Mexico Says It Intends to Stick to Austerity

Despite criticism at home, the government of President Miguel de la Madrid has reaffirmed its intention to maintain “strict discipline and firmness” in carrying out a program of economic austerity.

The promise was contained in a letter of intent that Mexico has given the International Monetary Fund in return for continued financial support from the fund and the world banking community.

The agreement on the letter was disclosed Monday, clearing the way for the signing Friday of a separate agreement with a group of 550 banks that represents Mexico’s international creditors.

The arrangement with the private banks is the culmination of nine months of complicated negotiations that will allow Mexico to restructure--that is, to roll over or extend--$28.6 billion in outstanding loans. Under its terms, Mexico will repay these loans over the next 14 years.

New Negotiations

Later this year, a new set of negotiations is expected to produce an agreement allowing Mexico a similar extension for the repayment of $20.1 billion in foreign credit. Thus, the full amount of the restructured package amounts to $48.7 billion, according to the chief Mexican financial negotiator, Angel Gurria.

Although that is an enormous amount, it is only about half of all of Mexico’s foreign debt. The rest, according to Gurria, falls into several categories that are not subject to restructuring:

- $19 billion in loans owed by private Mexican companies. The government has undertaken a separate plan to cover these loans over several years.

- $9 billion owed by Mexican commercial banks that were nationalized in 1982. These loans include interbank transfers, bank-to-bank lines of credit and other similar arrangements.

- $4 billion to $5 billion that the Mexican government owes to other governments. These loans will be paid on schedule or renegotiated on an individual basis if the need arises.

- $5 billion owed to international lending organizations, such as the World Bank. These payments also remain on schedule, Gurria said.

- $4 billion to $5 billion in bonds and “private placements” that will also be paid on time.

- $4.36 billion in a special credit facility established in British currency for Petroleos Mexicanos, the government energy monopoly.

The agreement with the banks had been expected to be ready for signing late in 1984 but, according to Gurria, writing a plan of such unprecedented scope posed special problems.

Perhaps most difficult, he said, was the arrangement whereby some of the banks will accept a total of up to $12 billion in hard currencies other than dollars.

“Defining an adequate conversion rate and trying to determine what the financial picture will be like 14 years from now--it was like Penelope’s web,” Gurria recalled. “The issue, of course, is that each minute detail involves money--the risk of losing it or the opportunity of getting more of it.”

Private U.S. banking sources said the agreement was held up for another reason--the difficulty in negotiating an agreement between the IMF and Mexico.

Technically, the two discussions were unrelated, but the banking community depends on the IMF’s judgment. The delay in arriving at an agreement seemed to reflect IMF doubts about the future of De la Madrid’s economic program.

The central question was Mexico’s longstanding dependence on deficit financing of economic development. In 1982, the last year of President Jose Lopez Portillo’s administration, the deficit rose to 17% of the gross domestic product.

This led to a catastrophic devaluation of the peso that sent the currency to 226 pesos to the dollar, the official rate today, from 28 pesos in early 1982.

In a rescue package put together by the IMF in late 1982, De la Madrid promised to reduce the deficit to 8.5% in 1983, a goal that was achieved, and to 5.5% in 1984, a goal that was not.

Further, the plan called for a reduction in the inflation rate from 100% in 1982 to 40% in 1984. The 1984 rate was 59.2%, though, and the goal of 35% for 1985 is considered a virtual impossibility.

Setting targets for this year that the IMF considered both realistic and necessary was the focus of the negotiations.

The Mexican letter of intent recognizes that “inflation remains much too high” and that “the situation demands that public finances be fortified and that monetary policies be adjusted.”

Mexican negotiators succeeded, however, in avoiding mention of a specific inflation target for 1985 in the letter.

On the other hand, the letter acknowledges that the deficit target of 5.5% was not met--the preliminary estimate is of a deficit of 6.2% of the gross domestic product--and promises that the government will strive to lower this to 4.1% in 1985.

That will require a reduction in government subsidies for food staples, electricity and other consumer products. That risks further political confrontations with the labor movement and other organizations that claim that the government is neglecting their needs and contributing to a further decline in the standard of living.