. :~11':1B!IATIONAL BANK FOR RECOIISTRUCTICN AND DEVELOPIilEllT ,. ',' ; ~! Economic Department 66854 MEXICO'S EXTERNAL PUBLIC DEBT, ECONOUIC iJJD FINANCIAL C!i.USES OF DEBT AND DEBT ADJUSTIJENT PLANS Foreign Investments Revised PREPARED BY: James J. ~ch January 30, 1949 I. Historical Review 1. In the period between 1824 and 1913 Mexico issued some ~1375,- 156,000 of U.S. dollar bonds, ~90,972,OOO sterling bonds and 250,275,- 000 franc bonds. Since that time, new issues have been almost ex- clusively dollar obligations but have been greatly reduced in amount (see Table I)~ The total of all bond issues between 1824 and 1947 is estimated to be equivalent to around 1 billion U.S. dollars. Table I Foreign Sales of Mexican Bonds, By Periods (000 omitted) Years Dollars Sterling Francs Marks 1824-1913 375,156 90,972 280,275* 1914-1919 6,186 821 8,416 1920-1929 98,643 252 1930-1947 15,000 . 494,985 91 !o793 - 28o~275* ; - 8 668 s =::=: *Issued to convert a sterling loan of 1899. National and guaranteed issues have been increased by reason of the obligations issued under the 1922 Debt Plan for interest arrears, Such obligations totaled U.S. ~17,42.1,362 as to the national issues and U.S. t12,715,037 as to the guaranteed issues. Further increases in the national obligations occurred in 1937 when the railroads were expropri- ated by the Mexican Government. .A..merican holdings in Mexican rails were principally direct investments e~d not portfolio in character until the Mexican Government took over control of the Mexican Central and the National Railroad Co. of Mexico and organized the National Railways of Mexico. With the shift in contro)., Americans, and other holders of the shares, received new Mexican bonds guaranteed by the Government in exchange for their interest in the roads formerly under American control. 20 Defaults occurred on the Mexican external debt from October" 1827 to April,'183lQ Various adjustments were made bet,reen 1831 and 1864. In 1864" a 6% loan was issued and later converted in 1865, mostly into bonds of a Mexican Imperial Lottery loan. T~ben" in 1867, the Imperial Government was overthrown, both loans were definitely re- pudiated by the Republic as having been contracted to oppose the consti- tutional government~ The loans were paid only in part from some pro- ceeds of certain funds held in paris. 3. In July, 1914 the entire Federal debt went into default. A debt settlement was effected in 1922 and modified in 192, and 1930, and again in 1931, but interest and amortization payments were limited to a sn~ll part of the requirements. Finally on March 2, 1943, a debt payment a~~ rangement, dated November 5, 1942, modifying payments of principal and interest, was declared operative. Briefly, as a result of various debt adjustment plans, the bondholders receive about 20 cents on the dollar of principal and less than one cent on the dollar of back intereEt due on their securities. 4. The effect of the debt adjustment plan of 1942 was to settle the equivalent of U.S. :w230,6)1,974 of principal amount of Mexican Govern- ment bonds for a new principal of U.S. ~47,,52,984~ Back interest on this debt amounted to ~278,884,248 and this was settled by issuing new bonds amounting to $2,061,713. Together interest and principal, amount- ing to ~509,5l6,222, liere settled for ~49,6l4,697. In addition to the direct Government debt, there were also the obligations of the Mexican railroads which, as mentioned above, were expropriated by the l\~exican Government in 1937. This debt was adjusted by the plan of 1946-1948 .. This plan was similar in effect to that sholnl above on the debt of the Government of Mexico. It called for a new principal amount of ~48,064,- 409 for old par of ~233,112,38'. Back interest on these bonds, ',hich amounted to ~324,491,997, was settled for ~2,44,,22l of new bonds, . bringing the total interest and amortization sett.lement on the ~i557,- 604,382 of railroad issues to a final amount of y50,509,630. In addi- tion to the above, various settlements were made to take over a:U properties and other unsettled claims against lViexico. (See I.B.Ii.D. Direct Investment study). II. Causes of Default . 1. All Mexican dollar bonds including the entire Mexican railway debt, went into default in 1913-14. The irr~ediate cause of default '~s the political and economic chaos which began in 1911 1i','ith the overthrm"l of the Diaz Regime. Chaos continued through the subsequent periods of revolutions and successive changes in government G There was little semblance of political stability until the Obregon Government was es- tablished in 1920 under a new constitution. This government was re- cognized in 1923 by the United States.. Hmvever, sporadic revolutions continued, the most serious occurring in 1929 in vffiich half of the Mexican states were included. Not until the Ortiz Rubio Government of 1930, and more particularly the Cardenas Government of 1934, was there a cessation of political turmoil in Mexico. Successive revolution- ary governments indicated little feeling of responsibility for the foreign obligations of their predecessors. This attitude was strengthened by the anti-foreign bias which characterized many of the revolutionarJ factions. 2. The most immediate impact of the revolutionary situation upon Mexico's ability to meet foreign financial obligations was its effect upon precious metal production and exports. The importance of precious metals in the international relationship of Mexico at this time is inci- cated by the fact that in 1910-11 gold and silver accounted for alrr~st ,0% of Mexico's total exports - 143 million gold pesos. Under the Diaz - 3- Regime, American capital had invested heavily in Mexican gold and silver production. Practically all the American Lrines closed as a result of the revolution. Of 110 American mining com?anies in 'Mexico studied by the Brookings Institute only 14 continued in operation from 19lh to the end of 1919. In 1920 exports of the precious metals had dropped to 104 million gold pesos, or around 20% of total exports. 30 In spite of this state of the gold and silver mining, the favor- able balance of trade of Mexico 17 was maintained by the expansion of e~ ports of petroleum and petroleum products. Exports of petroleum and petro- leum products increased from zero in 1910 to 145.5 million barrels in 1920 and constituted 66% of ~exico's total exports. Oil companies, by paying for protection, escaped the great destruction of property suffered by the mines during the revolution. As was the case 'with the mines, most of the oil wells were oV'med by British and American capital and much of the proceeds did not, therefore, return to Mey~co. 4. This foreign control of Mexican oil was challenged by the Carranza Constitution of 1917, which provided for nationalization of subsoil re- sources, and by a 60% export tax levied by the Obregon Government on petro- leum exports in 1920.. As a result of these measures, plus the intrusion of salt water into the wells which became se::-ious in 1922, many compa- nies stopped further exploration and dowlopment of I,£xican o.il in the early twenties and began transferring investmen'~s elsewhere. By :i.929' production had fallen almost to the 1916 level a1 though world pro- ., duction was almost three tj~es that of 1916. Petroleum products pro- vided only 14 0 8% by value of Mexican exports in 19290 5. Due to the progressive decline in petroleum exports, total ex- ports and Mexico's trade surpluf3 decl:!.nt:;ld auring the twenties. The de- cline '\las not proportionate to the drop in petroleum, however, because of expanded exports of metals, particularly copper, lead and zinc~ These three metals rOSe from 295 million metric tons (or 17% of the value of exports) in 1923 to 718 metric tons (or 40% of the value of exports) in 1929" 6. As a result of the dependence of its commercial economy on raw material exports, Mexico was hard hit by the post-1929 world depressione Between 1929 and 1932 the value of exports fell by approximately 50;&0 Converted into 1929 pesos the value of exports had, by 1939, recovered to about the 1929 level. Other indications confirm the fact that there were no significant strides in economic development during the early thirties. The val.ue of industrial prOdi.lction, adjusted for the de- preciation of the peso, was at about the 8a,00 level or even less in 1939 than in 1929. Furtherr.l.ore, despite emphasis of the Cardenas Regime on agrarian reform and expanded agricultural output, farm pro- Until 1940 liexican statistics of exports of minerals were overvalued because they were entered at the market value of the Lletals in 'i':eVl York, inc£uding, therefore, refining costs and sr~pping and ether charges. -4- duce only increased from 2.3 million metric tons in 1934 to 2.8 million in 1939. 1. Basically, li:exicols economic position at the beginning of World War II was still essentially semi-colonial in nature. Subsistence agri- culture was still the predominant economic activity. The commercial sector of the economy was geared primarily to exports of raw materials, a substantial portion of which was one ot the large items in the balance of payments. According to the official balance of payments of Inter- national Monetary Fund payments of investment income in 1938 amounted to ~41 million, or 21% of all current account payments. During that year, according to a eifferent SQu:::,ce,l; 8.event,....a:tae per cent Q.£ all e~.... ports from Me;dco originated from foreign-controlled enterprises. 8. Government finance was also affected by the economic difficulties of the thirties. Because of the importance of the customs duties in the government income, government receipts were sharply curtailed by the de- cline in foreign trade. Budget accounts showed a deficit in 1930, 1932, 1933, 1931, 1938 and 1939. The internal debt rose from 71.5 million pesos in 1930 to 480 million pesos in 1940. The external debt also in- creased but this represented the accumulation of arrears of debt in de- fault rather than new obligations. 9. Thus it is clear that from the time of defaults until 1940, neither economic nor political conditions were conducive to a res~~ption of payment on foreign obligations or a settlement of arrears. During the War, however, government income and financial conditions were greatly improved by expansion in many lines, including foreign trade, construction, development of new industries, and large public works expenditures. De- spite the fact that note circulation increased more than four-fold, and deposits six-fold in the five year period ending December 31, 1945, the ratio of metallic reserves to note circulation and sight obligations of the Bank of Mexico was maintained well above the legal minimum of 25% of the currency issued and sight obligations of the Banco de LIexieo. Total gold reserves increased from ~i27 million on December 31, 1939 to more than $292 million at the end of 1945. Short-term dollar assets of lIenco, ~cluding private holdings, at the end of 1939 amounted to ~59 million, to $116 million at the end of 1945. By February, 1948 gold holdings stood at ~~86 million while dollar assets, including private holdings, rose to :'11,32 million. III. Adjustment of the External Debt of 1.,:exi££ 1. In 1922 J the Federal debt having been in default since 1914, a settlement between the government and the International Committee of Bankers was effected (it became law on the 29th of September). One year's payments - up to and including January 21J 1924 - were made under the 1922 agreement in April, 1924, but none in 1925 and in October of that year an agreement modifying that of 1922 was made. In this agreement certain adjustments pertaining to back interest, present and future interest and amortization payments were made. -5- 2. The payments due in 1926 and 1927 under the Arrangement of 1925 were provided by the Mexican Government from January, 1926 to February, 1928 and were applied by the International Bankers' Committee to meet the cash vmrrants issued in respect to 1924 and 1925. 3. A third agreement readjusting debt payments was made bet'ween the Mexican Government and the International Conroittee of Bankers in Ju2.y, 1930. This new scheme provided for scaling down and funding of direct debt in 5;~ bonds of a new issue. Interest on these bonds was to be paid at 3% gradu- ally rising to 5%. An annuity was to be provided by the l1exican Govern- ment for the service of the direct debt and was to begin at $12.5 millicn in 1931 and gradually to increase to ~,>l5 million in 1936, at which figure it was to remain during the following fort y-f ive-yea I' period providing for the extension of both the direct and the railroad debt. This agree- ment was not ratified by the Mexican Congress. 4. Certain other arrangements were made in relation to the external debt but very little payment of interest or amortization took place during the entire thirties o 5. The various debt adjustment plans during the thirties had been only partially met or were complete~ defaulted ono Between 1922 and 1929 the International Committee of Bankers on lilexicots Debt had re- ceived from the Mexican Government and the National Railways of l\iexico approximately $43 million, most of which was distributed to the bond- holders. Finally, in 1943, the so-called Permanent Debt Adjustment Plans '\-'Vere agreed upon and are common~ referred to as the External Debt Settlement of 1942. It covered most of the eA~ernal debt of Mexico other than the Railroad Debt, vmich was settled by the Rail- road Debt Adjustment Plan of 1946-1948. Details of both of these plans are discussed below. 6. External Debt Settlement of 1942. In November 1942, the Mexi- can Government and the International COmmitte#'-rsached an agreement provi- ding for (1) the readjustment of the Mexican external debt structure under which the principal of the debt was reduced to Mexican pesos on the basis of 1 peso per U.S. ~l old face value, (2) the liquidation of interest arrears, and (3) the resumption of service payments on a modified basis. The Plan was ratified by the Mexican Congress and service paj11llents to assenting bondholders were begun July 1, 1943. 7. The principal amount of the debt was reduced to Mexican pesos on the basis of 1 peso per U.S. ~pl (sterling debt 'Vms converted into dollars at rate of ~4003). The redemption price of the debt, which was fixed in pesos and in dollars for the bonds covered in the agreement, is shown in the table below. * International Committee of Bankers on Mexico -6- Table II Redemption and Interest Terms, Mexican Debt Settlement, 1942 Treatment of Treatment of Principal Interest Original . Redemption Value Annual Interest Par Value in Pesos .in·.TSt in Pesos in US ~ A. Secured Debt liexico 5s, 1899 ~20 97.00 20.00 5.60 1.155 Mexico 4s, 1910 ~20 97.00 20 0 00 4.50 Oc9.3 Mexico 6s, 191.3 ;,20 91.00 20.00 6.70 1.38 B. Unsecured Debt City of Mexico 5a, 1889 iJ,.00 40.3.00 83.09.3 1.3f!90 2.86 Enc. Irrig. 4-1/28, 194.3 $100 100.00 20.619 3,,10 0.64 Mexico 4s, 1904 $500 500.00 103.093 13.80 2,,84 C. Internal & state Debt };Iexico 38, 1885 P25 5.154 1.062 0.08 0 .. 016 1Iexico 5a, 1895 PI00 20.61,8 4.251 0.58 0.12. Vera Cruz 5a, 1927 P100 20 0 618 4.251 0.58 0(;>.12 Vera Cruz 5s, 1901 PI000 206.185 h2.51.3 5.80 1.20 Tamaulipas 5s, 1903 Pl00 20.618 4.251 0.58 0.12 Tamaulipas 5s, 1907 PIOO 20 0 618 4,,251 0.58 0.12 Sinaloa 58, 1907 P100 20.618 4.251 0,,58 0.12 Tehuantepec Nat •. Ry. 4-1/2s, 195.3 ~20 80.60 16.619 2.04 0.42 Tehuantepec Nat. Ry. 5s, 1953 ~20 80.60 16.619 2.26 0.46 The teros 'with respect to interest were as follows: (1) Current interest froLl January 1, 19u3, to be paid semi-annually January and July 1 at the annual rates per bond as indicated in Table II. (2) Unpaid coupons maturing on and after JanuaFJ 3, 192.3, and prior to January 1, 1943, to be satisfied at holders 1 option through ( .... ) immediate cash payment of 1~; of face ve.lue of such coupons, in dollars, or alternatively in pesos at the fixed rate of 4.85 pesos to the dollar; or (b) by delivery of a receipt for such unpaid coupons entitling the holder to receive such pa~~ent of 1% on January 1, 1748, or the return of surrendered coupons if the Mexican GO'lernment in the intervening ,5 years fails to make the payment called for by the Agreement. - 7- (3) Interest falling due prior to January 3, 1923, to be paid im- mediately on the basis of 2/10ths of 1% in the case of Re- ceipts for Interest in Arrears, Class A, or corresponding coupons on bonds not deposited under the 1922 Agreement. 8. Redemption of the new principal amount of the secured debt (3 issues - see A above) is to be completed on or before January 1, 1963, at the rate of I peso for each dollar of original face amount (sterling to be converted at $4')85 per pwnd)., Beginning in 194B, lIe;~ico \;ould acquire a total of ::;'5 million per annum of original face amount of assented secured bonds. Redemption of the new principal amount of the unsecured debt (12 issues) is to be completed on or before January 1, 1968, at the rate of 1 peso for each dollar of original face amo~~t (original dollar face amount of sterling and peso bonds to be figured at :..4.. 03 per pound and 4.. 85 pesos per dollar, respectively), but until all assenting secured bonds are redeemed, none of the unsecured issues would be redeemed o 9. Railroad Debt Adjustment Plan of 1946-48. On April 28, 1948 the Mexican Railway Debt Agreement, 1946, was opened for acceptance by the bondholders e Agreement for adjustment of the dollar and sterling debt of the National Railways of Mexico was announced March 19, 1946, by the Finance Minister of Mexico and the International Committee of Bankers on Mexico. On March 12, 1947, the Securities and Exchange Commission approved the Mexican Government's registration statement and, upon completion of other arrangements, bondholders were to be offered two options, nAil and tlBfI. Plan A provided for retirement of the bonds at approxL~ately 20 cents for each dollar of principal amount, and payoent of interest on such principal from January 1, 1946, at an average rate of 4.35%, spe- cific rates varying ~~th the several issues. Al1nUal cumulative sinking fund of 1.78% was estin~ted as sufficient to retire the modified princi- pal in 29 years. Plan B required holders to waive interest fron January 1, 1946, but the same amount of money per bond applied under Plan A would be used to retire bonds by purchase or redemption at prices riSing gradt:ally over a period of 29 years from over ~/21 for each ~lOO of nominal value to pay- ment at par. All payments on the bonds, at option of the holders, would be made either in dollars or in pesos at a fixed rate of exchange eqUivalent to 4.85 pesos per dollar. The agreement also provided for payment of matured interest at the rate of 1% on interest amounts due after January 1, 1923, up to Janua~J 2, 1946$ and 0.2% and 0.1% respectively, on Class A and B receipts issued under June 16, 1922 agreement representing interest due prior to January 2, 1923. Participation in any distributive share of funds in the hands of the 1922 committee would be ivaived in favor of the 1Iexican Govern- ment. (See Table IV for further details). -8- The result of the various debt adjustments and agreements plus loans are set forth below. Table III Mexico's External Public Obligations Totals of Totals ot ' Origi.. Origi- nal Issues nal Issues Total U"S. Dollar in Origi- Converted Equivalent under nal into U.S. 1942 and 1946-48 Currencies Dollars Debt AdJus~~ent Plan Government Debt (12/31/45): Issues in U.S. Dollars 58,914,600 58,914,600 Issues in ~ sterling 30,094,320 142,935,014 Issues in Pesos 139,594,450 28,782,,360 Total Principal 228,603,370 230,631,974 47,552,984 Y Interest, 1914,1922 period 93,867,941 Interest, 1923-1942 period Total Interest - 185,016,,307 278,884,248 2,061,714 Total, Principal and Interest 509,516,222 49,614,697 Railway Debt (12/]1/45)1 Principal Outstanding 233,112,3 85 48,064,409 Interest, 1914-1922 period 92,582,486 126,126 Interest, 1923-1945 period 231,909~51l 2,319:>0~' Total Interest 324,491,997 2,445,221 Total, PrinCipal and Interest 557, 60L~, 382 50,ll509,630 Y Other Debts: American Properties (Oil Settlement 1942) . 1,000,,000 1iexican-American claims (1/1/48) 19,000,000 Anglo-Dutch Oil Settlement (1/1/48) 106,800,000 11 Export-Import Bank (6/30/48) 68, 85L}, 000 Y I~B.R.D. Loans (1/10/49) 34,100,000 Private loans guaranteed by :Mexico (Estimated) 15,000,,000 Total Debts Outstanding 344)'878,327 21 Source:Government and Railroad Debts - Selected Economic Data on the Latin American Republics - P.Ac Union, Yia,shington; 1948 0 y About 20% of this is enemy-ovmed and vull not be recognized. y About 10% of this is enemy-ormed and lull not be recce:11zed," Y Of which ahout :S25 million is interest from dat0 of expropriation to date of first annual payment (9/18/48)" Total pa;yment ~~130 milliono ~ The undisbursed balance of loans authorized was 053,716,000. In calculating the service cnarges (Table IV) it was assumed that this amount v:a5 fully disbursed by June )0, 19490 21Excludes U.S. Stabilization loan of $37 million and the International Monetary Fund loan of ~22,500,ooo. -9- Mexican Federal Debt: After Adjustment After adjustment, the Federal external debt of Mexico amounts to ebout ~.345 million (see Table III), and cBlls for serVice payments totaling $36 million in 1949. After rising to $39,400,000 in 1950, payments remain around $30 million until 1955 \·rhen they begin to decline rapidly. A large item of the debt pay- men~s is that arising out of the settlement for the expropriation of the Ar.Glo- Dutch Oil properties in 1938. That settlement called for the nayment of $81,250,000 plus 3% interest from the date of e:qpropriation (March 18, 1938) to September 18 t 1948 (amounting to $25.500,000) and 3% thereafter on the out- standing balance until the last installment is paid in 1962. the total amounting to $130 million. The payments are made in annual installments of $8,700,000. A balance of $19 million under the Mexican-American Claims Settlement was also outstanding at the beginning of 1948. The debt to the United States Government is largely of recent origin - the loans from the Export-Import Bank and the Lend-Lease debt. 'Vmile the amount of the latter is secret, it would be substantially less than the total of aid rendered \·,hich 1tJas $39,273,000. On June 30t 1948 the outst~nding indebtedness to the Export-Import Bank was $68,854,000. The undisbursed balances of loans authorized were $5),716,000. - 10 - Table IV Estimate of Service Requirements on External Debt of Nexico Eade b;y I. B. R. Dt (in thousands of U.S. dollars) Ha- Rail- Na- U.S. Ameri- Year tional way Export- ciona1* Claims Oil can IBPJ) Total Debt Debt Import Finan- Con- Settle- Pro- Loan V V Bank ciera vention ments perties 21 1949 2,670 6,233 ~ 13,556 1,350 2,500 8,700 204 1,085 36,298 1950 2,596 6,233 ~ 16,966 1,147 2,500 8,700 210 1,084 39,436 1951 2,522 6,233 2 14,604 1,138 2,500 8,700 216 1,085 36,998 1952 2,.448 2,709 14,403 1,106 2,500 8,700 222 1,OB4 33,172 1953 2(374 2,709 14,066 525 2,500 8,700 228 1,869 32,971 1954 2,300 2,709 13,734 466 2,500 8,700 1,860 32,269 1955 2,226 2,709 1.3,245 L:.54 1,500 8,700 1,853 30 ,687 1956 2,151 2,709 10,444 442 8,700 1,845 26,291 1957 2,077 2,709 8,065 430 8,700 1,835 23,816 1958 2,003 2,709 6,225 417 8,700 1,826 21,880 1959 1,929 2,709 3,883 204 8,700 1,817 19,242 1960 1,855 2,709 2,540 8,700 1,806 17,610 1961 1,781 2,709 2,470 8,700 1,796 17,456 1962 1,707 2,709 1,801 8,700 1,787 16,704 1963 1,6.33 2,709 1,161 1,775 7,278 1964 3,570 2,709 1,133 1,763 9,175 1965 3,524 2,709 1,106 1,752 9,091 1966 3,477 2,709 1,077 1,740 9,003 1967 3,431 2,709 817 1,729 8,686 1968 3,385 2,709 285 1,715 8,094 1969 2,709 1,700 4,409 1970 2,709 1,687 1.,,396 1971 2,709 1,673 1",382 1972 2,709 1,658 L.. ,367 1973 2,709 1,642 4,351 1974 2,709 2,709 1975 2,709 2,709 1976 2,683 2,683 .- V ZXoludes funds for paYilent on bonds held by l.orld Har II enemies., y Assumes assenting to debt readjustment plan 1949 t~rO"i.l€:h 1951 and payment of back interest plus payments for 1946, 1947 8.l:d 194.8 .. J/ Ther~ is also a 010,000,000 :rmm loan which may be> d:.:'a:wn on mei'ore 12/1/49 and ma.tures 12/31/499 interest at 1:.-1/2%. It is expected 'Ghat this loan may be refunded into a 25·..yea.r loen, on llllich the annual se:...~vice charges at 4-1/2% interest llould be approxillate1y :::;675,000 .. *Guarant1es (Notes continued on next page) - 11 - These amortization payments are calculated on the basis of purchases of bonds for retirement at the par specified in the adjustment agreements. Retirements at a m6.rket price lOvler than par lIould provide some savin£;s. For example, retirement at 16 instead of 20 Hould lessen the total pay- 11ents close to 02 million each year. Since ,30% of this debt is hele. internally, partly by the governnent, the above pa:;1!ilents overstate actual costs. It lias assumed tha'!; the undisbursed portions of Export-Import Banlc loans llauld be fully utilized by June 30, 1949; also, that enemy- held l.le::dcan Govel"11J."'lent and Railllay bonc~s \!ould not be servicec:. Ser'\tice pey.u1ents do not include dollar flexible charges due 011 the Unitec: States Stabilization International Fund loans lIllich, if paie: ~ron 1949-1954, would require en adi:itional pay;nen~~ of a?pro::dmately :J10,OOO,000 per :;-ee.r during this pel"iod. Debt Service and B§.~e.nce of Pg:ypents j\texico's foreign trade, inc.:i.~1ding transactions in t11e precious metals, has nornally been characterized by an excess of e:~orts over ir.lports. The e:lcports Here largely raw nateriols - minerals and petro:!.eun. The imports wel"e manufactured goods and, despite tile laree proportion of the population engaged in agriculture, foodstuffs. Since 1944 imports have exceeded exports, and, not,,,i thstandinc attempts to limit imports, a balance has not been reached. A Inrge part of this may be acc01,mteG. for as deferl~ed purchases of IJerchanclise lihicb could not be acquired utrr1l1g the are Data regarding the balance of intor11.2.Gional transactions of He:dco are not ave-.ilable for an histo:~ical study of trencis. Houever, data re- cently prepared by the International lionetary Fund relate to 19.38 as well as 19L,6 Dnd 1<:;l..7 and serve to point up 802:1e :i.:'.lportant changes that have taken plnce (see Table V). These data int~icate that, in 1938, there \lore threo principal items, net merchan0.ise exports" net gold ex-ports and net payr;'lonts of incoIlo an foreia;n investnents. The larGe payments of in- cor.le on foreiGn investments - ::~41 million - reflected the large foreiGn stake in iiexico. In thet year 71% of the exports from lie:dco uere pro- duced on foreign-owned properties. All other items were very snall, il1cluding knoHn capital moverilents. It IJrobable, however, tha.t ce.pital movOl"Jents vlore lDrge because the e}::propriation of the raill.luys in 1937 and the foreign oil properties in 1938 naturally caused foreign capital to leave the countTiJ, In 1946 and 1947 there Here several notable features of the balance of international transactions of iiey.ico. First, there \laS the change in merchal'1dise trade to an excess of il:lpOj.~tS, aIllounting to about ()230-250 million eo.ch year. Secondly, a nell so\,rrce of a substantiE'~l amount of income aPl)eared - foreign travel - \vhich averaged about (.85 :!::dllion net each year. ThirdlYI the income from foreign direct inves·~j:.lents in :iey,ico continued to be large (~~51 million in 1947) notl:i'Ghstal1ding the General unfavorable attitude tOvlard private foreign capital. Interest on the Goverrn:n.ent debt amounted to only 02.7 million. A fourth feature tJas debt - 12 - amortization i:lhich 8li1ounted to about ::,20 million in 1947 as contracted 'lith $1,580,000 in 1938. Current transactions each year resulted in net pay:r:~ents by :~exico - (;;151;. mllion in 191+70 These net payments were made out of the proceeds of neif private investments in Lexico, and il:lcrease in iie:dCa11 of- ficial ane: bank liabilities to foreigners, and sales of bole. The cur:t'ent interLational transactions of lienco at present c.re not in bal,::.nce and the gold a11d forei.::,n e::::change reserves are not sui'ric:'ent GO last lilore than a year or tHO at the present rate of U8e. J Gold produc- tion is only about (~15 million a year - less than 10;;; of t:le estinated cUI'rent account deficit in 1947 - and cannot be c1epended upon for much assistance, - 13 TaE-1e V ~timates of the Ba.3:~-2£. Pe;vm~nt!? of lIexi,Po 1~38, 19~6 and 1947 (in millions of U.S. dollars) Net Credit or Debit (-) Item 1938 1946 1947 " .-- Current ~ransac~: Herchandise 42;9 -232.2 ":'257.1 N011mOnetary gold mov6aent (net) 37.6 1.0 21.1 Foreign travel 8~2 87.5 82.9 Transportation .:..0.4 -3~7 -.3.1 Insurance -0,.6 -1.6 ':'1.8 Investment income -40.7 -42~1 ~57.8 Direct investment, ...36 .. 2 -50 .. 6 Other interest) -7.2 other equity ) -5.9 Government, B.L.E.. 2.1 B~7 9.0 Iviiscellaneous -0.6 Donations ..bQ. 19';' ;2~ Total current transactions 51.l -163.9 ':'153.9 Hovement of Ca]2ital and lIonet~ Gold Privat~ (excluding baxllcing institutions) Long-term capital -5.8 11.0 -15.8 Short-term capital 40.6 -6.0 Offipi~ and BaruSing Institu~ons Long-term capitel 1.6 -14.0 90.7 Loans to official aml ban1:ing institutions and ~ all sources 1.6 -35.6 -25.6 Amortization 15.1 19.8 Other 6.5 96.5 Short-term capital 2.9 ...6.3 -126 •.7 llonetary gold .Jt.& -11'3,~ -79·2 Total movement of capital and monetary gold 3.5 -82.0 -137 •.7 Errors and Omissions -47.,6 81.,9 16.2 Source: International llonetary Fund, Second Revised Draft for 1948 Year- book of Balance of Payments, Hexico ;L9J8, 19~6, 19/;t7, December 1948. - 14- The real solution must come frOLl achieving at leaot a comll tiOl1 of balance in its trade account. To SOLle e::lrtent this can be done throuGh the limit2tion of imports of luxury goods, 1:Thich I.lo.ve increased greatly since the T,ar. Some of this may come about automatically v1hen the accumulated needs of the \Jar period are satisfiec.. Imports of cE,pital goods have also increased greatly since the Har. To SO:'-ile extent this may be a result of the sa~e factor noted with respect to l~" articles - inability to sa'l:iiary requirements during the liar. Also it is pc.rtly a resul'G of the recent larger volu.rne of neiT direct investr.le:r..t. Hetl direct investments Llust,in general, be looked upon as Good be- cause they vTill increase production and possibly help C01"rect the tre.de balance. fie~d.co has extensive resources for nevr developnent 'Hhich might not only provide needed e::C'ports but llould supply the basis for fl.:lrther industrialization. These resources are being developed SlOitlly by i;:e:dcan capi tal through Government stimulation and aid. They could be developed much more rapidly if foreign private capital Here given real encourage... mente At present, some capital is beint£~ invested there, primarily in manufacturing industries, leaving the pr:Lnary industries lagging l:ehiOO, The value of ney private direct investments in 14exico vias estimated at about $19 million in 1947. There uas in addition an i11flov1 of short- term funds. Private foreign capital may be obtained on terms that ,vill benefit Nexico as l{ell as provide reasonable profits for the investors. It 'I..;ill be necessary, hovlever, for the Goverl'.nent to correc'G the anti-foreign attitude. ilany of l'lexico's difficulties in the past have arisen from the unllil1ingness of private capital - domestic and foreign ... to engage in any undertaking that required large capitul outlays and from which income vlOuld be delayed several years. Instead, capital \-!anted a quick return of large profits so that in case of expropriation or excessive eover:nment competition the loss would be minimized. This has led to speculative investments in real estate, merchandising and some simple manufacturing.. It has not been conducive to balanced il1c1ustrializahion.. Conclusion Future ~~ice on Hexicot.s Government debt vrill be from (?lO-25 mil- lion larger !f:I than it vIas in 1947. If the international account were noy in balance, this 'Would not constitute any serious obstacle to acl.(itional loans. The ability of liexico to balance its accounts remains to be proven and until that time the safety of additional loans is questionable; also, the debt record of Herico and its anti-foreign attitude touarcls direct capital investments are strongly negative factors. aI The amount of increase depends on payments made on the U.S. Stabili- zation and International i~onetary Fund loans. '£able VI - 15- Outlin~ of Amortization and Interest Under Railway Debt Ad.1u~tment Plan A Plan B Redemp-' Annual +Cumu1ative %of Bonds Issue Out- , tion Interest "'Redemption Price To :Be Retired standing Origina~ Price Payment per $1,000 (Based on original par Original; Denomi-; {Per (Per value) Amount I nation' Bond) llond) : 1946, 1947 1948, 1949 1946. 1947 1948 194~ ___ Thou.. . $ $ _._; $_.... j $' $ $: $ $ L CLASS "A" ; , J t Nat'l R.R. 4-1/2s, 1926 23,000 , $ 500 10).093 i 5.498 217.10 228.70~240.80; 253.60 6.69:13.0319.0624.79 Max. Centtl Ry. 5s, 1939 1,3'74; $1,000 206 f 186 10.182 ' t · CLASS liB It Nat'l Rys. 4-1/2s. 1957 84.804 $ 100 20.619 0.8704 Max. Cent'l Ry. 5% Eqp. Bds. (A) 1st Ser., 1897 150 $1,000 206.186 10.182 (:a) 2nd Ser., 1899 300. $1,000 206.186 10.182 (D) Sar. No. 10. 1907 342 : 746 ' $1,000 206 .. 186 10.182 , 45.60 6.02,11.79 215.40 225.00 235.0012 ' 17.31 22.59 Nat'l Rye. 6% Notes, 1913 $1.000 206.186 10.996 Nat'1 Rys. 6% Notas: (A) 2-yr. due 6-1-1915 4,983 $1,'000 206.186 : 10 .. 996 (A) 2-yr •• 1915 (stg.) 16.370 I, 100 83.09). 4.43 (») 2-yr., 19163 1.403 $25,000 5154.639 .1274.932 CLASS "C" Natal Rys. 4s t 1977 50,749 $ '100 20~619 0.8144 Vera Cruz. & Pac. 4-1/28. 1934 7,000 $1,000 206.186 9.164 214 .. 40 .223.00'231 .. 90,241.10 , } 5.67 11.12 16.36 21.40 , Nat'l R.R. 4s t 1951 24.740 $ 500 103.093 4.072 CLASS "D" Max. Intern. R.R. 4-1/28, 19J.j.7 4,836 is 100 l 83.093 3.138 Max. Intern. R.R. 4s t 1977 4,207 ! $ 500 103.093 3.461 Pan. Am. R.R. 5s, 1934 2,003 ; $1,000 206.186 7.636 Pan. Am. R.R. 5st 1937 1.484 ; $1,000 206.186 6.618 Nat'l Rys. 6% Notes: ! '214.3°\222.80:231.60 240.70 4.81; 9.44 13.90 18.18 (A) Sere Bt 1914 1,510 ; $ 2 0.412 0 ..02. i (0) )-yr., 1914 2,460 i $ 45 9.278 0~466 (D) Sere 0, 1914 161 I $ 15 3.093 0.154 (D) Se"r. Ot 1914 (stg .. ) 491 ; ; ~ 3 2.493 0.124 Total 231.112 ; - 16- Table VI - Continued III Price increases each year until 1974, by II!hich time nrice will be $1,000 and all bonds ...Jill be retired. + Represents maximum per cent of each issue \"ithin a given class to be retired by the end of each year until 1974.