade deficit was reduced as follows':. Millions 2f dollar~ Imports • 1947 1948 447 455 and probably around $80 million in 1948-. 1/ 704 597 Net current reoeipts on non-trade items were around ~lOO million in 1947 257 142 The overall balanoe of payments deficit on current account, estimated at $154 million in 1947, probably fell to around 11 $70 million in 194a , though exact figures are not yet available. According to preliminary figures, the main causes of change in non-trade items since 1947 was a fall by ;:~28 million in U~S. reqlittances for fighting the • aftosa. There was also a small loss in the earnings of Mexican workers abroad (~8 million). These losses were partly compensated by a rise in receipts from tourism (by $7 million) and a fall in incomes remitted abroad (by '~9 million). The net decrease in receipts on non-trade items was thus probably around ?20 ~l- lion. Main prospects of change in exports, imports and essential non-trade items are discussed below: 1) Export!! Total exports in 1948 (including silver) amounted to 2.594 million pesos (roughly 455 million at the 194B average rate of the peso of 5.70) or -----------....----- !I It has been assumed that exports of non~monetary gold stayed at their 1947 level, as the exact figure is not yet available. - 6 - about the same dollar value as in 1947.. Between 1946 and 1947 the value of exports had increased 22.6%. Exports of primary products represented 80% of the total value; those of manufaotured goods 20% only. The comparable proportion was 77% and 23% 2/ respectively in 1947- , reflecting a drop in foreign demand fot ~1exico' s industrial products. This is a normal evol\ltiop that had been expected. A detailed examination of Mexic~n exports, by co~~oGities, does not lend itself to overly pessimistic conclusions, though some drop in receipts might • be expected that may not be offset by a corresponding drop in import prices • 1lhe gro~E of bas&) m~ (25% of the total value of exports) is the one most affected by the drop in prices in the U.S. market. The most important is lead (16.}%) whos~ price has fallen from 18.05 cents per pound (1948 average) to 13 cents (May, 1949) or 28%. Assuming that the price will stay at 13 oents, whioh gives an average of 15.15 oents for the whole year of 1949, the price drop would imply a loss in gross foreign exchange receipts of 16%, or roughly $12 million. If the· price remains at 13 cents, the loss would be '$20 million • per year .. Zinc, the next most important metal (4.6% of total export value), drop- ped 19% .from 13.57 cents per pound (1948 average) to 11.0 cents (May, 1949) after having risen to 17.35 cents in the first quarter of 1949. If present price i8 maintained, the average price for the whole year of 1949 will be ~oughly 5% less than in 1948, causing a loss of ~~2 million in foreign exchange receipts. At the current price of 11 cents, the arulua1 rate of loss would be $8 million. Copper, which accounts for 2.6% at total export value, went down 18% from 22.0 cents (1948 average) to 18.0 cents (May, 1949). In the first quarter of 1949 the price had risen to 23.5 oents, so that the average for 1949 would 3/ Source: Banco de Mexico - 1949 report. - 7 be 19.6 cents if the present price is to continue. A drop of 11% in dollar r~oeipts is thus to be expected, amounting to roughly ~1.5 ~illion. Assuming that the 18.0 oents price will continue, the loss would be < '.~2. 5 million per year. The gross' decrease in foreign exchange receipts in the base metal group would thus total roughly $15 million or about 3% of total 1948 exports for the calendar year 1949. The annual rate of loss at present prices would be ';p30 mi1- lion. In all cases, it has been assumed that the 1948 volume of exports is • to be maintained. This appears to be a reasonable assumption since, according to ~ntative estimates of the mineral section, the May 1949 prices for lead, zinc, and copper are still (taking into aocotmt the devaluation of the peso) y somewhat above the minimum levels for profitable production • While it seems unlikely that lead prices will decline appreciably. from current levels (13 cents per lb.), the outlook for zinc and copper is somewhat less satisfactory. Production curtailment throughout the world seems inevitable as a result of the current decline in demand, especially in the U~S.A. At cur- • rent prices (11 cents for zinc and 18 cents for copper), slight curtailments at a few U.S.A. mines and at the nickel-copper operations in Canada have already occurred. Mexica.n copper operations may be curtailed if the price were to drop to 16 cents or lower. It is likely, however, that such curtailments would be only short-lived unless world demand continued to decline sharply, which contin- gency appears highly unlikely at this time. Both lead and zinc mining are appreciably aided by the favorable prices for their co-product, silver. Unfavorable prices for silver could adversely af- fect these operations. ~According to t;nta.tive estimates, the prices below which production is likely to be curtailed substantially are 10 cents for lead, 9 cents for zinc, and 16 cents for copper at the rate of 8 pesos to the dollar. - 8 - ~! (6% of total exports) The price of silver has been sustained thus far. The Bank of Mexico has become the largest buyer of Mexioan silver production. Sales of silver to Saudi-Arabia amounted to 13.2 million ounces, or a receipt of over $11 million if costs of minting are included. Prospects for $ilver are uncertain. Industrial demand may falloff so;ne .... what, and a reduction in exports may be necessary to maintain the price. A 15% decline in volume from 1948 levels would mean a loss of 'p4 million. If the • price were also to decline, which is not impossibJ,.e, this loss would be more than doubled~ On the other hand, new sales for monetary usa may offset the drop, partially or totally. The next group in Mexican exports of raw materials, that of E£oduc:ts of veget,able origin (both edible and industrial) represents 25.3% of the total. It includes several sub groups: i) ltlinter vegetable, f!Uit_and .Q£ffee exports (8%) It is estimated that, in 1949, 9000 carloads of vegetabl~ as against • 8685 last year will be a,vailable for shipment to the U.• S. This slight increase in volume may however be more than offset by a decline in prices. Long run pros- pects do not appear unfavorable. The £2ffe~ crop is from 10% to 15% larger than last year. This may mean an increase of roughly $1 million in exports at the present rate. A drop of 1 cent per pound in the price would mean a loss of only about $600,000 in receipts. Prospects continue good for coffee. ii) fext~f~bers~l This sub group comprises raw cotton and henequen in about equal pro- portions. Prospects are for price stability in cotton exports as U.S. prices are close to the support level. The volume may, however, decline. The outlook for henequen continues to be favorable so long as production in Java and the Philippines ha$ not recovered. Prices, however, have fallen slightly in 1949. 9 - other products, indivtdually minor, include flax seed, molasses and sugar cane, lumber and chicle. It is difficult to ascertain any definite trends in the market conditions for these products. In 1949, the sugar crop will be 15% higher than last year but it remains to be seen whether it can all be marketed. On the whole it seems that some fall in export receipts from the group of products of vegetable origin may be expected, but not a very important one.' 4It An overall 15% drop in receipts from this group would mean a fall in receipts of about $17 million~ Another important group in Mexican exports is fuel anq-1~bri~~~~. According to Mexiean figures, it represented in 1948, 10% of total exports, wi th a value of 250 million pesos or t:~43. 5 million. No reliable import figures are yet available, but it is generally estimated that the balance of payments on oil account was only slightly favorable to Mexico in 1945, and will be un- favorable in 1949. The first factor affecting the receipts from this source ~ has been the drop in prices. As Mexico is, at the same time, an exporter and an importer of petroleum products, this drop affects the Hexican position only insofar as a drop in export prices is not compensated by a corresponding fall in import prices. According to tentative estimates of the mineral section, the effects of the drop in export and import oil prices will largely cancel out, except for fuel oil of which Mexico is an important exporter. Fuel oil prices dropped from ~p2~50 per barrel in 1948 to $1.'37 in Hay, which represents, for Mexico, a loss in foreign exchange of about '~8 million per year, assuming a continuation of the$l.37 price. The mineral section estimates that, 2~the mO~~QE~~ic ~§?ump!!£a, assuming new investments of $100 million, the present prod~~tion of about 60 million barrels could be increased by rgrhaps 15 million barrels to 75 million - 10 - barrels, representing a gross annual gain infforeign exchange receipts of say, $30 million, after about three years (based on an approximate price of ~2.00 per barrel for crude oil). Assuming that consumption continues to increase about 3 million barrels per year, as in the past few years, the gross increase in re- ceipts at the end of the three-year period, estimated at 130 million would have to be reduoed by ~~18 million (9 million barrels at ~~2.00 per barrel) representing an increase in conswmPti~ A possible net gain of $12 million would thus be left. Without large and successful invesunents in oil exploitation and drilling, Mexico • is more likely to become a net importer than a net exporter of petroleum • ~EUfactured goods exports (20% of total value) According to Mexican sources, the share of these exports has been reduced by J% since 1947. It can be estimated that the tempora.r~r demand for products in short supply on the world markets is now over, and this should encourage the hope that Mexican exports can be stabilized at the 1948 level, especially \-1i th the help of the new drop in the valuo of the peso (4~b from the 1948 average). However, prospects for cotton textiles are not promising. Price for • henequen ropes have also fallen considerably in 1948 but the impact of this fall has already been felt. The developme~t of new export industries, like canned meat mentioned above, is an offsetting factor. If, however, exports of this group were to fall by an overall 15%, the resulting loss would be about ~13 mil- lion. 9onc~usions on Visible and Invisible Exports a) As a result of price drops already realized, Mexico, in calendar year 1949, faces a fall in gross export receipts, very tentatively estirnated at, say, $23 million (;~15 million on metals and 1>8 million on oil). However, as mining enterprises are almost entirely foreign-owned, the net decline in foreign exchange receipts will be lower. A reason- able guess would put it at ~)17 million only, assuming that 6CJ!u of the ~ll- loss on metal prices is borne by Mexico. Based on current low prices, the decline in gross export recairts on an annual basis would amount to $38 million ($30 million on metals and $8 million on oil). The net loss to t.1exico, on the same assumption as above, would be $26 ~llion. b) Other possible losses in ro~eign exchange receipts might total, ac- cording to very rough estimates, $34 millio·n ($4 million on silver, $17 million on vegetable products; $13 million on manufactured goods). ~ The total loss in foreign exchange would thus be around $50 mil- lion for the calendar year 1949, orl60 million at an annual rate. c) Offsetting factors are: i) ~ sale of 11 million dollars worth of coined silver to Saudi Arabia - already realized. ii) The probability of an increase in tourist receipts after devalua- tion. These receipts have increased from ~83 million in 1947 to 190 million in 1948. A l~b further increase in receipts from • iii) this source would represent '~9 million. In the longer run, the possibility of incre~sed receipts from oil, of an order of magnitude of $12 million. This, however, is not a safe assumption to make at present. The net overall loss in exchange reoeipts of Mexico would thus be around :~30 million in the calendar year 1949 or ~40 million at an annual rate. It could amount to more later if no further sales of monetary silver are made, and pos- sibly to less if successful investments are made in oil exploration and drilling. No estimates have been made for changes in remittances of Mexican workers abroad. These have already fallen since 1947 and we assumed that they would remain at 1948 levels. Further losses from this source wO"Q.ld, it snems, imply -12 - a deoline of eoonomic aotivity in the U,S., and consequently in Mexico. They would probably be more than offset by reduced transfers of profits of foreign- ovned firms, operating in fields other than mining. 2) Imports The effects of the recent devaluation and price drop on Mexican imports are difficult to visualize. So far, the previous devaluation of the peso from 4.&5 to 6.90 did not have any effect on the level of imports which were the same before and after July 22, 1945. This was largely the result of the absorption ~ of increased costs in high profit margins as explained in the preceding paragraph on prices. Prices of imports failed to rise enough in pesos. The new devaluation from 6.90 to above 8 pesos per dollar ahould not be absorbed, it seems, in the same way since profit margins are now narrower. Prices of imports of goods should rise and further limit the level of imports which already, according to preliminary figures, decreased from $704 million in 1947 to $596.3 million in 194B, not, as mentioned above, because of the devaluation, but because of good crops and to some extent, of import controls. ~ If this improvement has been secured without any apparent effects of devaluation, more should be expected "Then such effects will be felt. A further decrease is necessary, despite the fact that a large part of Mexican imports are, of a mOle or less "essential" character. According to the Banco de Mexico, imports of luxury goods fell from $62 million in 1947 to ~~21 mil- lion in 1948, and the goods identifiable as essential, amounted to j366 million or over 60% of total imports, They included imports of equipment goods of $144 million (as against $167 million in 1947). A new reduction in imports would necessarily slow the pace of Mexican development but financial stability cannot probably be regained otherwise. There is little doubt, in the short run at least, that the price of a unit of Mexioan exports is likely to fall more than the unit price of importso - 13 - However, the total value of Mexican imports is larger than that of exports. A relatively small drop in import prices may result in savings greater than the reduction in earnings brought about by a more important drop in export prices. Taking out the approximate value of petroleum imports (as drops in import prices on petroleum have already been taken into account) we find that an overall 5% drop in import prices for Mexico would result in savings of ~27.3 million or almost the amount necessary to compensate the net loss in exchange receipts cal- culated above for the calendar year 1949. To co~pensate the net loss on an • annual basis, or ',p40 million, import prices 'l.olould have to drop by slightly more than 7%. Conclusions on Balance of Payments On the whole, taking into account the recent drop in prices and the devalu- ation, it does not appear that the combined effect on the Mexican balance of payments need be too alarming. Mexico certainly faces losses in foreign exchange (of which the summary estimates '!l8.de above do not pretend to give more than a rough idea). But savings and supplementary gains may be envisaged, and it has • been seen that the totals of changes in receipts and expenditures may be not so far apart. The future is still very uncertain, but so was it at the time when the original loan was granted and the netol events do not in themselves change the conclusion that was then arrived at: namely, the necessity to adjust exchange expenditures to the level of receipts, and the utmost importance of the internal fiscal and monetary policy in that respect. c) Internal Honetary Supply 1) Public Finance One of the ~ajor elements affecting the money supply is the deficit of public accounts. Development in the fiscal field during the first quarter of 1949 appears rather encouraging. Future prospects remain uncertain. " -14 - i) Receipts According to preliminary figL1res during 1948 the Federal receipts increased by more than 11% from 2054 to 2331 million pesos, and in the first quarter of 1949 they were 35% higher than in the same period for 1948 1..fhich is an achievement brought about by simplification of tax collectio~ methods, increase in tariff rates and customs valuations and measures against tax eVasion, all taken in 1948. In addition, a tax on the sale of automobiles assembled in the country was decreed early in 1949. An excess profit tax was also put in force, and a ~ tax of 20% on luxury goods is under study. On the other hand, exemptions of the 15% export tax had to be granted on 145 items, in order to maintain exports. This reduction meant a treasury loss, estimated by the Minister of Finance at 67 million pesos. But the devaluation may allow for the repeal of these exel1lp- tions. The loss anyway would constitute only J% of total reoeipts~ Some ooncern has been expressed as to the effect of the drop in metal prices on the internal revenue of the Mexican government. Since the production tax on metals is calculated on the peso equivalent of the dollar quo- ~ tation in New York, the ~exican administration expects no decrease in receipts from this source, as the fall in prices will be at least offset by devaluation. On the ~hole it can be reasonably stated that no major setbacks in receipts will occur in 1949. i1) E!penditures Considerable efforts have been madg by the Minister of Finance, with the full backing of the President, to keep expenditures under control. Since the beginning of 1949, appropriations have been allocated monthly so that the Treasury will not be faced with the necessity to open supplementary credits at the end of the year. Federal vacancies were not filled. Public ~orks expenditures were cut. steps were taken, with some success, to improve the -15 - operating conditions and financial situation of the rail,.rays. On the 28th of April, 1949, the Minister of Finance could announce that "the govern:nent had been successful in balancing its income against its expenses." On April 8, President Aleman had confirmed the Government's intention of keeping the budget in balance. The future appears, ho\..rever, somewhat more difficult. Subvention on imported lard and wheat that had been cut may have to be resumed, and the cost may reach 80 million pesos. The cost of servicing the external debt will be increased by over 100 million pesos. The most important question is to know ~ whether the internal price level, which determines government expenditure, may be maintained despite devaluation. This question cannot be fully answered now. However, it seems reasonable to assume that, since last year's devaluation has been absorbed without significant increa~~es in prices, the new devalua t,ion from 6.90 to 8 or 8.50 may result in an overall rise in prices of say 15%. This would increase expenditures but should also, after a certain time lag, increase receipts. On the whole it does not appear impossible that, if the present policy is firmly pursued, the budgetary situation can be kept under control. ~ 2) Credit The policy of credit restrictions has been maintained rather consist- ently in the first part of 1949. The money supply which had risen by roughly 400 million pesos since the end of June, 1948 to 3.978 billion pesos, in December, fell to 3.874 billion at the end of April, 1949, or by 104 million pesos. This happened in spite of an increase in credits of 58 million pesos by private banks (rendered possible by an increase in deposits) and of 90 million by the Bank of Mexico. The reason for this net contraction of money in circulation was the fall in monetary reserves of the Central Bank and also an increase in government and savings deposits. Although it has not been possible to obtain and analyze detailed figures on the exact shares of these factors, the important ·~onclusion is that no o'Yerall monetary expansion occurred in Mexico, thl~ugh some elements -16 - of contraction have been offset. d) Exchange situation and-E!0spects for stabiliz?-tio~_.9f the. p es2 1) ~~2ffihange market Since the fall of the peso from the level of 4.86 to the dollar, in July, 1948, the free selling exohange rate had remained fairly stable at around 6.90 to the dollar. In February and March, 1949, the peso dropped to 6.97, and on April 26 it fell for the first time to 7. On May 5 it had fallen to 8.15. Since then it fluctuated around 8. On May 20, there was a temporary • drop to 8.40 but the Bank of Mexico brought back the rate to around 8.10 - 8.15 • The rat,e had again dropped to 8.50 on May 28 •.. The causes of this movement are said to be largely specula- tive and this is confirmed by some observations of the Bank of Mexico, in parti- cular, by the large demand of dollar notes in individually small amounts. In view of the strength of this movement, the Bank of Mexico withdrew from the market on May 4. Around May 9 it intervened again to prevent an improvement in the rate but had, in the last 10 days, to feed the market with dollars to prevent • a further fall • The speCUlation movement has been explained by a deception following excessive optimism as to prospects of an inflow of dollars created by oil loan negotiations. Many importers, in particular, were said to have post- poned their payments in the hope of an amelioration of the rate. 2) ~erve! The movements of Mexican gold and foreign exchange reserves are summarized in the following table: y Net Gold and Foreign Exchange Holdings (millions of dol~ar~ December 31, 1948 64.2 January 31, 1949 59.6 February 28, 1949 48.6 March 31, 1949 53.5 May 13, 1949 41.0 11 Deducting liabilities and holdings of Spanish pesetas and Czech crowns. -17 - Reserves are thus at an all time low. Total reserves amount to $96 mlllion, including silver and are close to the legal minimum of 25% but the proportion of silver is of course far above the legal minimum of 20%. There is scarcely any leeway to meet purohases and sales of exchange, and this is one of the main factors inviting ~peculation • .3) Prospects for stabiliza.tion A prerequisite to stabilization is the establishment of reserves adequate for discouraging speculation. Negotiations are in progress with the • International Monetary Fund and the U.S. Treasury to obtain 60 million of addi- tional reserves as follows: Drawing'S on IMF 22. 5 U.S. Tr'easury Stabiliza- tion Fund 13. Addition to U.S. Treasury Fund 25. 60.5 Together with present Mexican reserves, this would total ~100 million. This, it is estimated, would be enough to discourage speculation. • If the present negotiations were successful, stabilization could be announced very soon, and the dangerous speculative opportunities offered by a fluctuating rate would be eliminated. It is our understanding that the Inter- national Monetary Fund has already agreed in principle to restore the Mexican drawing rights, within the limit of ~22.5 million, provided 1) that a new par value of the peso be fixed in agreement with the n~, and 2) that the present budget and credit policies be continued and enforced. A. difficult question to be solved is that of the rate: it must at the same time allow the reconstitution of reserves~ and not exert an undue pressure on Mexican prices. This does not appear impossible to realize j as at the rate of 6.90 the peso was already probably somewhat undervalued. A. rate of, around 8.50 might be tenable, with a strict internal monetary policy and reserves -18- adequate to discourage speculation. e) The Present External Deb~ of M~xico The preSGllt estimates take into ac~ount probable additional debt to be incu!:'red in 1949. They reveal that the present debt burdun of IJiexico is high. The service of the additional ($16 million loan from the IBRD represents, however, an insignificant part of this service. The principal of the Mexican foreign debt amounts roughly to $450 million as follows (rounded figures): • (Units of $1,000,000) Settlements of old debts Government Debt ••••••••••••••••••••••••••••••••••• 49 . '. Railway Debt •••••••••••••••• '1\ . '• • • • • . • II . . . . . . . . . 0 • • • • • 51 100 Qbl!g~1ions arising from exPropriations of fo!eign-owned properties Oil Settlements.~ ••••••••••••••••••••••••••••••••• 108 Mexican American Claims ••••••••••••••••••••••••••• 19 127 Amounts representing new capit~ Eximbank - Amount outstanding and disbursed as of February 28, 1949................ 09 Undisbursed commitments (including allocations still to be made under the • $50 million) ••••••••••••••••••••••••••• 46 IBRD {amount granted as of Jan. 6, 1949) •• r • • • • • • • 34 Guaranteed Private Loans ••••••••••••••••• 4 •••••••• 15 U.S. Stabilization Fund ••••••••••••••• ~.~ ••••••••• 37 International Monetary Fund •••••••••••••••••• ~ •••• 22 Probable additions to this amount in 1949 w1.11 bring the total to )$478 million if the following loans ale concluded: Supplement to IBRD Loans After Hexlight Reorganization.............................. 16 Eximbank Loan to American and Foreign Power •••• ~.................................. __ 1~ 28 The first t,.ro items listed (amounting to '~lOO million) of the present debt represent the settlement value of past funded debt of the Mexican Government ~nd the Mexican ~ailroads which runounted to $463 million of principal and / -19 - $603 million of back interest. The next. tvo items represent obligations assumed vis-a-vis the former owners of oil prop€rties and agricultural lands expropriated by the Mexican Government. Most of the remaining ~223 million represents indebt- edness resulting from credits or advances obtained by !vIexico since the end of the war (of which $46 million is yet to be disbursed). About ~60 million was obtained from the IMF and the U.S. Treasury for the purpose of meeting balance of payments difficulties. The remainder was. extended largely for the development of highways, railroads, and electricity with smaller amounts for industrial in- • stallations • It is to be noted that the first two categories, which make up about one- half of the total foreign debt, represent scaled down obligations resulting from amounts invested over an extended period of time prior to 1930. In contrast to projects being undertaken with the recently acquired debt, tbese investments have for some time been making their contribution to the Mexican economy and can- not be counted upon to bring about any appreciable increase in Mexico's producti- vity. • A rough estimate of the annual dollar requirements for servicing the prospective Mexican debt of ~~478 million for the next fifteen years is indicated below a This estimate is based upon the assumption that the amounts O1.ved to the IMF and the U.S. Treasury will be repaid during the next ..6 years, that the new loans under the Eximbank $50 million commitment will be amortized during the last seven years of the next decade, and that loans to American and Foreign - ,20 - 1/ Power and Mexican Light will be twenty-year loans.- (1) (2) (3) (4) Present Debt Repayment of Seryict:. & Amortiza- ~ Amounts Owed t.io:'l of r~ 0.~})t:~,;' t.ive to U.S. Treasury to l~f:l;1?()r (' L,)a~."!·~: and IMF Power (~~Z million) &- - He:x.Jigt.:t:· --.. p _.mill.) (:{'16 __.._- 1949 37 10 47 1950 40 10 2 52 1951 38 10 2 50 1952 34 10 2 46 1953 34 10 2 46 1954 33 10 2 45 1955 31 2 33 • 1956 28 2 30 1957 24 2 26 1958 22 2 24 1959 19 2 21 1960 18 2 20 1961 17 2 19 1962 16 2 18 1963 7 2 9 196IL _. _____________ _________1L -~- ~~ The service requirements given in column 3 of the foregoing table amount to approximately $50 million per year during the next six years. As a percentage of total 1947 foreign exchange receipts C~691 million) and total exports • ($447 million), this amounts to respectively. ?% and 11% respectively. exchange receipts and exports would raise these percentages to ~ decline of 25% in It should also be noted that an annual serv'ice requirement of 10% and 15% this magnitude is approximately equal to the total present. gold and foreign exchange reserves of Mexico. 17- Includes assumed interest and amortization of undisbursed Eximbank loans ($46 million as of Jan. 1, 1949). It is also assumed that bondholders assent to the railroad debt readjustment plan 1949 through 1951 and that back inter- est and back payments for 1946, 1947, and 1948 are made over 1949-50-51.