Report No. 16373-ME Mexico Mobilizing Savings for Growth (In Two Volumes) Volume 1: Sunmary Report December 23, 1997 Mexico Country Management Unit Latin America and the Carribean Region Document of the World Bank CURRENCY EQUIVALENTS Currenc, Unit = Mexico New Peso (MemNP) USS1 00 = MexNPS 072 (December 18, 1997) GOVERNMENT FISCAL YEAR Januar% I - December 31- ABBREVIATIONS AND ACRONYMS ABS Asset Backed Secunties ADE Debtor Relief Program (Acuerdo de Apoyo Inmediato a los Deudores de la Banca) AFORES Retirement Fund Administrator (Administradores de Fondos de Aborro para el Retiro) ASCRA Accumulating Savings and Credit Association CANAFO Mexican Development Savings Bank (Caja Meicana de Fomento) CD Certficate of Deposit CEA Special Savings Account (Cuentas Especiales de Ahorro) CETES Mexican Treasurm Bills CMCP Confederation of Mexican Cajas Populares CNBV National Banking and Securities Commission (Comusion Nacional Bancaria , de Valores) CONSAR National Comrmssion of the Retirement Savings S% stem (Comision Nacional del Sistema de Aborro para el Rearo) CPM Caja Popular Mexicana EU European Union FOBAPROA Bank Fund for Savings Protection (Fondo Bancario, de Proteccion a Aborro) FOVI Bank Housing Finance Fund (Fondo de Operaci6n , Futanciamuento Bancano a la Vivienda) FOVISSSTE Gosermment Workers' Housig Fund (Fondo pars [a Vivienda de los Trabajadores del ISSSTE) GAPP Generall Accepted Accounting Principles GATT General Agreement on Trade and Tariffs GDP Gross Domestic Product GDS Gross Domestic Saving GNI Gross National Income GNP Gross National Product GNS Gross National Saving ICVM Disability, Old Age, Severance and Death Benefits (InvalLdez, Cesanta. Vejez. Muerte) IMSS Mexican Social Security Institute (tIsato Meutcano del Seguro Social) INEGI The National Institute for Stasncs, Geography and Information (Instiruto Nactonal de Estadistica, Georgrafia e Informatica) INFONAVIT National Workers' Housing Fund Institute (Instituto del Fondo Nacional de la Vivienda de los Trabajadores) ISSSTE Social Security Institute for Government Workers MBS Mortgage Backed Security MPG Minmum Pension Guarantees MPK Margusal Product of Capital Net of Depreciation MSE Mexican Stock Exchange NAFIN National Finance Bank (Nacional Financiera) NAFTA North American Free Trade Agreement NFI Net Foreign Income and Transfers OECD Organization for Economic Cooperation and Development PANHAL National Savings Trust (Patronato del Ahorro Nacional) PAYG Pay-As-You-Go PDC Private Domestic Credit PRONASOL National Solidarity Program (Programa Nacional de Solidaridad) PSL Pension System Law R&D Research and Development ROSCAS Rotating Savings and Credit Associations RPTR Relative Price of Tradable Goods SAP Savings and Loan Association (Soctedad de Aborro y Prestamo) SAR Retirement Savings System (Sistema ie Aborro para el Retiro) SEC Security Exchange Commission 909Tffi Secretarfat for Social Development (Secretana de Desarrollo Social) SHCP Ministry of Finance (Secretaria de Hacienda y Credito Pfiblico) SIEFORES Society for Specialized Investment un Retrement Funds (Sociedades de Inversi6n Especializadas en Fonidos para el Retiro) SNA S. stem ofNational Accounts SOFOL Limited Purpose Bank (Sociedad Financ.era de Objero Limitado) SPV Special Purpose Vehicle TFP Total Factor Productivity UDI Inflation Adjusted Units (Unidad de Inversi6n) VAT Value Added Tax VVA Asset Disposal Agency (Valuacion v Venta de Acctivos) Vice President Shalud Javed Burki, LCR Counts Director Olivier Lafburcade. LCC IC Sector Manager Guillermo Perry, LCSPR Staff.Member Zia Qureshi. LCCIA MEXICO MOBILIZING SAVINGS FOR GROWTH VOLUME I: SUMMARY REPORT CONTENTS Preface ..............................................................vii A. Overview ........................................................... 1 B. Mexico's Savings Performance ................................ ...............2 C. Why Savings Must Increase ..............................................6 D. Policies for Mobilizing Savings............................................7 (i) Maintaining Macroeconomic Stability.....................................8 (ii) Improving the Tax System............................. . ........9 (iii) Extending Pension System Reform.......................................11 (iv) Developing the Financial Markets......................... .. ..........13 (v) Fostering Small Savings..............................................17 Statistical Annex: Basic Macroeconomic Data....................................20 TEXT FIGURES 1 National Saving and Investment Balance .............................. ..........3 2 Public and Private Saving Rates ..............................................3 3 Bank Liabilities and Credit Extended to the Private Sector........................4 4 Estimates of Private Sector Wealth................................ ............. 4 5 The Current Account and Portfolio Capital Inflows ............................ .... 5  VOLUME II: DETAILED REPORT CONTENTS Preface to Volume II .................................................... vii 1. The Decline in Mexican Saving: A Cost of Reform9.......... ............. .. . 1 I. Introduction.......................................... ... . ...... 1 II. Measurement of Saving ....................... .....................3 National versus Domestic Saving .................................... 3 Public-Sector Budget Accounts .........................................5 Private versus Public Saving ............................. ......... 7 III. Accounting for The Saving Decline........ ............. ...............10 Exchange Rate-Based Stabilization................................... 10 External Sector Liberalization ........................ ......... 12 Financial Sector Liberalization ............................. ....... 16 An Asset-Market Bubble........................................18 Regression Analysis ...........................................21 IV. Policy Implications .............................................. 23 2. Public Saving, Stabilization and Private Saving in Mexico.........................29 I. Introduction................................................. ..29 II. Savings in Mexico and Around the World................................30 III. Savings Behavior in Mexico ................................. ........ 31 Measuring Savings............................................ 31 Annual Data 1960-1994 ........................................34 Quarterly Data 1980-1995 ................................. ......35 Regression Analysis .................... ............... 36 IV. A Model of Consumption and Saving in Mexico ........................... 39 Effects of Shocks on Macroeconomic Aggregates ................. ........40 Predictions of the Model. ........................................ 44 V. Conclusion ...................................................46 3. Tax Policy, Domestic Savings and Investment in Mexico......................67 I. Introduction ................................................... 67 II. Current Tax Structure in Mexico .................. ................ 68 iii iv Contents III. Taxation of Investment in an Open Economy ............... ............... 68 IV. Capital Deepening versus Productivity Growth.. ......................74 V. Summary .....................................................77 4. Financial Markets and Savings Mobilization: Regulatory and Development Agenda.............81 I. Overview ................................................. ........ 81 II. Financial Markets and Savings ............................. ......83 III. Pension Funds ................................................. 86 Recent Pension System Reform .......................................86 Policy Issues in Pension System Design ..................................... 86 Recommendations ............................................91 IV. Banking System . ................................................92 Current Status of the Banking System .................................92 Key Reform Issues ....................... ............... 97 Recommendations ................................................... 100 V. Stock Market ........................................ ......... 101 Recent Performance of the Mexican Stock Market................ ....... 101 Causes of Small Corporate Universe, Low Market Capitalization and Illiquidity .......... 103 Recommendations .................................... ........ 104 VI. Asset-Backed Securities Markets ................................ ..... 105 Problems in Issuance of ABS in Mexico ..................................... 106 Recommendations ............................................ 108 VII. Mutual Funds................... . ...................... ..... 109 Recent Performance ...................................... ..... 109 Regulatory Issues.......................................... 109 Recommendations ..................................... ....... 110 5. The Impact of Mexican Pension Reform on Savings. ............................. 113 I. Introduction.................................... . ........ 113 II. The Mexican Pension Reform....................................... 115 The Existing System and Need for Reform ................................... 115 The New Pension System for Private Sector Workers ............................. 117 Assessment, Risks and Uncertainties ....................................... 120 m. Methodology and Background Projections. ............................... 122 Impact of Pension Reform on Savings: Conceptual Background ........... .... 122 A Projections Model................................ .................. 123 IV. Analysis of the Savings Impact ............................................... 128 Contents v Estimation.................. .............................. 128 Assessment ................................................ 131 V. Conclusion ................................................... 132 6. Improving the Quality and Availability of Small Savings Instruments in Mexico ..... ..... 143 I. Introduction................................................... 143 II. Overview of Financial Savings Services for Low-Income Groups ............ ... .. 145 Formal Savings Services ........................................... 145 Semi-Formal Savings Services ............................... .....151 Informal Savings Services ............................................. 153 . Conclusions. .................................................. 155 V. Policy recommendations ........................ ............155 Reducing Transaction Costs.....................................1 56 Fostering Institution-Building ..................................... 157 TEXT TABLES 1.1 Saving and Investment Balance, 1970-94 ... ....................................1 1.2 Relationship Between National Accounts Aggregates, 1970-94.......... .............4 1.3 Alternative Measures of Public Sector Balance, 1970-94................ ..........6 1.4 Alternative Measures of Public and Private Saving, Nominal Values ....................7 1.5 Alternative Measures of Public and Private Saving, Inflation-Adjusted .....................9 1.6 Interest and Exchange Rates, 1980-94............................... 12 1.7 The Mexican Current Account Deficit and Its Financing ................. .........14 1.8 Private Consumption and Its Components, 1980-94........................ 15 1.9 Net Credit and Liabilities of the Consolidated Banking System, 1981-94 ................17 1.10 Price Indices for Mexican Equities and Land, 1980-94 ............. .............. 19 1.11 Private Sector Wealth and its Components, 1980-94 ....................... .... .20 1.12 Regression Estimates for the Private Saving Rate, 1971-94......... ............. .22 2.1 Growth Regressions with Savings Rates, 1960-1989 ............................47 2.2 Summary Statistics for Growth Rates .....................................47 2.3 Summary Statistics for Growth Rates ..... ................. .... ... ...........48 2.4 Consumption Regressions ...............................................49 2.5 Savings Regressions ................................................50 4.1 Agenda for Financial and Capital Market Development ..................... ..... 84 4.2 Size of Mexican Financial Institutions and Markets ........................... ... . 85 4.3 Structure of Mexican Commercial Banks............. ...... .... ....... . .. 93 4.4 Size Distribution of Commercial Bank Direct Funding .....................95 4.5 CNBV's Latest Estimate of the Fiscal Cost of Bank Restructuring Programs .............97 4.6 Measures of Mexican Stock Exchange .................................... 102 4.7 Comparative Stock Market Indicators, 1994-1995 ... .... ............ ... .. .....102 vi Contents 5.1 Inflation and Minimum Wage Assumptions ............................ ..... 133 5.2 Fiscal Costs of Reform ..............................................134 5.3 Net Accumulation in Individual Savings Accounts and Retirement Insurance Reserves ............. 135 5.4A Impact on National Savings under Alternative Financing Schemes Low Inflation Scenario....... 136 5. 5A Impact on National Savings under Alternative Financing Schemes High Inflation Scenario ...... 138 6.1 Bank Branches and Accounts .......................................... 144 6.2 Agregate Savings and Financial Penetration ................................. 144 6.3 Small Savings Instruments in Mexico................................. ..... 145 TEXT FIGURES 1.1 National Saving and Investment Balance, 1970-94 ........................2 1.2 Alternative Measures of National Saving, 1970-94..............................5 1.3 Public Sector Budget Balance, Nominal and Inflation-Adjusted ......................7 1.4 Nominal Values of Public and Private Saving................ ................. 8 1.5 Inflation-Adjusted Values of Public and Private Saving .......................... 12 1.6 The Current Account and Portfolio Capital Inflows.............................15 1.7 Bank Liabilities and Credit Extended to the Private Sector, 1980-94 ............ ...... 18 1.8 Private Sector Wealth, Alternative Valuations ................................20 1.9 Actual and Predicted Private Saving Rate, 1971-94 .............................22 2.1 Level of Income and Savings Rate............................ ...........51 2.2 National Savings Rate and Growth Rate of Real Per Capita GDP....................51 2.3 Annual Time Series for Mexico, 1960-94 .............................. .....52 2.4 Annual Time Series for Mexico, 1960-94...................................52 2.5 Annual Time Series for Mexico, 1960-94............................. ....... 53 2.6 Quarterly Time Series for Mexico, 1980Q1-1995Q2 .......................53 27 Quarterly Private and Public Sector Time Series ..........................54 2.8 Response to TFP Shock in Tradables Sector ...................................54 2.9 Response to TFP Shock in Nontradables Sector ...............................55 2.10 Response to a Decrease in Foreign Interest Rate ...............................55 2.11 Response to an Increase in Foreign Inflation Rate..............................56 2.12 Response to a Decrease in Depreciation Rate of the Peso.........................56 2 13 Response to an Increase in Government Consumption ...................... .....57 2.14 Response to a Decrease in Tax Rate...............................57 2.15 Observable Shock Measures ...........................................58 2.16 Model Predictions. .............................. ...................58 2.17 Model Predictions for Shares of GDP .....................................59 4.1 Ten Most Active Stocks' Share of Total Value Traded ..................... ..... 103 5.1 Fiscal Costs under Alternative Inflation Scenarios ....................... ...... 126 5.2 Private Savings Accumulation under Alternative Inflation Scenarios .................. 128 5.3 Impact on National Savings under Alternative Financing and Inflation Scenarios ..... ..... 130 5.4 Impact on National Savings under Alternative Assumptions about Substitution Effect ........ ... 130 5.5 Impact on National Savings under Alternative Assumptions about INFONAVIT Reform.......... 131 PREFACE The Mexican crisis of 1994-95 dramatically brought home the importance of saving to economic stability and sustained growth. This report analyzes the causes of Mexico's relatively low saving rate, especially the decline since the mid-1980s, and develops a set of policy recommendations to improve Mexico's savings performance. The report is in two volumes: Volume I provides a summary of the report's findings and recommendations, while the detailed supporting analysis is presented in Volume II. Raising the national saving rate is a major point of emphasis in the policy agenda of the present Mexican Government. This report is intended as an input into the efforts the Government is making toward that objective. In the preparation of the report, the Bank team received valuable cooperation from several parts of the Mexican Government, especially Secretaria de Hacienda y Cr9dito Publico and Banco de M6xico, which is gratefully acknowledged. This report was prepared by a team led by Zia Qureshi and comprising Craig Burnside, Hemant Shah, Mike Lubrano, Laura Mecagni (all Bank staff), and Ulpiano Ayala, Barry Bosworth, Roger Gordon, and Catherine Mansell-Carstens (consultants). Tony Ollero and Joost Draaisma contributed with research and statistical assistance. Mark Austin provided editorial assistance and, together with Raquel Obleas and Luis Mufioz, processed the document. Peer reviewers were Frank Lysy, Peter Montiel and Luis Serven. As part of the preparation of the report, Bankwide seminars were held on most of the background papers included in Volume II, and the papers have benefited from comments from the seminar participants. A Bankwide review of the overall report was held in March 1997, and discussions with the Mexican Government on the draft report were held later in the year. The present version of the report incorporates comments received at those discussions. vai 'r MEXICO MOBILIZING SAVINGS FOR GROWTH SUMMARY REPORT A. OVERVIEW 1. Mexico must improve its growth performance in order to achieve its development objectives of raising the level of welfare of its people and reducing its persistently high poverty. A necessary condition for achieving higher growth in a sustainable manner is for Mexico to mobilize more of its own resources in support of investment. Mexico's national saving rate is relatively low, and it declined appreciably in the latter half of the 1980s and the early 1990s (by as much as 7.5 percent of GDP). By 1994, the national saving rate had dropped to about 16 percent of GDP. The decline in national saving was an important underlying cause of the financial crisis that erupted that year. 2. This report has two objectives. First, it reviews trends in saving in Mexico and analyzes the causes of the low rate of saving, especially the decline in saving since the mid-1980s. The analysis focuses on the period up to the 1994 crisis. Second, the report develops a set of policy recommendations aimed at a stronger mobilization of national savings. These recommendations seek both to increase the saving rate and to improve the efficiency with which savings are deployed in supporting investment. The focus of the report is on private saving, which experienced most of the decline in recent years. 3. Mexico's low and recently declining saving rate is explained by an interplay of structural factors and macroeconomic developments. While factors such as weaknesses in the tax and social security systems and the lack of depth of the financial system have acted as constraints on saving for some time, macroeconomic developments of the latter half of the 1980s and early 1990s also played an important role in the decline in saving that occurred during that period-rapid growth of bank credit to the private sector, surge in portfolio capital inflows, boom in domestic asset markets, currency appreciation. 4. The report recommends that Mexico aim to increase its national saving rate to around 25 percent of GDP over the medium to long term, a level moderately above that prevailing prior to the saving rate decline. The bulk of this increase in saving will need to come from the private sector, but public saving will need to rise too. The report's recommendations on policies to increase national saving can be grouped under five heads: * Macroeconomic policies must provide a stable financial environment conducive to a sustained rise in saving. This means adherence to fiscal, monetary and debt management policies that foster macroeconomic stability, together with an exchange rate policy supportive of competitiveness. Maintenance of a stable macroeconomic environment is a necessary condition for Mexico to benefit from the virtuous circle that links higher growth with higher saving. * There will be need for tax reform, both to increase public saving and improve incentives for private saving. The centerpiece of the tax reform should be a major strengthening of the value-added tax (VAT), that would raise more revenue and at the same time shift the balance of taxation from income toward consumption and allow a reduction of the effective tax on the return to capital. * The reform of the pension system for private sector workers that came into effect in 1997 is a major step forward, with a potentially significant impact on saving that would be stronger the more the 1 transitional fiscal costs of the reform are met through fiscal adjustment. But the present reform must be followed by further actions to: establish a sound regulatory and investment regime for the new privately managed pension funds; deepen the reform of the housing component of the pension system (INFONAVIT); and extend pension reform to public sector workers. The development of financial markets is important both to increasing savings and to allocating them efficiently. A priority is the rehabilitation of the banking system from the recent crisis. But equally important are the more fundamental reforms in the incentives and regulatory regime-reform of bank liability insurance, upgrading of bank accounting, capital rules, prudential regulation and supervision-which are necessary to ensure sound development of the banking system in the future. Improvements in the legal, regulatory and institutional framework are also key to the development of the capital markets more broadly, for which the establishment of private pension funds creates new opportunities for growth-securitization and bankruptcy laws, regulatory and supervisory regime governing the securities markets. The availability and quality of small savings instruments need to be improved to expand the access of low-income savers to better-quality savings vehicles, especially in rural areas. The spread of banks into rural areas should be encouraged, drawing on the successful experiments in other countries that demonstrate the viability of a rural bank branch network. Scope exits for making a more effective use of the small savings schemes utilizing the network of post offices (PAHNAL). Given a stronger legal foundation, and improved prudential regulation and supervision, a greater role in the mobilization of small savings can also be played by the large number of financial cooperatives, or cajas de ahorro, that exist in Mexico. 5. The main findings of the report are summarized below. Details of the analysis and conclusions are provided in Volume II of the report. B. MEXICO'S SAVINGS PERFORMANCE 6. In the latter half of the 1980s and the first half of the 1990s, Mexico implemented a major program of stabilization and structural reform. Substantial progress was made in the macroeconomic sphere with the sharp reduction of the fiscal deficit and inflation, and a number of structural reforms were implemented. Mexico liberalized its trade regime, established both current and capital-account convertibility, privatized public enterprises including banks, and sharply reduced government regulation of the domestic financial system. Yet, the actual gains in economic performance were limited. The economy did rebound from the 1986 recession, but overall growth remained well below the rates achieved in the 1970s (GDP growth averaged 2.7 percent during 1987-94, less than half the growth rate over the 1970s). 7. One particularly notable feature of the Mexican experience was the failure of the reforms to move the economy in the direction of higher rates of domestic saving and capital accumulation. Together with a productivity performance that remained relatively weak (structural reforms, though significant, did not go far enough to give productivity a major boost), the lack of dynamism in domestic capital formation kept growth low.' Domestic investment had by the early 1990s largely recovered from I Saving/investment and productivity constitute two fundamental determinants of long-term growth. The focus of this report is on the former. For more on the latter, see Mexico: Reform and Productivity Growth, World Bank, 1994. A more up-to-date analysis of Mexico's productivity performance is the focus of another World Bank report currently being prepared. 3 the depressed rates of the mid-1980s, but it did not reach the peak share of GNP achieved in the National saving has declined substantially since the early 1980s, and it has remained far below the mid-1980s rates that have become common for East Asia. Figure 1: National Saving and Investment Even more surprising, the rate of national saving Balance actually fell substantially, from an average (Percent of GNP) approaching 24 percent of GNP in 1980-84 to about 16 percent by 1993 (Figure 1). With the deterioration of internal saving, Mexico became 25 increasingly dependent on net inflows of foreign 20 resources, reflected in current account deficits of 6-8 percent of GNP in 1992-94, to finance to F investment. The low rate of saving and the consequent excessive dependence on foreign capital inflows was a fundamental factor underlying the financial crisis that erupted in late 1994.mid 8. The decline in saving started in the first half of the 1980s but became more pronounced after 1987. The national saving rate dropped by about 7.5 percent of GDP from its average level in 1980- 84 to that in 1992-94. How this decline was shared between public and private saving depends upon what measure of the public budget balance is used-whether it is defined to include or exclude the financial intermediation activities of government. In inflation-adjusted terms (adjusting interest payments on public debt for inflation), the decline in the national saving rate during the above period is almost wholly explained by private saving if public saving is estimated using the economic balance (fiscal balance excluding government financial institutions). If public saving is estimated using the financial balance (fiscal balance including government financial institutions), about 2 percentage points of the 7.5 percentage point decline appears attributable to public saving (Figure 2). Either way, the major part of the decline in the national saving rate was in private saving-hence the focus of this report on private saving. The decline in saving has been concentrated in the private sector Figure 2: Public and Private Saving Rates (Percent of GNP) infleiorMUed inwlaA4USted 35 Ecomic EWance 35 FiraM Baaw 30 30 25Pirwaeswing 25 PI vaeing 20 20 15 15 10bliesetorse1 Public seorg swirig 5- 0 0 -5 -5 -10.................................................-10. 1970 1975 1980 191% 1990 1970 1975 1980 19 1990 Source: Volume U, Paper 1. 4 9. An important question analyzed in the report is what caused this large drop in private saving. Interest focuses especially on the F aimrket libeiato wa co period after 1987, both because the decline in saving was concentrated in that period and Figure 3: Bank Liabilities and Credit Extended because 1987 also marked the year when Mexico to the Private Sector embarked upon its stabilization and reform (Percent of GDP) program. While it is difficult to sort out all the 5o changes that were then occurring in Mexico, analysis suggests that a substantial part of the fall in private saving during that period can be attributed to certain aspects of Mexico's reform 20 program and related market developments. A key role was played by the liberalization of financial 10 markets-privatization, elimination of restrictions 0 on lending and reserve requirements, permission to 10 1985 1wo 1m banks to issue marketable securities, liberalization Source: Volume 11, Paper 1. of external capital account transactions-that permitted a large expansion of credit to the private sector, and by a major boom in asset markets that generated large wealth effects. Credit extended to the private sector rose from 8.5 to 41 percent of GDP between 1987 and 1994 (Figure 3). The sharp increase in credit available to the private sector contributed to the explosion in asset values. The stock market index rose seven-fold and land prices rose five-fold behween 1987-93. An estimated composite index of private sector wealth shows private wealth at market value rising from 1.5 times GDP in 1987 to 5.6 times GDP in 1993 (Figure 4). The enlarged access to credit and the surge in private wealth as a result of the massive capital gains boosted consumption. 10. A sharp rise in foreign capital inflows also increased credit availability and fed the surge in cap)ital gains. It is not only the size of the capital inflow that is relevant here, but also its composition: much of the surge in inflows came in the form of portfolio capital that boosted prices in the relatively thin dornestic securities market. Negligible until 1990, portfolio capital inflows rose to 8 percent of GNP by 1993, before plunging in 1994 as the financial crisis developed (Figure 5). 11. The exchange rate-based stalbilization program adopted by Mexico also Large wealth effects from an asset market boom played a role. International experience provides contributed to the private saving decline evidence of such stabilization programs leading to a short-term boom in consumption (Argentina, Figure 4: Estimates of Private Sector Wealth Chile, Israel and Uruguay, for example, have (Ratio to GDP) experienced such episodes). In Mexico's case, the i c stailization program appears to have contributed i r ares ose f both directly and indirectly to the drop in private w 4 saving. Analysis in this report finds that saving 3 was negatively affected by the real exchange rate appreciation. Some contributory role also appears i 2 to have been played by trade liberalization that i c te e e r lowered the price of imported consumer goods. Indirectly, the stabilization program appears to have boosted consumption through its effects on Source: Volume I Paper 1. expectations, that raised consumers' perceived 5 permanent income and generated investor optimism (euphoria) that fed the financial and assetexpanding external deficit, added to the domestic 12. What appears to stand out most financial and asset market boom prominently in the decline of private saving in Figure 5: The Current Account and Portfolio Mexico is the potential danger of rapid Capital Inflows liberalization of financial markets without (Percent of GNP) supportive institutional strengthening. An open C u competitive financial market calls for a different Account type of financial regulation from that applied P \ during the era of credit controls and allocations. 0 - Both the regulators and the market participants are .5- likely to be rather inexperienced. The explosive growth of bank credit to the private sector hurt -1 a saving, and also contributed to a serious bank 1990 1e8s - s9 crisis when a large part of that credit growth went Source. Volume II, Paper 1. sour (para. 47). It would seem better to proceed with financial liberalization at a pace determined by how fast the institutional framework for prudential regulation and supervision can be strengthened. This is particularly true if domestic financial market liberalization is combined with external capital account convertibility. The inflow of foreign capital can easily overwhelm domestic markets that are still lacking in depth. Mexico could have induced a more conservative bank lending policy, e.g., by requiring higher capitalization of banks, and it could have attempted to temper portfolio capital inflows, through a macroeconomic policy mix that supported lower domestic interest rates and perhaps also through a limited use of tax and reserve account measures similar to those employed by Chile. The Mexican experience suggests that reforming economies should be wary of large price increases in asset markets, induced by the transitory effects of market liberalization and excessive optimism. The Mexican authorities viewed the price increases in equity markets as a sign of the success of the reform program, but they also contained the seeds of the subsequent collapse. 13. As noted, the decline in saving was a principal underlying cause of the financial crisis of 1994-95. It was the major force behind the expansion of the current account deficit, and the reliance on private portfolio capital proved to be as transitory and as dangerous as that on bank finance a decade earlier. In principle, the inflow of capital through a current account deficit can make a contribution to stronger and sustainable growth, if the inflow is channeled into investment that increases domestic output and generates the resources needed for the eventual servicing of the external capital. Capital inflows in the form of foreign direct investment can be especially conducive to such an outcome. In contrast, Mexico's is a case where the bulk of the capital inflow supported consumption rather than investment, and the dominant form of the inflow was portfolio capital. The combination of a high and rising domestic investment rate and a large foreign resource inflow can be viewed in a favorable light (with the proviso that the increased investment flows into productive activities), but the combination of a falling domestic saving rate and a rising resource inflow should be viewed as a threat to stability and sustained growth. 14. While the decline in public saving, estimated using the public sector financial balance, was small relative to private saving, it nevertheless contributed to the overall decline in national saving An important element of Mexico's stabilization and reform program was the reining in of the country's large fiscal deficit, and initially considerable success was achieved in that objective. However, there was a renewed deterioration of the public sector budget balance in 1992-94. This resulted partly from an increase 6 in spending in the run-up to the 1994 elections, especially through the government development banks. Partly it resulted also from fiscal pressures arising from slow growth in tax revenues, that tended to lag behind GDP, signaling a low elasticity of the tax system and weaknesses in tax administration (para. 32). 15. The large decline in private saving and the sharply increased reliance on foreign capital suggest that Mexico's fiscal policy, viewed in the overall macroeconomic context, was too expansionary. In the situation in which the fall in private saving could not be reversed, the need for greater national saving could have been addressed through running a larger budget surplus. In contrast, the fiscal position actually weakened, contributing to the build-up of macroeconomic pressures that culminated in the financial crisis. Also, fiscal restraint could have been complemented by some depreciation of the exchange rate. C. WHY SAVINGS MUST INCREASE 16. Mexico needs to raise its national saving rate significantly, from the low level of about 16 percent of GDP to which it had dropped prior to the crisis of 1994 toward 25 percent of GDP over the medium to long term. This would involve not only reversing the large decline in the saving rate that took place after the mid-1980s, but also raising the saving rate to a level moderately above that prevailing prior to that decline. At 25 percent of GDP, the national saving rate in Mexico would still be appreciably lower than the rates typical of the high-saving and fast-growing East Asian economies (30-35 percent of GDP), but that is a level that seems to be absolutely necessary over the medium term for Mexico to achieve its growth and development objectives in a sustainable manner. 17. Over the medium to long term, Mexico needs to attain and sustain a GDP growth rate of about 6 percent per annum to generate gainful employment for its expanding labor force and make serious inroads into its persistently high poverty. It is estimated that this would require an increase in Mexico's gross domestic investment toward an average rate of around 27 percent of GDP, from the recent crisis- depressed rate of around 20 percent and the pre-crisis rate of about 23 percent. In the medium term, Mexico could run external current account deficits averaging around 2.5 percent of GDP. Deficits much larger than that on a continuing basis run the risk of endangering the sustainability of the economy's external financial position. Mexico's recent experience provides a clear warning against allowing the external deficit to become very large, to levels that imply an unsustainably rapid increase in external liabilities and that render the economy vulnerable to potentially volatile capital flows. The desired long- term investment rate and the need to keep reliance on foreign saving within sustainable limits imply a desired long-term national saving rate of around 25 percent of GDP, as noted above. 18. For any target growth rate, the required investment is less the faster the growth in productivity. Extending and deepening structural reforms to improve Mexico's productivity performance will be a crucial, indispensable element of the country's development agenda. The above estimate of investment requirements in the medium to long term assumes progress on this front, but recognizes that it would be gradual. It also reflects Mexico's large investment requirements in the coming years, especially in infrastructure development and in the modernization of capital that, in the past several years of a drop in aggregate investment, has suffered from inadequate investment to offset rapid depreciation and obsolescence. Also, to an important degree, productivity growth itself would depend on investments embodying new technologies and processes. 19. Both private and public saving will need to contribute to the desired increase in national saving. As the fall in saving in recent years was much larger in private saving, the increase in national saving in the period ahead will need to come mainly from a recovery in private saving. In the couple of 7 years preceding the 1994 financial crisis, private saving had declined to an average of about 14 percent of GDP and public saving to an average of about 2 percent of GDP (in inflation-adjusted terms and using the financial balance-based measure of public saving). A reasonable target would be for private saving to rise to about 20 percent of GDP over the medium term and public saving to about 5 percent of GDP, in both cases to levels moderately higher than those prevailing prior to the decline in saving starting in the latter half of the 1980s. 20. Increasing public saving can be a quick and effective way of raising national saving. Analysis of saving trends in Mexico presented in this report finds that changes in public saving tend to have an offsetting effect on private saving (the so-called Ricardian equivalence effect), but that this effect is partial. Evidence seems to point to an offset coefficient in the range of 0.5-0.6. Even this estimate may be biased upwards by measurement errors: since private saving is computed as a residual, any error in the measurement of public saving automatically gives rise to a negative correlation between public and private saving. Increases in public saving can therefore contribute to raising aggregate saving. 21. Consistent with the above reasoning, increasing the national saving rate is a key element of the policy agenda of the present Mexican Government, as elaborated in the National Development Plan for 1995-2000. More recently, in mid-1997 the Government announced a medium-term macroeconomic policy framework for 1997-2000 (PRONAFIDE) which reconfirmed the emphasis on the mobilization of national savings as a centerpiece of the Government's strategy for the attainment of stronger and sustainable growth. The target increase in the national saving rate envisaged in the PRONAFIDE program is broadly consistent with the orders of magnitude indicated above. I. POLICIES FOR MOBILIZING SAVINGS 22. Part of the desired increase in national saving would be expected to result from the unwinding or correction of some of the factors causing the recent decline in saving that may be considered relatively temporary. That would include, for instance, the end of the asset market bubble, and the correction of the exchange rate appreciation. Partly reflecting these developments, national accounts data for 1995-96 show the beginning of a recovery in private saving. But much of the policy agenda for raising national saving is medium to longer term in nature, involving actions that affect the underlying "structural" determinants of saving, such as the tax system, the pension (contractual savings) system, and the depth of the financial system. Over the still longer term, saving would be influenced also by demographic and socio- economic factors-the age distribution of the population, income distribution-that have an important bearing on saving but evolve more slowly. 23. This report identifies five main elements of the policy agenda for the mobilization of savings in Mexico: maintaining macroeconomic stability; improving the tax system; extending pension system reform; developing the financial markets; and fostering small savings. These are broadly also the areas spanned by the Government's savings mobilization strategy set out in the PRONAFIDE program, and the thrust of that strategy is consistent with the policy agenda proposed in this report. Actions in these five areas would promote higher saving, but would also contribute to raising the efficiency with which savings are allocated in the economy. Some of the recommended policies, such as those for the development of financial markets, may initially affect more the allocation rather than the level of savings, but a more efficient allocation of savings through improved financial intermediation would in turn be expected to boost aggregate savings by supporting higher economic growth. Existing inefficiencies in the financial system indicate that the scope for such improvement in allocative efficiency is substantial. 8 24. The policy agenda summarized below under the above-mentioned five areas is fairly broad, spanning macroeconomic policy, structural reform and institution-building. Clearly, in implementing this agenda, there would be the need for appropriate priority ordering and sequencing, including taking into account the Government's room to maneuver. (i) Maintaining Macroeconomic Stability 25. A fundamental, general condition for the attainment of high saving and investment is macroeconomic stability. An environment marked by economic volatility and uncertainty hurts saving and investment by discouraging long-term commitment of funds and distorting market signals. High inflation, that tends to be associated with negative real interest rates, acts as a disincentive to saving by taxing the accumulation of financial assets. A stable macroeconomic setting is an essential foundation for sustained growth, and hence for an economy to benefit from the positive correlation between high growth and high saving that is supported by much empirical evidence, including that developed in this report. East Asian economies have been particularly successful in exploiting this virtuous circle. For a sustained increase in saving, Mexico must break away from its vulnerability to periodic bouts of macroeconomic instability. 26. The foregoing calls for pursuing sound macroeconomic policies-fiscal, monetary, debt management, exchange rate-in a consistent and sustained manner. Mexico's increased integration into international capital markets, and the increased mobility and potential volatility of capital that comes with it, heightens the need for maintaining strict discipline in macroeconomic management, including sound financial sector management. With increased international integration, the payoffs to sound policies are larger, but so are the penalties for policy errors, as Mexico's own experience vividly demonstrates. 27 Since the crisis, Mexico has made substantial progress in restoring financial stability and creating conditions for a resumption of growth-reducing inflation, reversing the sharp rise in interest rates, boosting exports, correcting the external imbalance, reestablishing investor confidence. But much remains to be done to consolidate and build upon these gains. In the period ahead, three policy areas will be particularly important to the maintenance of macroeconomic stability: preservation of fiscal discipline in the face of important new demands on the budget; maintenance of a competitive exchange rate; and orderly resolution of the crisis in the banking system.2 Besides fostering a stable macroeconomic environment conducive to sustained growth, actions in these areas would contribute to savings directly- higher fiscal and financial sector savings, positive effect of a competitive exchange rate on domestic savings. 28. Strengthen the Fiscal Position. The fiscal policy challenge will be two-fold. First, in the years ahead Mexico faces additional fiscal expenditures of 2.5-3 percent of GDP per annum arising from the fiscal costs of the social security reform (covering both the private sector pension system and health insurance) that came into effect in 1997 and the costs associated with the various bank restructuring programs the Government has introduced in response to the banking system crisis. These major new costs arise at a time when pressures for increase in other spending will likely also be strong, given the demands for a recovery in spending from the compressed levels forced by the 1994-95 crisis in general and the large needs of infrastructure development in particular. On the revenue side, the fiscal position recently has been supported in part by revenues that are temporary in nature-oil revenue windfall, privatization proceeds- which compounds the fiscal challenge ahead. The Government needs to accommodate the important new demands on the budget while preventing a significant weakening of its overall fiscal position (from the near 2 The last of these is taken up in a subsequent section on Developing the Financial Markets. 9 balance in the non-financial public sector accounts achieved in 1995-96). Second, beyond this fiscal adjustment, the Government needs to generate over the medium term an increase in public saving as part of the overall target increase in national saving discussed in the preceding section. 29. While a tight rein must be maintained on non-essential spending, tax measures to mobilize more revenue will be inevitable if these fiscal objectives are to be realized, as elaborated in the next section. The Government needs to formulate its fiscal measures within a framework that brings together the various elements of the medium-term fiscal outlook and provides an integrated assessment of the sustainability of the fiscal position and its macroeconomic consistency. 30. Maintain a Competitive Exchange Rate. The need to maintain a competitive exchange rate and keep the current account deficit within limits that avoid overexposure to external capital is a key lesson of the Mexican crisis. Fiscal adjustment, discussed above, is important also from this perspective. Sizable capital inflows are once again putting upward pressure on the exchange rate. Fiscal adjustment can be instrumental in this situation in preventing excessive real appreciation, tempering the inflows and alleviating the pressure on monetary policy. With the appreciation that occurred in 1996, the real depreciation relative to the pre-crisis level of the exchange rate that remained as of early 1997 was around 20 percent, less than half of the initial real depreciation following the crisis. Mexico needs to prevent any further erosion of competitiveness. (ii) Improving the Tax System 31. In meeting the major new demands on the budget and achieving the desired increase in public saving, several public policy instruments can be used. First, while substantial adjustment in public expenditures has taken place as part of the Government's stabilization and reform program, there remains scope for further economies and efficiency gains, such as through better targeting of consumer subsidies, further reform of health insurance, systemic improvements in the expenditure management process, and containment of politically-oriented spending that tends to rise around elections. Second, better pricing of public services (electricity, for example) offers scope for more public resource mobilization. Third, further progress on privatization (especially in the energy sector) can reduce the burden on the budget of the large needs of infrastructure development. While improvements on these fronts should be vigorously pursued, and steps are being taken by the Government, the fiscal challenges that Mexico faces in the penod ahead would still necessitate tax reform to mobilize more revenues. 32. The objective of tax reform would be the efficient mobilization of revenues to enhance public saving, not to provide resources to increase the size of government. While increasing revenues, tax reform should also seek efficient ways to improve incentives for private saving and investment. With an overall tax to GDP ratio of around 15 percent, the tax burden in Mexico is moderate relative to that in comparable countries, and shows scope for an increase. Also, in recent years, tax revenue has tended to lag behind GDP: the non-oil tax to GDP ratio declined from about 12 5 percent in the early 1990s to 10.5 percent in 1994, and fell further to 8.6 percent in 1996 following the crisis. Tax reform needs to address the low system elasticity and problems in tax administration signaled by this revenue performance. 33. Expand the VAT. The focus of the tax reform strategy should be the VAT. Strengthening the VAT would both bring in more public revenue as well as improve incentives for saving and investment by shifting the balance of taxation from income toward consumption. Currently, because of a very narrow base, as well as extensive non-compliance, Mexico receives only about 3 percent of GDP in revenue from the VAT, well below the 6 percent raised in Argentina and 9 percent raised in Chile. The VAT-based tax 10 reform has been an integral element of Chile's successful drive to raise national saving. In Mexico, extensive zero rating of domestic transactions and exemptions reduce the potential VAT base by nearly half. The VAT reform should include the elimination of all zero rating for domestic transactions, leaving only exports as zero rated. Exemptions should be drastically reduced and limited to basic staples. Also, consideration should be given to raising the standard VAT rate from the present 15 percent to 18 percent, and at the same time eliminating multiple rates. Such reform could double the revenue yield from the tax. 34. The impact of this reform on low-income groups could be cushioned by an increase in the individual income tax credit. Such relief would be better targeted and more revenue-efficient than the present zero rating and exemptions (only an estimated 15 percent of the benefit from the present zero rating of food accrues to the poorest 30 percent of the population). This reform would also be consistent with the current general direction of Government strategy for the reform of consumer subsidies which involves a switch away from price interventions toward targeted income support. 35. Improve Tax Incentives for Saving/Investment. Available international evidence is highly ambiguous on the effectiveness of targeted saving and investment incentives. Mexico's system of corporate and personal income taxation is a comprehensive and modem one, and it is important not to undermine its attributes of efficiency and neutrality by introducing a number of special incentives. A fundamental tax reform that would be supportive of saving and investment is the one proposed above, that would increase the role of the VAT (a tax on consumption) relative to the income tax, and reduce the effective tax rate on the return to capital from what it would otherwise be. Down the road, if the VAT reform (together with the other tax reforms proposed here) is able to raise substantial more revenue, it might also become feasible to consider some lowering of the statutory income tax rate. 36. Beyond that, only a few, broad-based incentives may be considered. With respect to the corporate income tax, provisions that make it easier for firms to take advantage of tax losses, as occurs under a VAT, would reduce existing tax disincentives to investment in new products and technologies that are inherently risky but important to productivity growth. Given the cash flow constraints faced by new firms, another incentive to new investment meriting consideration would be to allow a faster write-off of initial capital costs. On the other hand, the temporary investment incentives introduced during the 1995 recession should be withdrawn (a revenue gain of about 0.5 percent of GDP). With respect to individual savings, consideration could be given to broadening the coverage of the present tax deduction for savings in the special savings accounts (Cuentas Especiales de Ahorro, or CEAs) so that the savings instruments eligible for this deduction include not just these accounts but also voluntary savings in other long-term financial assets. 37. Institute an Effective Property Tax. Mexico currently obtains negligible revenue from the property tax. In contrast, countries making a more effective use of this tax raise upwards of 2 percent of GDP from it (Canada raises 4 percent), and revenue from the tax is a mainstay of their local government finances. Property tax has attractive efficiency and equity features, and is ideally suited as a major source of revenue for local governments. Its more effective use in Mexico will require improvements in cadastral records, assessments, and the efficiency of collection by the municipal governments which administer this tax in Mexico. As part of its decentralization program, the Mexican Government is devolving increasing expenditure functions to subnational governments, but this should be underpinned by a strengthening of these governments' own-revenue generation capacity. Currently, subnational governments depend on federal transfers for as much as three-quarters of their expenditures. This heavy dependence, and burden, on federal finances must be reduced. While other local revenue-raising options should also be considered, such as additional local excises and more effective use of local user charges, strengthening the property tax should be a central element of local government revenue mobilization efforts. 11 38. Strengthen Tax Administration. Tax administration needs to be strengthened in general. Even for the VAT, which in principle would seem less susceptible to evasion than income tax, more than one-third of potential revenue is estimated to be lost due to noncompliance. The overall problem of evasion likely is of larger proportions. While tax administration issues were not studied in detail in this report, improvement appears to be needed on several fronts-effectiveness of tax audits, enforcement, institutional capacity (especially at the subnational level). Simplifying the design of taxes that are unnecessarily complex would facilitate their administration. This is certainly the case with the VAT, with its multiple rates and extensive zero rating and exemptions. Also, public education campaigns can help in instilling a stronger sense of tax payment responsibility in the citizenry. In that regard, actions that entail the risk of moral hazard, such as those in the past and recently that provided partial forgiveness of overdue taxes, should be avoided. (iii) Extending Pension System Reform 39. Potentially the most important policy initiative recently taken by the Government to raise the Mexican saving rate is the reform of the pension system for private sector workers that came into effect in July 1997. Under this reform, the existing defined-benefit, pay-as-you-go (PAYG) pension system for about 10 million private sector workers administered by the Mexican social security institute (IMSS) was replaced by a defined-contribution, funded system that will be managed by private pension funds known as AFORES (Administradores de Fondos para el Retiro). The positive impact of this reform on saving would be expected to arise both directly from the accumulation of savings in the contributors' individual accounts and the prospect of increased returns on those savings, and indirectly from the favorable capital and labor market effects of the reform and in turn from the resulting higher economic growth. The potential for a longer-term increase in saving resulting from expanded pension system coverage could also be significant, as at present Mexico's pension system covers less than 40 percent of the active labor force. Aside from the potential impact of the pension reform on saving, the positive effect of the reform on economic efficiency through increasing capital market depth and labor market flexibility would be an important gain in its own right. 40. Finance Pension Reform through Fiscal Adjustment. The net impact of the pension reform on national saving will depend importantly on how the transitional fiscal costs of the reform are financed. These fiscal costs-arising from existing pensions, the acquired rights of the transition generation, government contributions to individual accounts, and minimum pension guarantees-are estimated at 1-1.5 percent of GDP annually over the next several years. Though significant, these costs are lower than those of some other pension reforms in the region, thanks to Mexico's favorable demographics and the early timing of its reform. Estimating the savings impact of pension reform is difficult as it depends, in addition to the manner in which the transitional fiscal costs of the reform are financed, on the contributors' behavioral response to the change in the pension regime, on the indirect effects of the reform working through the capital and labor markets, and also on second-round effects working through the impact on economic growth. Based on a set of simplifying assumptions, some illustrative estimates of the impact of the Mexican pension reform on national saving have been attempted in this study (see Volume 2, Paper 5 for details). These show that the increase in national saving when the transitional fiscal costs are financed through fiscal adjustment (tax increases or reduction in other spending) is on average more than twice as large as when these costs are financed through borrowing.3 If an increase in the fiscal deficit is avoided, the increase in the national saving rate resulting from the pension reform rises gradually to reach a The difference between the national savings impact of the fiscal adjustment- and borrowing-financed pension refonn diminishes to the extent private agents are "Ricardian" and respond to public dissaving by increasing their own saving. 12 peak of 2-2.5 percent of GDP m about ten years, based on rather conservative assumptions about the rate of return on pension fund investments and growth in the population of affiliates, and abstracting from the indirect and second-round effects of the pension reform on saving. 41. Both the short-term need to maintain a tight fiscal position to support the consolidation of macroeconomic stability and the longer-term need to increase the national saving rate to support stronger growth argue for the fiscal costs of the pension reform to be financed predominantly through fiscal adjustment. A policy that avoids absorbing the bulk of the new private pension fund balances in government borrowing to finance a fiscal deficit would also allow the pension reform to contribute more to capital market development. The Government needs to place the fiscal costs of the pension reform, alongside new pressures on the budget arising from other sources (banking system support and health insurance reform), in an integrated and medium-term framework and develop a financing plan that would accommodate the new demands on the budget while maintaining an overall fiscal balance supportive of macroeconomic stability and savings mobilization. As part of such a financing plan, the scope for reducing other spending must be explored, but, as argued above, an increase in taxes would be unavoidable. Among the tax options, financing through higher consumption taxes, such as the VAT, would have a stronger effect on saving than raising income taxes. Also, the financing of the fiscal costs of the pension reform should be transparently reflected in the budget. This is especially important in the case of the Mexican pension reform which lacks the transparency of other reforms (e.g., in Chile and Colombia) that made the pension system's accrued liabilities explicit through the issuance of pension recognition bonds. 42. Extend the Scope of Pension Reform. While the reform of the pension system for private sector workers that came into effect in 1997 is a major step forward, with a potentially significant effect on saving and economic efficiency, Mexico needs to build on this reform. Two key areas where the reform needs to be extended, and where action could appreciably strengthen the potential impact on saving and efficiency, are: the implementation of deeper reform of INFONAVIT, the housing component of private workers' pension system; and the extension of pension reform to public sector workers. True, these reforms could entail additional transitional fiscal costs, at a time when the fiscal position is already tight (para. 28), but delay would only increase the eventual fiscal cost of reform. 43. Implement More Fundamental INFONA VIT Reform. Under the present pension reform, 5 percent of private workers' salaries (a little over 40 percent of their total mandatory pension system contributions) will continue to flow to INFONAVIT, a public low-cost housing finance institution. Without this component, workers' contributions that will flow to the new private pension funds (AFORES) are likely to be insufficient to support adequate pensions for most workers. Workers' balances with INFONAVIT will be available to them upon retirement, alongside their balances with AFORES, but returns on INFONAVIT balances have tended to be poor, generally negative. INFONAVIT suffers from serious problems of portfolio quality and management, and its investments are a poor substitute for privately managed retirement accounts. The Government's recent reform efforts with respect to INFONAVIT have aimed at improving its performance and making it earn positive returns on workers' contributions, including the creation of contributors' individual accounts and improvement of management and auditing arrangements. Further steps in that direction would include the introduction of more market- based terms and instruments for INFONAVIT mortgage financing. Even with these improvements, however, it is doubtful that returns on INFONAVIT investments could match the potential returns on AFORE investments. Also, these improvements would leave the overall mandatory pension system portfolio (AFORES plus INFONAVIT) heavily dependent on real estate investments (over 40 percent). In the future, therefore, a more fundamental reform should be considered, including the transfer of workers' INFONAVIT contributions to AFORES, fully integrating them into the new funded and privately managed pension system. That would support both higher contribution-defined pensions and enhance the impact of 13 pension reform on saving. Illustrative estimates developed in Volume 2 (Paper 5) show that full integration of workers' INFONAVIT contributions into the pension system reform could possibly double the impact of the reform on saving. Delaying major INFONAVIT reform, therefore, involves a potentially large sacrifice of savings. 44. Reform the Public Sector Pension System. Lack of political consensus prevented the extension of the present pension system reform to public sector workers, who will remain under the old PAYG system. This includes the employees of the federal and state governments, public enterprises and the military, totaling about 2.3 million, or about a quarter of the private sector employees covered by the present reform. The partial character of the present reform not only limits its potential savings impact but could also give rise to impediments to labor mobility and inequities between the different pension subsystems. The public employee pension system, the largest part of which is ISSSTE covering all federal and some state government employees, is known to be inefficient and actuarially unsustainable. The longer the reform is delayed, the larger will be the fiscal burden of eventual reform. Preparations for public sector pension reform should start now, including estimating and publicizing its benefits and fiscal costs and creating individual records. While the focus of this reform would be ISSSTE, state government and public enterprise pension funds should also be covered (for example, federal transfers to states and public enterprises could be conditioned on the rationalization of their pension funds). Also, along the lines of what is recommended above for INFONAVIT, the public sector pension system reform should include FOVISSSTE, which is the analogue of INFONAVIT for government workers. (iv) Developing the Financial Markets 45. Recent literature has provided increasing evidence of the contribution sound financial system development can make to economic growth, by mobilizing savings and channeling them more efficiently to investment. In addition to the traditional role of financial markets in offering savers attractive and diverse savings instruments and facilitating investors' access to finance, recent literature has emphasized their role in allowing better risk management and improving information flows and corporate governance. Financial market development is becoming increasingly important also to macroeconomic stability, as markets with greater breadth and depth are better placed to withstand possible shocks arising from the increasingly mobile and potentially volatile international capital flows. Macroeconomic and banking system crises are increasingly interrelated, as Mexico's own experience vividly illustrates. The review of Mexico's savings performance in recent years in Section B highlighted the importance of underpinning financial market liberalization with effective prudential regulation and supervision. 46. The most urgent issue in Mexico's financial sector agenda is the restoration of the crisis- stricken banking system to health and the strengthening of its regulatory and institutional underpinnings. But there is need also to intensify efforts relating to the development of the broader financial system, including capital markets. The priority of this broader reform agenda has risen with the establishment of the new private pension funds which open major new opportunities for capital market development in Mexico. The following paragraphs outline the main elements of this reform agenda for financial and capital market development in Mexico. Many of the measures considered below will have their initial effect on the efficiency rather than the level of national savings, but would promote higher savings subsequently by contributing to higher economic growth. 47. Banking System. The financial system in Mexico is dominated by commercial banks, which account for roughly 60 percent of the total financial system assets. The health and efficiency of the banking system, therefore, have a major bearing on the mobilization of savings in the economy and the 14' efficiency with which they are deployed. Mexico's recent economic crisis had a serious impact on its banking system, causing extensive system losses and distress, but important systemic weaknesses had been developing for some time. The banking system has suffered from several years of weak regulation and enforcement, comprehensive liability insurance, limitation of foreign competition, and deficient accounting and reporting practices. As a result of the economic crisis, it now suffers also from serious decapitalization, widespread portfolio problems, and a high degree of fragility. Ten banks had to be intervened and the Government has had to put in place several bank and debtor support schemes, entailing high fiscal costs (currently estimated at 12-13 percent of 1997 GDP in present value terms but eventually could be higher). 48. For the banking system to play its due role in raising and intermediating savings, confidence in the system must be restored and reforms implemented that would support sound and efficient development of the system in the future. A more secure, efficient and competitive banking system would make a stronger contribution to the mobilization of savings by instilling a greater sense of security among savers, by offering higher returns on savings as cost efficiencies lead to lower spreads, by being more responsive to savers' needs for a diversity of savings instruments, and by promoting viable investment opportunities through improvements in the allocation of credit. Also important is a macroeconomic environment conducive to deposit mobilization-financial stability, low inflation that allows a positive real return to savers. Past cycles of macroeconomic instability, and real interest rates that were negative for much of the 1980s, have been factors limiting the growth of the banks' deposit base. This is reflected in the banks' relatively heavy dependence on non-deposit sources of funding and in a deposit base that is narrowly concentrated in large accounts, with over 60 percent of the banks' direct funding (deposits, CDs, etc.) coming from only 0.2 percent of the accounts. The existing comprehensive bank liability insurance has contributed to this funding structure of the Mexican banks. Expanding the banks' deposit base, therefore, would contribute both to mobilizing savings and to strengthening the banks' funding structure. 49. Managing the crisis in the banking system remains a priority, but reform efforts should increasingly focus on strengthening the underlying regulatory and institutional framework. The reform agenda has three main elements. First, the Government needs to expedite the resolution of problem banks and bank assets and limit its fiscal costs, by accelerating the resolution of the intervened banks, proactively encouraging the sale/merger/consolidation of weak banks, and arranging an early disposal of the impaired bank portfolio acquired by the Government. Second, the incentives regime needs to be reformed, to reduce moral hazard in the system and improve market discipline. This includes: rolling back the comprehensive liability insurance; refraining from the introduction of any new subsidy schemes for banks or debtors; and fostering more effective competition in the system. The roll-back of liability insurance could start with institutional investors, repo transactions, and interbank loans-high-value liabilities that minimize the risk of causing depositor panic. Third, the regulatory and institutional framework underpinning the banking system needs to be strengthened significantly, including the tightening of the prudential and supervisory regime and enforcement-capital adequacy, provisioning, classification and accounting, limitation of interconnected lending, phase-out of regulatory forbearance under FOBAPROA (the official bank liability protection fund) loan purchase and restructuring schemes-and the improvement of the legal framework for bank-client interaction-laws relating to bankruptcy, foreclosure, securitization. 50. Pension Funds. Capital market development could receive a major impetus from the private pension funds being established under Mexico's recent reform of its pension system for private sector workers. Private pension funds have the potential of becoming the largest single industry in Mexico's capital market within a decade. In Chile, for example, private pension funds managed assets equivalent to 43 percent of GDP in 1994, only 12 years after their inception. With about 10 million private sector workers who will now hold individual accounts in AFORES under the Mexican pension reform, the is number of Mexicans who participate in formal financial markets will increase appreciably. Mexico must take full advantage of the capital market development opportunities that come with pension reform. The need to extend the scope of the pension reform, to incorporate public sector workers and workers' contributions to housing funds, was noted above. But whatever the scope of the reform, its contribution to retirees' welfare, national savings, government finance, and capital market development would be profoundly affected by the efficiency and investment returns of the new private pension funds (AFORES). That in turn would depend importantly on the soundness of the regulatory regime governing the AFORES and their investments. 51. The regulatory regime for AFORES should encourage effective competition among the pension funds and promote efficiency in their asset management. Regulations should allow workers an adequate choice of providers of pension fund management services as well as permit the investment of the funds in a broad range of assets and vehicles. They should also allow pension funds to specialize in particular investment vehicles, such as stocks or bonds, while permitting substantial flexibility in the admissible investment options. Thus, the requirement that every AFORE offer a bond fund, to be invested predominantly in indexed government securities, should be reviewed after the initial phase of reform. Competition, specialization, and flexibility in investment options should help contain operational costs, and hence investment management fees. CONSAR, the new pension fund regulator, will need strong institutional capacity to supervise the new system effectively, especially in view of the potential sources of moral hazard in the new system (for example, that arising from the option given to the transition generation workers to switch to the benefits of the old system at retirement). Over the medium term, consideration should be given to dismantling the segmentation between the management of mandated savings (managed by AFORES) and voluntary savings (managed by insurers, mutual funds, banks, etc.). 52. Stock and Bond Markets. For a middle-income country, Mexico's stock market is underdeveloped. Despite the boom of the early 1990s, its capitalization ratio of about 40 percent of GDP compares with ratios in the emerging market economies of East Asia that are multiples of that figure. The development of Mexico's stock market has been hindered by the periodic bouts of macroeconomic instability. But it also suffers from several structural weaknesses, which are reflected in its small number of listings (only 185 in 1995, fewer than half the number in Malaysia which has an economy about one fifth the size of Mexico's), low liquidity (a stock turnover ratio of two-thirds to less than half that in the more active East Asian markets), a high degree of concentration (about 60 percent of market trading is concentrated in only 10 stocks), inadequate legal/regulatory framework and trading system, and a reputation that is not conducive to wide participatidn in the market, especially by small savers and investors. These inadequacies discourage savings and investment not only directly by discouraging participation in the market, but also indirectly by hindering the development of pension and mutual funds, restructuring of enterprises, privatization, and the resolution of the portfolio problems of commercial banks. 53. The Government's stock market development strategy needs to focus on an in-depth identification of the causes of the inadequate use of this market and non-listing of the large subsidiaries of industrial conglomerates; strengthening of the legal framework for the protection of minority shareholders; improvements in the trading system, disclosure, and institutional investor guidelines; and improved self- regulation and marketing of the Mexican Stock Exchange. 54. The development of the bond markets also has been constrained by both macroeconomic volatility and structural problems, including the lack of a clear interest rate benchmark and multiplicity of interest rate bases (dollar-based, inflation-linked, nominal). Public debt management in the past tended to be dominated by the pursuit of relatively short-term goals, contributing to market instability. Public debt 16 issuance did not help create and maintain a long-term, complete interest rate spectrum, and hampered the development of private markets in interest-bearing securities. Measures to better support bond market development include rationalizing the public debt structure, adopting and popularizing a unified interest rate basis, removing interest rate segmentation of debt securities markets, and removing hindrances to the issuance of private debt securities and structured finance 55 Housing Finance. The financing of homes is an important motivation for (and form of) saving. Adequate housing is also an important social concern. Mexico needs to increase the depth and efficiency of its home finance market. With housing stocks amounting to between 1.5-2 times GDP, the development of housing finance can make a significant contribution to the overall development of financial markets in Mexico. At present, there is an absence of a well-conceived national policy on housing finance. The Government has engaged in efforts to provide both housing and housing finance through multiple institutions and programs. The result has been a segmentation of the housing finance market that has constrained its development, creation of public housing finance institutions that lack a clear rationale and suffer from major performance problems (especially INFONAVIT), and large costs to the treasury (with a large proportion of the mortgage portfolio going sour in the recent banking crisis). 56, Against this background, the Government is, correctly, focusing its housing finance reform efforts in three, related areas. First, it needs to develop a long-term national housing finance strategy, clearly articulating public and private roles in the housing finance market, and limiting support through subsidies/transfers to more precisely identified target groups and ensuring consistency of the implied fiscal burden with macroeconomic targets. Second, the roles of the existing public housing finance institutions (INFONAVIT, FOVISSSTE, FOVI, others) need to be rationalized. The Government has initiated reform in these institutions. These reforms should be guided by a clear vision of the future role of these institutions and the implied need for their restructuring, phase-out or privatization. Third, the growth of private housing finance market should be supported through a broad range of reforms relating to notaries and registries, collateral requirements, securitization methods, and prudential and capital adequacy guidelines to make primary mortgages and their securitization cost-effective and to encourage competition in their provision. These reforms, through facilitating product standardization and simplification and permitting better credit risk management, would both spur the primary mortgage market and, over time, aid in the sound development of the secondary market. 57, Asset-Backed Securities Markets. Given a conducive setting, markets for asset-backed securities (ABS) have the potential to approach the size of the private pension funds markets. The markets for ABS can help in the efficient mobilization of savings through supporting the development of mortgage and bond finance, instrument diversification, promotion of investment opportunities by lowering the cost of borrowing, and improved risk management by allowing the reduction of maturity mismatch risks. The development of ABS markets, however, is currently hampered not only by the widespread portfolio problems in the banking system brought on by the recent crisis but also by institutional weaknesses such as large notary and registration costs and inefficiencies, deficient land and real estate titling, lack of product standardization, tax anomalies that inadvertently penalize securitization, and an inadequate legal basis for certain simplifying structures This regulatory and institutional basis will need to be improved to enable ABS markets to play a more dynamic role in Mexico's savings and investment mobilization over the medium term as the economy rebounds and the banking system recovers from its current state of distress. 58 Mutual Funds and Insurance Companies. Basic regulation and investment guidelines for mutual funds and insurance companies are broadly adequate, but enforcement is weak and efficiency low compared to world-class standards. Further efforts at development should focus on greater openness to foreign competition, improved disclosure and enforcement, greater representation of shareholders in mutual 17 fund operations, participation of insurance companies and mutual funds in the management of pension funds, and maximum possible harmonization of the operations and regulation of pension funds and mutual funds. 59. Financial Market Infrastructure. A common theme cutting across the agenda for the development of the various financial markets outlined above is the need to strengthen the legal, regulatory and institutional infrastructure underlying these markers. Principal areas for action include: the adoption of the Generally Accepted Accounting Principles (GAAP) not only by banks but also by other financial intermediaries and non-financial businesses, complemented by improved disclosure and enforcement; improvements in property titling and institutional strengthening and technical upgrading of public registries; improvements in collateral laws and unification of state-level laws and procedures; improvements in bankruptcy laws and processes; development of credit and rating information services; and improvement of the technical capacity of the principal financial market regulators. Also needed is market and investor education to improve the functioning of the stock and bond markets, mutual funds and the new pension funds. (v) Fostering Small Savings 60. Saving by the low-income population is constrained by limited access to and the poor quality of small savings services in Mexico. Rural financial markets are especially underdeveloped, limiting both rural household saving and the availability of credit to small rural enterprises. As many as two-thirds of the municipalities do not have commercial bank branches. An array of semi-formal and informal financial services exist, of which the different kinds of cajas de ahorro (savings and loan cooperatives) are the most important, but they are characterized by uneven coverage and a generally low level of efficiency and financial health. Financial intermediaries are discouraged from entering the market for small savings and loans because of the higher transaction and information costs involved in catering to small clients, especially when they are sparsely dispersed as is often the case in rural areas. Policies aimed at improving the quality and availability of small savings services need to have two main thrusts: reducing the transaction costs; and providing a policy and regulatory framework supportive of sound institution- building. Improved access to savings services should be complemented by public education campaigns to promote the habit of thrift. 61. Reduce Transaction Costs Informal financial services can, in many instances, meet the needs of small savers at a lower cost than can formal financial intermediaries as they are able to minimize the transaction costs. Nevertheless, there are drawbacks to informal finance: savings services remain scarce despite demand; there is limited intermediation (funding loans with deposits); in confining their credit operations to well-known local borrowers, informal lenders operate on an inefficient scale and in highly segmented markets, and often with high concentrations of risk; and an appropriate legal and supervisory framework is lacking. But informal finance need not be discouraged; rather, the emphasis should be on reducing the costs of expanding the formal financial "frontier" and, thereby, providing improved savings services to a larger proportion of the low-income population. 62. Encourage Establishment of Rural Branches by Private Banks. So far very few private Mexican banks have experimented with innovative ways of reducing the transaction costs of reaching small savers and the rural areas, such as through mini-branches, mobile banking, design of instruments specially tailored to the needs of low-income savers and small borrowers. However, as competition mounts both within the banking system and between banks and nonbank financial intermediaries, Mexican banks are likely to look increasingly for new, non-traditional business niches. The Government can encourage the spread of bank branches into rural areas in two ways. First, it should ensure that the bank regulatory 18 regime, while prudentially sound, is flexible enough to accommodate the needs of such banking. Second, it can encourage, on a pilot basis, experimentation with appropriate technologies for financial intermediation in rural areas, through provision of initial technical and financial support to the experimental rural banking units of competitively selected banks. The Government has recently initiated such a pilot program. Such experiments can pilot the innovations that have been found successful in the development of rural bank branch networks in some other countries, e.g., Indonesia and Thailand. The success of such experiments, through demonstration that rural banking can be -iable and compatible with market-based pricing and allocation of credit, could induce other banks to follow. 63. Strengthen PAHNAL. By being able to utilize the existing network of post offices, the PAINAL postal savings scheme has the advantage of reaping economies of scale and thereby reducing the transaction costs in mobilizing small savings in widely dispersed areas. Experience in Asia shows that such schemes can be effective in mobilizing small savings. The potential of the postal savings scheme is still greatly underutilized in Mexico, but results since PAHNAL's 1993 reform appear promising. Efforts to strengthen this scheme should continue, expanding its branch network using post offices to enlarge access and broadening the menu of accounts offered to include longer-term saving options at attractive interest rates. With good design and sound management practices, PAHNAL has the potential to bring savings services to a much larger number of low-income and rural savers without access to more formal savings services. 64. Modernize Cajas de Ahorro and Increase Competition. Transaction costs can be reduced by subjecting financial institutions to increased competitive pressures. So far only a handful of cajas de ahorro, which are private institutions specifically oriented to providing small savings and credit services, have been legally authorized to operate as savings and loan societies (SAPs). The majority remain outside the modern legal framework and supervision by a competent financial authority. International experience shows that cooperatives can play an important role in providing financial services to a clientele commercial banks tend to avoid. Nevertheless, providing large-scale legal recognition to financial cooperatives would be inadvisable. Of the variety of financial cooperatives operating in Mexico-SAPs, independent cajas de ahorro, cajas solidarias, credit unions-many are confronting severe problems which can be traced to flawed governance rules, an unhealthy dependence on external subsidized funding, inadequate diversification, and weak prudential supervision, in addition to the problems brought on by the recent economic crisis. The introduction of greater competition in the small savings market through increasing the number of legally recognized SAPs must be underpinned by policies that promote stronger such institutions. Legal recognition should be considered only in the case of those institutions that can meet strict qualifying criteria. 65. Support Institution-Building. In promoting the development of stronger institutions oriented to the mobilization of small savings, the Government needs to: encourage sound financial practices by these institutions; and strengthen the framework for their prudential regulation and supervision. 66. Assign Subsidies to Institution-Building, not to Credits. Interest rate ceilings and targeted credit policies should be avoided. They create distortions, engender dependence on government subsidies, undermine institutional viability, and generally are counterproductive to the equity objectives they are designed to promote. This has been precisely the experience with the Mexican credit unions; it may also prove to be the case with the cajas solidarias. There is a role for subsidies, but it should be to subsidize institution-building, not credits. For example, limited, one-time subsidies could be provided as seed capital to help with the start-up or upgrading of institutions, training, software, or other technical assistance that 19 would help the supported institutions achieve self-sustainability. What must be avoided is a longer-term, continuing dependence on subsidies. 67. Strengthen Prudential Regulation and Supervision. For financial cooperatives, which are non-profit institutions, regulation and supervision must be adapted to take into account their differing capital structures and to monitor the subsidy-dependence risk. Capital adequacy standards applied to non- profit institutions can achieve their first purpose: to provide a cushion against loan losses. But as these institutions do not have owners who stand to earn profits on their capital, capital adequacy standards do not in this case provide strong incentives for responsible management. Therefore, if these institutions are to take deposits from the public, they should be obliged to meet higher capital adequacy requirements and subjected to stricter monitoring than their for-profit counterparts. Also, cooperatives meriting legal recognition should have governance rules that are consistent with long-term stability. Those that are unviable without continual infusions of external credit at below-market interest rates should not be given legal recognition. 68. More cooperatives should be granted legal recognition only if the financial authorities have the capacity to adequately supervise them. Clearly, it is easier and less expensive to supervise a small number of relatively large institutions, such as commercial banks. But the current lack of competition in the provision of financial services to low-income Mexicans by viable institutions warrants the commitment of resources and skilled personnel to improving the supervision of cooperatives. Only with such strengthening of the regulatory and supervisory framework would it be advisable for the Government to promote cooperatives more vigorously. Promoting cooperatives by subsidizing credit or requiring the fulfillment of credit quotas and targets would be a mistake. The emphasis should instead be on supporting the development of healthy and independent institutions and ensuring their sound operation. 69. Promote a "Culture of Saving. " Public education campaigns and simple but widespread advertising can reinforce the advantages of improved availability and quality of savings services. One common feature of Asian countries with high personal saving rates is the existence of a widespread "culture of saving," and public education campaigns have played a role in fostering the habit of thrift. Besides their advocacy role, such campaigns can perform a useful informational role in familiarizing the public with the available savings services and explaining instruments that many individuals may find difficult to understand-special savings accounts (CEAs), UDI denominated (inflation-indexed) instruments, mutual funds, the new private pension funds. The PAHNAL scheme provides one means for a broad-based public campaign to raise private saving. The present Government has placed strong emphasis on raising the national saving rate as part of its development policy agenda. A well-conceived, broad-based public education campaign can help propagate that message, not only to the small savers but in the economy at large.  21 MEXICO STATISTICAL ANNEX BASIC MACROECONOMIC DATA List of Tables Table 1: National Accounts by Expenditure, 1985-95 ....................................22 Table 2: National Accounts by Industrial Origin, 1984-95 ........................24 Table 3: Savings-Investment Balance, 1985-95 .................................26 Table 4: International Trade, 1985-95 ............................................. 27 Table 5: Balance of Payments, 1985-95 .............................................28 Table 6: External Debt Stocks and Flows, 1985-95 ..................................29 Table 7: Public Finance, 1985-95 .............................................31 Table 8: Monetary Survey, 1985-95 ................................... .........32 Table 9: Prices and Production, 1985-95 ............................................. 33 Note: The Statistical Annex is a compilation of macroeconomic data from official sources. In some instances, these data may differ from data in the main text of the report due to different Bank definitions and methodologies. 22 Table 1: Mexico: National Accounts by Expenditure, 1985-95 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 p/ A. In Current Pesos (millions) Gross Domestic Product 47,167 78,787 193,162 393,727 512,603 694,872 876,933 1,034,733 1,256,196 1,423,364 1,841,323 Total Consumption 34,949 61,417 144,263 304,739 399,815 544,153 699,180 838,615 1,041,738 1,180,656 1,423,660 ]Private Consumption 30,575 54,209 127,268 270,998 356,900 486,354 621,208 735,865 903,174 1,016,495 1,231,679 Public Consumption 4,374 7,208 16,995 33,741 42,915 57,798 77,971 102,751 138,565 164,161 191,981 Gross Domestic Investment 9,811 14,276 37,083 82,976 113,684 158,738 205,581 252,764 263,777 311,890 363,503 Gross Domestic Fixed Investment 9,048 15,415 35,667 75,199 92,220 127,728 168,486 211,933 233,179 274,861 296,708 Private Fixed Investment 5,901 10,239 25,596 55,482 67,745 94,211 129,085 169,034 185,916 221,512 235,741 Public Fixed Investment 3,147 5,176 10,071 19,717 24,474 33,517 39,401 42,899 47,264 53,349 60,967 Change in Stocks 762 -1,139 1,416 7,777 21,465 31,011 37,094 40,830 30,578 37,029 66,795 Bxports at 7,305 13,732 37,692 65,568 81,148 108,299 119,535 128,325 140,155 167,754 400,459 Imports b/ 4,897 10,639 25,877 59,555 82,045 116,318 147,363 184,972 189,474 236,937 346,299 B. Shares of Gross Domestic Product (%) Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Total Consumption 74.1 78.0 74.7 77.4 78.0 78.3 79.7 81.0 82.9 82.9 77.3 Private Consumption 64.8 68.8 65.9 68.8 69.6 70.0 70.8 71.1 71.9 71.4 66.9 Public Consumption 9.3 9.1 8.8 8.6 8.4 8.3 8.9 9.9 11.0 11.5 10.4 Gross Domestic Investment 20.8 18.1 19.2 21.1 22.2 22.8 23.4 24.4 21.0 21.9 19.7 Gross Domestic Fixed Investment 19.2 19.6 18.5 19.1 18.0 18.4 19.2 20.5 18.6 19.3 16.1 Private Fixed Investment 12.5 13.0 13.3 14.1 13.2 13.6 14.7 16.3 14.8 15.6 12.8 Public Fixed Investment 6.7 6.6 5.2 5.0 4.8 4.8 4.5 4.1 3.8 3.7 3.3 Change in Stocks 1.6 -1.4 0.7 2.0 4.2 4.5 4.2 3.9 2.4 2.6 3.6 Exports a/ 15.5 17.4 19.5 16.7 15.8 15.6 13.6 12.4 11.2 11.8 21.7 Imports b/ 10.4 13.5 13.4 15.1 16.0 16.7 16.8 17.9 15.1 16.6 18.8 C. In Constant 1980 Pesos (for years 1985-92) and Constant 1993 Pesos (for years 1993-95) (mllfions) Gross Domestic Product 4,918 4,739 4,824 4,884 5,047 5,272 5,463 5,620 1,256,196 1,312,200 1,230,925 Total Consumption 3,631 3,554 3,550 3,602 3,808 4,018 4,209 4,364 1,041,738 1,087,587 995,902 Private Consumption 3,073 2,988 2,991 3,046 3,252 3,450 3,619 3,760 903,174 945,070 855,259 Public Consumption 558 566 559 556 556 569 591 604 138,565 142,517 140,643 Gross Domestic Investment 905 729 768 858 898 995 1,070 1,227 263,777 289,991 188,992 Gross Domestic Fixed Investment 884 777 776 821 874 988 1,070 1,186 233,179 252,745 179,438 Private Fixed Investment 571 505 537 592 636 720 814 943 185,916 204,109 138,964 Public Fixed Investment 313 272 239 229 238 268 256 243 47,264 48,636 40,747 Change in Stocks 21 -48 -9 36 25 7 -1 41 30,597 37,245 9,554 Exports a/ 757 776 862 912 933 967 1,011 1,028 140,155 156,082 208,098 Imports b/ 375 321 357 488 592 709 827 1,000 189,474 221,459 162,066 D. Anal Real Growth Rate (%) Gross Domestic Product 2.5 -3.6 1.8 1.2 3.3 4.4 3.6 2.9 0.7 4.5 -6.2 Total Consumption 2.9 -2.1 -0.1 1.4 5.7 5.5 4.8 3.7 0.4 4.4 -8.4 Private Consumption 3.3 -2.8 0.1 1.8 ' 6.8 6.1 4.9 3.9 0.2 4.6 -9.5 Public Consumption 0.9 1.5 -1.2 -0.5 -0.1 2.3 3.9 2.3 2.0 2.9 -1.3 23 Table 1: Mexico: National Accounts by Expenditure, 1985-95 (cont.) 1985 1986 198/ 1988 1989 1990 1991 1992 1993 1994 1995 pl Gross Domestic Investment 11.8 -19.4 5.2 11.7 4.8 10.7 7.5 14.7 -2.6 9.9 -34.8 Gross Domestic Fixed Investment 8.1 -12.0 -0.1 5.8 6.4 13.1 8.3 10.8 -1.2 8.4 -29.0 Private Fixed Investment 13.7 -11.5 6.3 10.2 7.5 13.3 13.0 15.8 -0.6 9.8 -31.9 Public Fixed Investment -0.7 -13.0 -12.1 -4.2 3.6 12.7 -4.4 -3.0 -3.8 2.9 -16.2 Exports at -4.1 2.6 11.1 5.8 2.3 3.6 4.6 1.7 3.7 11.4 33.3 Imports b/ 13.4 -14.4 11.1 36.7 21.3 19.7 16.8 20.9 -1.3 16.9 -26.8 a/ includes Net Maquila (rn-bond industy) Exports b/ excludes Maquila (in-bond industry) Imports pl preliminary Source: Instituto Nacional de Estadistica y Geografla Informatica (INEGI), Sistema de Cuentas Nacionales 24 Table 2: Mexico: National Accounts by Industrial Origin, 1984-95 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 pl A. In Current Pesos (millions) Groas Domestic Product at Market Prices 47,167 78,787 193,162 393,727 512,603 694,872 876,933 1,034,733 1,256,196 1,423,364 1,841,323 Net Indirect Taxes 4,428 6,319 18,728 35,612 47,789 66,213 86,109 102,851 101,064 113,858 158,184 Gross Domestic Product at Factor Cost 42,740 72,468 174,433 358,115 464,813 628,659 790,824 931,882 1,155,132 1,309,506 1,683,139 Agriculture 4,082 7,062 16,676 33,966 44,230 63,277 78,450 86,716 72,703 78,165 95,447 industry 15,805 26,721 69,338 138,842 164,054 210,585 259,932 301,347 309,897 350,778 469,432 Mining 2,218 2,899 9,810 12,753 13,595 17,696 18,120 21,424 16,258 17,442 29,072 Manufacturing 11,069 19,446 49,551 105,403 124,087 156,180 192,527 215,711 219,934 245,012 350,671 Construction 2,070 3,383 7,887 15,726 19,588 27,230 36,217 48.491 55,379 69,146 6%,s58 Electricity, Gas & Water 449 994 2,090 4,959 6,785 9,480 13,068 15,721 18,327 19,178 21,331 Services 27,280 45,003 107,149 220,919 304,318 421,010 538,552 646,670 772,532 880,564 1,118,260 Commerce, Restaur. & Hotels 13,306 21,185 52,425 106,622 135,438 178,783 214,150 244,150 251,629 275,679 351,981 Transport & Communication 3,165 5,708 13,767 29,528 37,610 56,505 76,545 95,105 107,480 124,833 168,083 Finance, Insur. & Real Estate 3,531 6,218 13,761 30,663 52,804 80,973 108,410 136,127 183,208 211,497 308,361 Community, Soc. & Pers. Services 7,831 12,918 29,725 59,839 81,472 112,301 150,462 194,880 263,922 311,031 380,048 Imputed Bank Services -554 -1,026 -2,529 -5,734 -3,006 -7,552 -11,015 -23,592 -33,707 -42,477 -90,214 B. Shares of Gross Domestic Product (%) Gross Domestic Product at Market Prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Net Indirect Taxes 9.4 810 9.7 9.0 9.3 9.5 9.8 9.9 8.0 8.0 8.6 Gross Domestic Product at Factor Cost 90.6 92.0 90.3 91.0 90.7 90.5 90.2 90.1 92.0 92.0 91.4 Agriculture 8.7 9.0 8.6 8.6 8.6 9.1 8.9 8.4 5.8 5.5 5.2 Industty 33.5 33.9 35.9 35.3 32.0 30.3 29.6 29.1 24.7 24.6 25.5 Mining 4.7 3.7 5.1 3.2 2.7 2.5 2.1 2.1 1.3 1.2 1.6 Manufacturing 23.5 24.7 25.7 26.8 24.2 22.5 22.0 20.8 17.5 17.2 19.0 Construction 4.4 4.3 4.1 4.0 3.8 3.9 4.1 4.7 4.4 4.9 3.7 Electricity, Gas & Water 1.0 1.3 1.1 1.3 1.3 1.4 1.5 1.5 1.5 1.3 1.2 Services 57.8 57.1 55.5 56.1 59.4 60.6 61.4 62.5 61.5 61.9 60.7 Commerce, Restaur. & Hotels 28.2 26.9 27.1 27.1 26.4 25.7 24.4 23.6 20.0 19.4 19.1 Transport & Communication 6.7 7.2 7.1 7.5 7.3 8.1 8.7 9.2 8.6 8.8 9.1 Finance, Insur. & Real Estate 7.5 7.9 7.1 7.8 10.3 11.7 12.4 13.2 14.6 14.9 16.7 Community, Soc. & Pes. Services 16.6 16.4 15.4 15.2 15.9 16.2 17.2 18.8 21.0 21.9 20.6 Imputed Bank Services -1.2 -1.3 -1.3 -1.5 -0.6 -1.1 -1.3 -2.3 -2.7 -3.0 -4.9 C. In Constant 1980 Pesos (for years 1980-92) and Constant 1993 Pesos (for years 1993-95) (millions) Gross Domestic Product at Market Prices 4,918 4,739 4,824 4,884 5,047 5,272 5,463 5,620 1,256,196 1,312,200 1,230,925 Net Indirect Taxes 462 380 468 442 471 502 536 559 101,064 105,526 99,036 Gross Domestic Product at Factor Cost 4,456 4,359 4,356 4,442 4,577 4,769 4,926 5,061 1,155,132 1,206,674 1,131,889 Agriculture 416 405 410 395 386 409 413 409 72,703 73,373 74,099 Industry 1,562 1,474 1,523 1,559 1,645 1,738 1,797 1,853 309,897 324,810 299,634 Mining 182 174 183 184 183 188 189 193 16,258 16,670 16,223 Manufacturing 1,051 996 1,026 1,059 1,135 1,204 1,252 1,281 219,934 228,892 217,839 Construction .. .. .. 245 250 268 274 296 55,379 60,048 45,958 Electricity, Gas & Water ., .. .. 71 77 79 81 83 18,327 19,201 19,614 Services 2,942 2,857 2,890 2,997 3,016 3,124 3,253 3,355 772,532 808,491 758,155 Commerce, Restaur. & Hotels .. .. .. 1,255 1,302 1,355 1,414 1,464 251,629 268,696 226,896 Transport& Communication .. .. .. 312 325 347 367 395 107,480 116,842 111,081 Finance, Insur. & Real Estate .. .. .. 532 548 569 590 612 183,208 193,146 192,526 Community, Soc. & Pers. Services .. .. .. 898 911 928 962 968 263,922 267,243 261,067 Imputed Bank Services .. .. .. 0 -69 -74 -80 -85 -33,707 -37,436 -33,416 25 Table 2: Mexico: National Accounts by Industrial Origin (cont.) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 D. Annual Real Growth Rate (%) Gross Domestic Product at Market Prices 2.5 -3.6 1.8 1.2 3.3 4.4 3.6 2.9 0.7 4.5 -6.2 Net Indirect Taxes 19.1 -17.7 23.1 -5.6 6.5 6.8 6.8 4.1 -4.5 4.4 -6.2 Gross Domestic Product at Factor Cost 1.1 -2.2 -0.1 2.0 3.0 4.2 3.3 2.7 1.3 4.5 -6.2 Agriculture 3.7 -2.7 1.4 -3.8 -2.3 5.9 1.0 -1.0 1.4 0.9 1.0 Industry 4.8 -5.6 3.3 2.4 5.5 5.7 3.4 3.1 0.2 4.8 -7.8 Mining -0.1 -4.1 5.3 0.4 516.5 6.1 4.0 2.3 .0.8 2.5 -2.7 Manufacturing 6.1 -5.3 3.0 3.2 7.2 6.1 4.0 2.3 0.9 4.1 -4.8 Construction .. .. .. .. 2.1 6.9 2.4 7.8 2.8 8.4 -23.5 Electricity, Gas & Water .. .. .. .. 7.7 2.9 2.7 3.0 4.2 4.8 2.2 Services 1.3 -2.9 1.2 3.7 0.6 3.6 4.1 3.1 0.7 4.7 -6.2 Commerce,Restaur.&1otels .. .. .. .. 3.8 4.1 4.3 3.6 -1.3 6.8 -15.6 Transport & Communication .. .. .. .. 4.2 6.6 5.8 7.6 3.3 8.7 -4.9 Finance, Insur. & Real Estate .. .. .. .. 2.9 3.9 3.8 3.7 4.7 5.4 -0.3 Community, Soc. & Pers. Services .. .. .. .. 1.4 1.8 3.7 0.6 1.2 1.3 -2.3 Imputed Bank Services .. .. .. .. .. 6.5 8.0 6.4 11.2 11.1 -10.7 p/ preliminary Source: Instituto Nacional de Estadistica y Geografia Informatica (INEGI), Sistema de Cuenta Nacionales 26 Table 3: Mexico: Savings-Investment Balance, 1985-95 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 pl A. In Current Pesos (millions) Gross Domestic Product 47,167 78,787 193,162 393,727 512,603 694,872 876,933 1,034,733 1,256,196 1,423,364 1,841,323 minus Total Consumption 34,949 61,417 144,263 304,739 399,815 544,153 699,180 838,615 1,041,738 1,180,656 1,423,660 = Gross Domestic Savings 12,219 17,370 48,899 88,988 112,788 150,719 177,753 196,117 214,458 242,708 417,663 equals Investment 9,811 14,276 37,083 82,976 113,684 158,738 205,581 252,764 263,777 311,890 363,503 plus Resource Balance 2,408 3,094 11,816 6,012 -897 -8,019 -27,828 -56,646 -49,319 -69,183 54,160 Gross Domestic Savings 12,219 17,370 48,899 88,988 112,788 150,719 177,753 196,117 214,458 242,708 417,663 plus Net Factor Income from Abroad -2,312 -4,600 -9,373 -16,471 -20,436 -24,259 -25,982 -29,693 -35,644 -43,918 -85,518 plus Net Current Transfers 510 964 2,645 5,130 6,262 11,189 9,028 10,480 11,343 12,766 25,421 = National Savings 10,417 13,733 42,170 77,648 98,614 137,649 160,800 176,904 190,158 211,556 357,566 equals Investment 9,811 14,276 37,083 82,976 113,684 158,738 205,581 252,764 263,777 311,890 363,503 plus Current Account Balance 607 -543 5,087 -5,328 -15,071 -21,089 -44,781 -75,860 -73,619 -100,335 -5,937 B. Shares of GDP (%) Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 minus Total Consumption 74.1 78.0 74.7 77.4 78.0 78.3 79.7 81.0 82.9 82.9 77.3 = Gross Domestic Savings 25.9 22.0 25.3 22.6 22.0 21.7 20.3 19.0 17.1 17.1 22.7 equals Investment 20.8 18.1 19.2 21.1 22.2 22.8 23.4 24.4 21.0 21.9 19.7 plus Resource Balance 5.1 3.9 6.1 1.5 -0.2 -1.2 -3.2 -5.5 -3.9 -4.9 2.9 Gross Domestic Savings plus Net Factor Income from Abroad -4.9 -5.8 -4.9 -4.2 -4.0 -3.5 -3.0 -2.9 -2.8 -3.1 -4.6 plus Net Current Transfers 1.1 1.2 1.4 1.3 1.2 1.6 1.0 1.0 0.9 0.9 1.4 = National Savings 22.1 17.4 21.8 19.7 19.2 19.8 18.3 17.1 15.1 14.9 19.4 equals Investment 20.8 18.1 19.2 21.1 22.2 22.8 23.4 24.4 21.0 21.9 19.7 plus CurrentAccountBalance 1.3 -0.7 2.6 -1.4 -2.9 -3.0 -5.1 -7.3 -5.9 -7.0 -0.3 p/ 1preliminary Source: Instituto Nacional de Estadistica y Geografia Informatica (INEGI), Sistema de Cuentas Nacionales 27 Table 4: Mexico: International Trade, 1985-95 (US$ million) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Merchandise Exports 22,931 17,452 22,093 22,883 25,843 30,390 30,905 32,259 35,453 40,416 53,363 Petroleum 14,767 6,307 8,630 6,711 7,876 10,104 8,166 8,307 7,418 7,445 8,423 Manufactured Goods at 6,245 8,537 11,344 13,841 15,608 17,507 19,819 21,484 25,252 29,936 40,379 Other Goods 1,919 2,608 2,119 2,331 2,359 2,779 2,919 2,469 2,782 3,035 4,561 Merchandise Imports 14,533 12,433 13,305 20,274 25,438 31,272 38,184 48,193 48,924 58,880 46,274 Consumer Goods 1,082 846 768 1,922 3,499 5,099 5,834 7,744 7,842 9,510 5,335 Intermediate Goods bl 10,287 8,632 9,907 14,325 17,171 19,384 23,762 28,893 30,025 36,048 32,242 Capital Goods 3,165 2,954 2,631 4,027 4,769 6,790 8,588 11,556 11,056 13,322 8,697 a/ includes Net Maquila (rn-bond industry) Exports b/ excludes Maquila (in-bond industry) Imports Source: Banco de Mexico 28 Table 5: Mexico: Balance of Payments, 1985-95 (US$ million at current prices) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Exports of Goods and Non-Factor Services 27,726 22,024 27,509 28,951 33,035 38,411 39,695 41,451 44,872 50,717 63,041 Merchandise a/ 22,931 17,452 22,093 22,883 25,843 30,390 30,905 32,259 35,453 40,416 53,363 Services 4,795 4,572 5,416 6,068 7,192 8,021 8,790 9,192 9,419 10,301 9,678 Imports of Goods and Non-FactorServices 19,915 17,454 18,387 26,338 33,098 41,215 48,725 59,681 OD,473 71,149 55,258 Merchandise b/ 14,533 12,433 13,305 20,274 25,438 31,272 38,184 48,193 48,924 58,880 46,274 Services 5,382 5,021 5,082 6,064 7,660 9,943 10,541 11,488 11,549 12,270 8,983 Resource Balance 7,811 4,571 9,121 2,613 -da -2,804 -9,030 -18,230 -15,801 -20,432 7,783 Not Factor Income -8,998 -7,519 -6,801 -7,246 -8,302 -8,625 -8,608 -9,595 -11,439 -13,012 -13,322 Factor Receipts 2,294 1,961 2,416 3,064 3,181 3,347 3,600 2,876 2,790 3,367 3,810 Factor Payments 11,292 9,480 9,217 10,310 11,483 11,972 12,208 12,471 14,229 16,379 17,132 Interest (due) c/ 10,220 8,375 9,006 8,931 9,672 7,874 8,730 7,772 8,101 9,237 11,127 Total Interest Paid 10,220 8,375 8,296 8,712 9,310 7,304 8,186 7,538 8,101 9,237 11,127 Net Adjustments to Scheduled Interest 0 0 710 219 362 570 544 234 0 0 0 OtherFactorPayment 1,071 1,105 211 1,379 1,811 4,098 3,478 4,699 6,128 7,142 6,005 Net Private Current Transfers 1,986 1,575 1,919 2,257 2,544 3,978 2,991 3,386 3,640 3,783 3,960 CurrentReceipts 2,014 1,590 1,937 2,272 2,560 3,992 3,010 3,406 3,657 3,822 3,995 Of which Workers' Remittances 173 180 207 209 1,821 1,980 2,414 2,704 2,380 2,653 2,785 Current Payments 28 15 18 15 16 14 19 19 17 40 35 Current Account Balance 800 -1,374 4,239 -2,376 -5,821 -7,451 -14,647 -24,438 -23,399 -29,662 -1,579 Private Investment Direct ForeignInvestment 1,984 2,401 2,635 2,880 3,176 2,633 4,761 4,393 4,389 10,973 9,773 Portfolio Investment -596 -519 -1,004 1,000 351 3,370 12,753 18,041 28,919 8,182 -9,715 Net Long-Term Borrowmg -22 552 3,778 -1,488 -1,460 9,224 4,171 54 2,495 4,629 15,930 Disbursements 5,050 4,975 7,173 4,710 3,973 12,045 8,425 12,432 17,436 16,130 27,215 Repayments (scheduled) c/ 5,072 4,423 3,593 6,198 5,560 3,025 4,415 12,454 14,941 11,501 11,285 Total PrincipalRepaid 5,072 4,423 3,395 6,198 5,433 2,821 4,254 12,378 14,941 11,501 11,285 Not Adjustments to Scheduled Repayments 0 0 198 0 127 204 161 76 0 0 0 Net Other Long-Term Inflows 0 0 0 0 0 0 0 0 0 0 0 Adjustments to Scheduled Debt Service c/ 0 0 908 219 489 774 705 310 0 0 0 Other Capital Flows -4,589 -458 4,456 -4,543 3,700 -5,184 -50 2,660 -6,464 -12,513 -4,819 Not Short-Term Capital c/ -990 450 -100 2,079 783 7,420 5,775 2,678 11,722 3,065 -2,022 Not Capital Flows n e i. -692 -169 -7,406 -3,527 -164 -15,124 -3,658 943 -15,044 -12,265 1,686 Errors and Omissions -2,907 -739 3,050 -3,095 3,081 2,520 -2,167 -961 -3,142 -3,314 -4,483 Change in Net International Reserves 2,423 -603 -6,100 4,307 -436 -3,367 -7,694 -1,020 -5,941 18,391 -9,591 (- indicate increase m assets) Mernorandw Itemr: Total Gross Reserves (excl. Gold) d/ 4,906 5,670 12,464 5,279 6,329 9,863 17,726 18,942 25,110 6,278 16,847 Total GrossReserves in Months Imports of G&S 1.9 2.6 5.5 1.8 1.7 2.2 3.5 3.2 4.0 0.9 2.8 Exchange Rates Annual Average 0.2569 0.6118 1.3782 2.2731 2.4615 2.8126 3.0184 3.0947 3.1160 3.3751 64194 At End of Year 0 3717 0.9235 2.2097 2.2810 2.6410 2.9454 3.0710 3.1154 3.1059 5.3250 7.6425 Index ofReal Exchange Rate (1980 = 100) 136 177 179 143 135 129 117 107 101 105 153 Current AccountBalance as % of GDP 0.4 -1.1 3.0 -1.4 -2.8 -3.0 -5.0 -7.3 -5.8 -7.0 -0.6 al includes Not Maquila (in-bond mdustry) Exports b/ excludes Maquila (in-bond industry) Imports on based on external debt data reported by the World Bank d/ based on data reported by the International Monetary Fund Sources: Banco de Mexico; World Bank. Global Development Fnance (formerly World Debt Tables) ; and, International Monetary Fund, hueradonal Fnancial Statistics 29 Table 6: Mexico: External Debt Stocks and Flows, 1985-95 (US$ million at current prices) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 A. Gross Disbursements Public and Publicly-Guaranteed 3,935 3,276 6,927 4,507 2,904 9,985 6,075 7,319 8,383 8,665 19,830 Official Multilateral Creditors 1,144 1,444 1,084 1,631 1,618 3,647 2,114 1,749 1,483 1,281 2,670 of which: IBRD 840 1,016 983 1,347 1,297 3,326 1,581 1,352 1,098 943 1,733 Official Bilateral Creditors 461 865 700 629 523 1,820 757 1,151 1,326 813 10,752 Private Creditors 2,330 967 5,143 2,247 763 4,518 3,204 4,419 5,574 6,571 6,409 of which: Bonds 43 0 0 0 0 975 1,324 1,157 3,750 4,388 5,522 Private Non-Guaranteed 1,115 1,700 247 203 1,070 2,060 2,394 5,113 9,010 7,439 7,879 Total Long-Term Loan Disbursements 5,050 4,976 7,174 4,710 3,974 12,045 8,469 12,432 17,392 16,104 27,709 Net Short-Term Credit -990 450 -100 2,079 783 7,420 5,775 2,678 2,746 4,318 -2,023 Drawings from the IMF 300 870 786 470 1,209 2,184 1,276 328 0 0 13,288 Total Disbursements 4,360 6,295 7,860 7,260 5,965 21,649 15,520 15,439 20,138 20,422 38,974 B. Amoertiations Public and Publicly-Ouaranteed 3,358 2,646 2,311 3,280 2,403 2,625 3,645 10,320 5,957 6,584 5,891 Official Multilateral Creditors 716 734 699 881 890 1,037 1,211 1,259 1,276 1,423 1,714 of which: IBRD 335 424 567 673 677 801 954 981 991 1,065 1,411 Official Bilateral Creditors 381 310 197 382 314 249 268 1,022 1,513 1,296 1,367 Private Creditors 2,260 1,602 1,415 2,016 1,199 1,339 2,166 8,040 3,168 3,866 2,810 of which: Bonds 520 554 749 1,130 259 464 84 4,592 650 1,113 1,434 Private Non-Guaranteed 2,016 1,990 1,084 2,918 3,030 196 609 2,058 8,983 4,917 5,394 Total Long-Tern Loan Amortization 5,374 4,636 3,395 6,198 5,433 2,821 4,254 12,378 14,941 11,501 11,285 Repayments to the IMF 0 147 367 563 820 1,191 1,105 896 1,175 1,204 1,163 Total Amortization 5,374 4,783 3,762 6,761 6,253 4,012 5,359 13,274 16,116 12,705 12,448 C. Not Disbursements Public and Publicly-Guaranteed 577 629 4,616 1,227 501 7,360 2,430 -3,001 2,425 2,081 13,939 Official Multilateral Creditors 428 710 384 750 728 2,610 903 490 207 -142 956 of which: IBRD 505 592 416 674 620 2,524 627 370 107 -123 322 Official Bilateral Creditors 80 555 504 247 209 1,S71 489 130 -187 -482 9,385 Private Creditors 70 -636 3,728 231 -436 3,179 1,038 -3,621 2,405 2,705 3,599 of which: Bonds -477 -554 -749 -1,130 -259 511 1,240 -3,435 3,099 3,275 4,088 Private Non-Guaranteed -901 -290 -837 -2,715 -1,960 1,864 1,785 3,055 27 2,523 2,485 Total Long-Term Loan Net Disbursements -324 339 3,779 -1,488 -1,459 9,224 4,215 54 2,452 4,603 16,424 Not Short-Term Credit -990 450 -100 2,079 783 7,420 5,775 2,678 2,746 4,318 -2,023 Net Credit from the IMF 300 723 419 -93 389 993 171 -568 -1,175 -1,204 12,125 Total Net Disbursements -1,014 1,512 4,098 499 -287 17,637 10,161 2,165 4,022 7,717 26,527 30 Table 6: Mexico: External Debt Stocks and Flows (cont.) (US$ million at current prices) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 D. Interest and Charges Public and Publicly-Guaranteed 7,516 6,175 6,294 6,632 7,088 5,218 5,613 5,043 4,708 5,197 6,247 Official Multilateral Creditors 386 579 750 832 809 1,005 1,126 1,176 1,196 1,232 1,291 of which: IBRD 262 395 505 574 567 751 861 892 905 923 961 OfficialBilateral Creditors 196 184 183 295 314 373 551 716 723 762 1,374 Private Creditors 6,934 5,413 5,360 5,504 5,965 3,840 3,935 3,152 2,789 3,203 3,582 of which: Bonds 465 407 363 410 457 1,112 3,084 2,527 2,206 2,611 2,852 Private Non-Guaranteed 1,866 1,500 1,369 911 828 582 610 832 1,146 1,358 1,723 Total Interest on Long-Term Loans 9,382 7,675 7,663 7,543 7,916 5,800 6,223 5,875 5,854 6,556 7,971 Interest on Short-Tern Credit 636 434 350 830 997 982 1,423 1,160 1,822 2,448 2,611 Interest on IMF Drawings 202 266 283 339 398 522 541 503 426 233 545 Total Interest Paid 10,220 8,375 8,296 8,712 9,310 7,304 8,186 7,538 8,101 9,237 11,127 E. External Debt (DOD) Public and Publicly-Guaranteed 72,703 74,726 84,358 80,598 76,114 75,974 77,825 71,105 74,989 79,284 94,028 Official Multilateral Creditors 6,017 8,177 10,380 10,333 10,753 14,302 15,475 15,537 16,077 17,075 18,643 of which: IBRD 4,034 5,566 7,346 7,427 7,821 11,030 11,928 11,966 12,322 13,038 13,824 Official Bilateral Creditors 2,826 3,864 5,306 5,746 6,041 8,461 9,617 9,702 10,017 10,391 19,792 Private Creditors 63,861 62,686 68,671 64,520 59,321 53,211 52,733 45,866 48,896 51,818 55,593 of which: Bonds 3,689 2,258 2,849 4,203 3,743 40,100 40,660 35,018 37,616 41,045 45,195 Private Non-Guaranteed 15,745 15,103 14,148 5,931 3,971 5,835 7,620 10,675 15,539 17,489 18,587 Total Long-Term DOD 88,448 89,829 98,506 86,529 80,085 81,809 85,445 81,780 90,528 96,772 112,615 Short-Tenn Debt 5,450 5,900 5,800 7,879 8,662 16,082 21,857 24,535 36,257 39,323 37,300 Use of lMF Credit 2,969 4,060 5,163 4,804 5,091 6,551 6,766 5,950 4,787 3,860 15,828 Total DOD 96,867 99,789 109,469 99,213 93,838 104,442 114,068 112,265 131,572 139,955 165,744 G. Debt and Debt Burden Indicators Total Debt Service 15,293 12,945 12,058 15,473 15,563 11,316 13,545 20,812 24,217 21,942 23,556 Interest 5,072 4,570 3,762 6,761 6,253 4,012 5,359 13,274 16,116 12,705 12,429 Principal 10,220 8,375 8,296 8,712 9,310 7,304 8,186 7,538 8,101 9,237 11,127 Total DOD and TDS (%) DOD/Exports (XGS) Ratio 320.8 412.9 363.3 307.9 246.7 238.8 249.5 238.7 262.9 246.7 238.0 DOD/GDP Ratio 52.8 77.5 78.1 57.3 45.1 42.3 39.3 33.6 32.6 33.2 57.8 TDS/Exports (XGS + WR) Ratio 50.6 53.6 40.0 48.0 40.9 25.9 29.6 44.3 48.4 38.7 33.8 IBRD Exposure Indicators (%) IBRD DS/Public Loan DS 5.5 9.1 11.6 11.5 11.6 16.2 16.6 11.2 15.5 15.0 17.2 Preferred Creditor DS/Public DS 9.3 16.8 22.7 24.2 27.2 39.3 36.5 22.9 33.2 31.0 33.9 IBRD DS/Exports (XGS) 2.0 3.4 3.6 3.9 3.3 3.6 4.0 4.0 3.8 3.5 3.4 Country Share in IBRD Portfolio 7.78 8.02 8.11 8.7 9.14 11.35 11.72 12.11 11.91 11.83 11.98 Source: World Bank, Global Development Finance (fonnerly World Debt Tables) 31 Table 7: Mexico: Public Finance, 1985-95 (At current prices and exchange rates) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 A. Government Budget (in million Pesos) Total Current Revenues 14,833 24,036 57,559 113,855 138,995 187,729 222,904 266,333 286,212 322,464 425,181 Direct Taxes 1,923 3,365 7,655 19,468 25,909 32,972 42,990 57,945 69,221 72,900 75,288 Indirect Taxes 2,865 5,472 12,871 27,379 34,372 45,317 60,727 68,819 73,933 87,417 95,941 On Domestic Goods and Services 2,559 4,791 11,383 25,616 30,528 39,005 50,811 55,935 61,249 74,709 84,575 On International Trade 306 681 1,488 1,763 3,844 6,312 9,916 12,884 12,684 12,708 11,366 Non-Tax Receipts 10,045 15,199 37,034 67,009 78,714 109,440 119,187 139,569 143,059 162,147 253,951 Total Cuurent Expenditures 15,593 30,403 76,501 141,570 151,562 182,952 194,465 210,929 244,936 273,321 366,417 Interest on External Debt 1,918 3,848 8,792 15,482 18,866 17,709 18,355 16,350 14,537 16,667 30,446 Interest on Domestic Debt 3,637 9,541 29,583 51,456 48,244 49,409 29,872 24,497 18,796 16,253 40,797 Transfers to the Private Sector 1,117 2,032 4,326 8,146 9,365 10,282 16,902 33,299 50,902 65,547 72,313 Transfers to Other NFPS 1,275 2,042 5,133 11,132 14,377 20,717 27,019 33,000 37,701 41,632 49,193 Subsidies 0 0 0 0 0 0 0 0 0 0 0 Consumption 7,647 12,940 28,667 55,354 60,711 84,835 102,317 103,783 122,999 133,222 173,668 Wages and Salaries 2,957 4,832 11,571 21,089 27,352 34,679 44,797 42,340 50,522 56,975 67,206 Other Consumption 4,690 8,108 17,096 34,265 33,359 50,155 57,520 61,443 72,477 76,247 106,462 Budgetary Savings -761 -6,367 -18,941 -27,715 -12,567 4,777 28,439 55,404 41,276 49,144 58,763 Capital Revenues 0 0 0 0 0 0 0 0 0 0 0 Total Capital Expenditures 2,156 3,853 9,221 13,953 16,288 26,300 33,460 40,356 37,242 52,076 57,877 Capital Transfers 335 806 2,089 1,849 2,099 5,717 5,739 10,200 5,578 9,748 12,670 Budgetary Fixed Investment 1,820 3,047 7,132 12,104 14,188 20,583 27,721 30,156 31,664 42,328 45,206 Overall Balance -2,916 -10,220 -28,162 -41,668 -28,854 -21,523 -5,021 15,048 4,034 -2,932 887 B. Shares of GDP (in %) Total Current Revenues 31.4 30.5 29.8 28.9 27.1 27.0 25.4 25.7 22.8 22.7 23.1 Direct Taxes 4.1 4.3 4.0 4.9 5.1 4.7 4.9 5.6 5.5 5.1 4.1 Indirect Taxes 6.1 6.9 6.7 7.0 6.7 6.5 6.9 6.7 5.9 6.1 5.2 On Domestic Goods and Services 5.4 6.1 5 9 6.5 6.0 5.6 5.8 5.4 4.9 5.2 4.6 On Intemational Trade 0.6 0.9 0.8 0.4 0.7 0.9 1.1 1.2 1.0 0.9 0.6 Non-Tax Receipts 21.3 19.3 19 2 17.0 15.4 15.7 13.6 13.5 11.4 11.4 13.8 Total Cuurent Expenditures 33.1 38.6 39.6 36.0 29.6 26.3 22.2 20.4 19.5 19.2 19.9 Interest on External Debt 4.1 4.9 4.6 3.9 3.7 2.5 2.1 1.6 1.2 12 1.7 Interest on Domestic Debt 7.7 12.1 15.3 13.1 9.4 7.1 3.4 2.4 1.5 1.1 2.2 Transfers to the Private Sector 2.4 2.6 2.2 2.1 1.8 1.5 1.9 3.2 4.1 4.6 3.9 Transfers to Other NFPS 2.7 2.6 2.7 2.8 2.8 3.0 3.1 3.2 3.0 2.9 2.7 Subsidies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Consumption 16.2 16.4 14.8 14.1 11.8 12.2 11.7 10.0 9.8 9.4 9.4 Wages and Salaries 6.3 6.1 6.0 5.4 5.3 5.0 5.1 4.1 4.0 4.0 3.6 Other Consumption 9.9 10.3 8.9 8.7 6.5 7.2 6.6 5.9 5.8 5.4 5.8 Budgetary Savings -1.6 -8.1 -9.8 -7 0 -2.5 0.7 3.2 5.4 3.3 3.5 3.2 Capital Revenues 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Capital Expenditures 4.6 4.9 4.8 3.5 3.2 3.8 3.8 3.9 3.0 3.7 3.1 Capital Transfers 0 7 1.0 1.1 0.5 0.4 0.8 0.7 1.0 0.4 0.7 0.7 Budgetary Fixed Investment 3.9 3.9 3.7 3.1 2.8 3.0 3.2 2.9 2.5 3.0 2.5 Overall Balance -6.2 -13.0 -14.6 -10.6 -5.6 -3.1 -0.6 1.5 0.3 -0.2 0.0 Source: Hacienda and International Monetary Fund 32' Table 8: Mexico: Monetary Survey, 1985-95 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 A. Annual Hows (in million Pesos) Net Foreign Assets 311 2,208 19,534 -16,895 895 2,480 14,090 7,292 17,597 -59,801 -2,181 Domestic Credit 6,888 17,048 35,303 46,210 52,602 69,966 84,678 68,958 45,058 127,582 28,373 To Government 5,017 12,819 19,635 27,349 12,531 11,397 -4,404 -42,378 42,027 -50,891 57,101 Central Government 4,670 11,320 16,525 26,330 8,600 12,857 -2,097 43,238 -45,047 -56,705 67,211 State & Local Governments 3 16 159 71 1,184 1,189 1,207 1,011 4,114 5,885 -9,514 Non-Financial Public Enterprises 344 1,483 2,951 948 2,747 -2,649 -3,514 -151 -1,094 -71 -596 To Rest of Economy 1,871 4,229 15,668 18,861 40,071 58,569 89,082 111,336 87,085 178,473 -28,728 Private Sector 1,795 3,581 13,850 18,738 40,347 60,040 87,191 109,255 82,212 169,419 -28,280 Other Financial Institutions 76 648 1,818 123 -276 -1,471 1,891 2,081 4,873 9,054 -448 Total Assets =Total Liabilities 7,199 19,256 54,837 29,315 53,497 72,446 98,768 76,250 62,655 67,781 26,192 Money and Quasi-Money 3,604 9,363 31,357 -9,208 50,370 71,134 81,383 56,258 43,875 75,281 140,372 money 1,147 2,328 6,837 8,564 7,896 18,352 58,788 15,993 21,682 1,527 5,143 Quasi-Money 2,457 7,035 24,520 -17,772 42,474 52,782 22,595 40,265 22,193 73,754 135,229 Net Other Liabilities 3,595 9,893 23,480 38,523 3,127 1,312 17,385 19,992 18,780 -7,500 -114,180 B. End-of-Year Stocks On million Pesos) Ne ForeignAssets 1,646 3,854 23,388 6,493 7,388 9,868 23,958 31,250 48,848 -10,953 -13,134 Domestic Credit 16,767 33,815 69,118 115,328 167,930 237,896 322,574 391,532 436,590 564,172 592,545 To Government 11,171 23,990 43,625 70,974 83,505 94,902 90,498 48,120 6,093 44,798 12,303 Central Government 9,740 21,060 37,585 63,915 72,515 85,372 83,275 40,037 -5,010 -61,715 5,496 State & Local Governments 76 92 251 322 1,506 2,695 3,902 4,913 9,027 14,912 5,398 Non-Financial Public Enterprises 1,355 2,838 5,789 6,737 9,484 6,835 3,321 3,170 2,076 2,005 1,409 To Rest of Economy 5,596 9,825 25,493 44,354 84,425 142,994 232,076 343,412 430,497 608,970 580,242 Private Sector 5,177 8,758 22,608 41,346 81,693 141,733 228,924 338,179 420,391 589,810 561,530 Other Financial Institutions 419 1,067 2,885 3,008 2,732 1,261 3,152 5,233 10,106 19,160 18,712 Total Assets = Total Liabilities 18,413 37,669 92,506 121,821 175,318 247,764 346,532 422,782 485,438 553,219 579,411 Money and Quasi-Money 11,936 21,299 52,656 43,448 93,818 164,952 246,335 302,593 346,468 421,749 562,121 Money (Ml) 3,462 5,790 12,627 21,191 29,087 47,439 106,227 122,220 143,902 145,429 150,572 (uasi-Money 8,474 15,509 40,029 22,257 64,731 117,513 140,108 180,373 202,566 276,320 411,549 Net Other Liabilities 6,477 16,370 39,850 78,373 81,500 82,812 100,197 120,189 138,970 131,470 17,290 C. Factors Accounting for Monetary Expansion (as % of Money and Quasi-Money) Net Foreign Assets 13.8 18.1 44.4 14.9 7.9 6.0 9.7 10.3 14.1 -2.6 -2.3 Credit to Government 93.6 112.6 82.8 163.4 89.0 57.5 36.7 15.9 1.8 -10.6 2.2 Credit to Rest of Economy 46.9 46.1 48.4 102.1 90.0 86.7 94.2 113.5 124.3 144.4 103.2 Net Other Liabilities (-) 54.3 76.9 75.7 180.4 86.9 502 407 39.7 40.1 31.2 3.1 Total Increase in Money 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 and Quasi-Money D. Money, Credit and Interest Rates (%) Ammal Growth Rate in Money 43.3 78.4 147.2 -17.5 115.9 75.8 49.3 22.8 14.5 21.7 33.3 and Quasi-Money Annual Growth Rate in Private Credit 50.2 75.6 159.5 74.0 90.3 69.4 62.3 48.0 25.4 41.5 -4.7 Increase in Private Credit 27.2 24.8 44.4 40.8 76.2 83.7 105.2 161.5 193.3 139.9 -101.3 at % of Increase in Domestic Credit Interest Rates (percent p.a.): Ave Rate on Money Market 62.44 88.01 95.59 69.01 47.43 37.36 23.58 18.87 17.39 16.47 50.52 Rate on 13-Week Treasury Bills 63.20 .. 103.07 69.15 44.99 34.76 19.28 15.62 15.03 14.10 48.44 Deposit Rate 59.48 84.68 97.24 63.65 36.29 31.24 17.10 15.68 15.46 13.26 39.18 Average Cost of Funds 56.07 80.88 94.64 67.64 44.61 37.07 22.56 18.78 18.56 15.50 45.12 Source: International Monetary Fund, International Financial Statistics 33 Table 9: Mexico: Prices and Production, 1985-95 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 A. Period Average (1990 = 100) Industrial Share Prices 1.1 4 1 28.4 33.1 57.7 100 0 190 1 291 3 325.6 442 1 389.3 Wholesale Prices 7 6 14 3 33.6 69 8 81 1 100 0 120 5 1367 148 8 158 9 221 1 Consumer Price Index 7 1 13 3 30.7 65 8 79.0 100 0 122.7 141 7 155.5 1663 224 5 Wages- Monthly Earnings 6 6 11 5 27.0 57.3 76.6 100 0 129.1 151 7 164 7 174 6 192 1 Industrial Production 89 4 84 6 88.1 90.1 94.8 100 0 104.1 107 3 1069 111 9 103 7 Manufacturing Production 88.2 84 0 87.2 89.4 95.1 100 0 103.9 1067 104 5 1095 102 2 Mining Production 96.6 92 6 96.1 96.6 96.1 100 0 100.6 101 5 102.6 104 2 104.2 Crude Petroleum Production 96.5 92 3 96.4 964 97.2 100 0 104 0 103 7 103.7 104 6 103.2 B. Annual Percentage Change Industrial Share Prices 77.8 2583 594.8 16.6 74 4 73.2 90 1 53 2 11 8 35 8 -120 Wholesale Prices 53.6 88 4 135.6 107 8 16 1 23.3 20 5 13.4 8 9 6 8 39 1 Consumer Price Index 57.7 86 2 131.8 114.2 20 0 26.7 22 7 15 5 9 8 7 0 35 0 Wages: Monthly Earnings 59.6 75 7 134.2 112 2 33.7 30.5 29 1 17 5 8 6 6 0 10 0 Industrial Production 5 2 -5 3 4.1 2.3 5 1 5.5 4.1 3 1 -0 4 4 7 -7 3 Manufacturing Production 6 6 -4 8 3.9 2.4 6 4 5.1 3 9 2.7 -2 0 4 7 -6 7 Mining Production 0.9 -4.2 3.8 0.5 -0 5 4.1 0 6 0 9 1 1 1 6 0 0 Crude Petroleum Production -1.2 -4 3 4.5 0.0 0 8 2.9 4 0 -0 3 0 0 0 8 -1 3 Source International Monetary Fund, Internaional Financial Statistics