Mexico’s Money Troubles Far From Over Despite Agreement With IMF

Mexico still faces an uphill battle to persuade international banks to go along with sweeping debt concessions despite a new $3.64-billion agreement with the International Monetary Fund, bankers and government officials said Wednesday.

Finance Minister Pedro Aspe announced the agreement on the $3.64-billion, 3-year Extended Fund Facility loan on Tuesday. He said Mexico is also negotiating a $500-million IMF loan to compensate for foreign currency shortfalls.

However, he added that while the IMF accord will help Mexico in its upcoming talks with international banks, due to start next Wednesday, he recognized that the negotiations still will not be easy.

“We expect these negotiations to be arduous and difficult,” he said. “We have taken an important first step but there is a long road to travel.”

Foreign bankers here said the IMF accord will undoubtedly put pressure on banks to agree to a debt-reduction operation, but they were not happy with Aspe’s tactic of leaving negotiations with them until last.

“It’s like he’s saying the governments have agreed so now you have to,” one North American banker said.

Aspe said Tuesday that he wants quick agreement with the banks in order to cope with some large payments coming due. Bankers estimate that Mexico owes about $16 billion in interest and principal this year, with more than $500 million coming due in May.

Bankers question Mexico’s portrayal of its cash-flow difficulties, pointing out that oil prices are rising and that the government first needs to resolve a fiscal deficit that translates into financing costs of around $20 billion a year.

“The key to their financing gap lies in just what their level of reserves is,” one banker said. Estimates vary between $5 billion and $8.5 billion, but Mexican officials are very tight-lipped on this statistic.

Aspe said Mexico’s total debt now stands at $100 billion, including $60 billion in medium-term commercial bank debt. Of this, $14 billion is new bank loans raised in 1983, 1984 and 1986, and the rest is restructured debt. Only $5 billion to $6 billion is private-sector debt, and another $25 billion is owed to government and multilateral creditors. Interbank lines make up $10 billion .

Though Mexico has concentrated up until now on reduction of debt principal, Mexican officials recognize that the debt burden will not ease significantly unless interest relief is achieved.

“Without a reduction in debt service, the deficit on current account could more than double between 1988 and 1994,” Aspe said. Last year the deficit was $3.1 billion.

The letter of intent with the IMF acknowledges the oil price improvement and projects a drop in interest payments to 7% of GDP this year from 13% last year.

Initial reaction in Mexico to the new IMF agreement, the third since its debt problems began in August, 1982, was generally positive, with both business and union leaders praising its growth orientation.

But some economists said Mexico risks falling short of its goals by following the strategy drawn up by creditor nations.

“The only commitment we have is to continue our present economic policy,” Aspe told a television interviewer Wednesday.

The accord, which is extendable to a fourth year, will be evaluated by the end of August and then again by the end of February, 1990.

Mexico undertakes the agreement with the aim of bringing inflation down to 18% this year from 51.7% in 1988, and to single digits thereafter, to reduce its fiscal deficit to 7% from 10.8% and achieve a 6% growth rate by 1994. Growth, which was down 4% in 1986, has been flat for the past 2 years.