Market Focus : Mexico’s Economy Moves Off Critical List : Debt is no longer an issue in Mexico, the chairman of Citicorp said recently. And he may be right as interest rates have been sliced and foreign investors are coming back.

Mexico’s largest single creditor surprised executives gathered for a luncheon at a colonial mansion here last month.

The debt crisis is over, John Reed, chairman of New York’s Citicorp, told members of the American Chamber of Commerce, referring to the nation ranked second only to Brazil among the indebted countries of the developing world.

“Debt is not an issue in Mexico--not an issue with international banks in regard to Mexico,” he said.

A year after Mexico became the first country to sign a debt reduction agreement under a plan initiated by U.S. Treasury Secretary Nicholas F. Brady, domestic interest rates have been cut in half and investment is slowly flowing back into the country.

Mexico is even able to borrow money abroad again although not from commercial banks. In the last even months, the government-owned telephone, electric-power and oil companies have all raised funds by selling bonds on either European or U.S. financial markets.

“It is not all attributable to the debt deal,” said Jose Angel Gurria, Mexico’s undersecretary of the Treasury for international finance matters. “Without appropriate economic measures, you would not have these (improvements). But I think it can all be traced back to having done the debt deal.”

The Brady Plan “debt deal” is a scheme under which commercial banks forgive part of the sums they are owed by developing nations or reduce the interest rates that they are charging. In return, the remainder of their loans are effectively guaranteed by the International Monetary Fund, the World Bank, and the wealthy industrial countries that support those organizations.

While there is some debate about the practice, the plan offers a good deal for both lender and borrower, in theory.

For the indebted countries, which have seen a larger and larger share of their wealth required just to pay interest on their mounting debts, it promises some relief--maybe even enough to generate the kind of real economic growth that might one day pull them out of the hole.

And for the lenders facing the prospect of having more and more of their huge overseas loans go bad, it offers the chance to limit those losses.

Since Mexico signed that first Brady Plan agreement, the Philippines, Costa Rica, Venezuela and Morocco have negotiated debt reductions with banks.

The World Bank considers another 14 nations--all middle-ranking in terms of income and with mainly bank debts--to be prospects for Brady-style debt agreements.

The U.N. Economic Commission for Latin America and the Caribbean (ECLAC) placed the number higher, at 34, based on a U.S. Treasury report. In all, Third World countries owe a total of about $279 billion to commercial banks. So, it’s clear that a lot of people have an interest in how the year-old concept is working.

Participants--creditor banks, debtor countries, the World Bank and especially the U.S. Treasury Department--are outwardly enthusiastic about results. But outside analysts are more cautious.

Meanwhile, those trying to make up their minds as to whether the plan might work for them can hear the money clock ticking.

The $30 billion to $35 billion in financing available under the debt reduction initiative “is not enough to support programs for all 19 Brady countries,” according to the World Bank’s World Development Report 1990. ECLAC estimates the financing needs to be three times the amount available.

The implication is that those who do not settle soon may be left out completely, unless other sources of money are found.

And whatever their lingering doubts, no one wants to be left out. While the long-term effects of the plan are open to debate, it stands at the moment as the only solution outside of default being offered to countries with bank debt.

Since the debt crisis surfaced in 1982, just meeting the interest payments due on their borrowings has been a major obstacle to growth in Latin America.

Debt payments were equal to one-fifth of the region’s exports last year, according to World Bank figures. Both Mexico and Venezuela paid more in debt payments than they made in oil exports.

Constant debt renegotiations were not providing an answer, either for the countries doing the borrowing or for the banks to which they are indebted.

Peru also reduced its payments, and other major debtors, notably Brazil and Argentina, periodically stopped paying.

The Brady Plan allows different options for reducing debts.

One option, for example, is for a country to “buy back” its debt at a discount, using money borrowed from the World Bank in combination with another agency or government. Or it can “exchange” the debt for new bonds, guaranteed by those international institutions or industrialized countries, that either have a lower value or pay a reduced interest rate.

The United Nations has cautioned that these arrangements leave the developing countries heavily in debt--just to different lenders. There is also concern that the indebted countries are borrowing money to effect these complex debt-reduction arrangements that might be better used for development projects.

“All the agreements have been quite complicated, and assessments of them have varied,” according to the U.N. World Economic Survey 1990. “However, when all the relevant aspects are taken into account, the benefits estimated are modest, and the solution to the developing country debt problem seems once again to have eluded the international community.”

The exact terms of any Brady Plan debt-reduction depends on negotiations between the creditor banks and the indebted countries. And the banks have so far proven to be hard bargainers.

Mexico, for example, had hoped to cut its debt payments by two-thirds, but now that the talks are done, the country is paying about one-third less, saving from $3.4 billion to $4 billion a year, depending on interest rates.

Gurria, Mexico’s principal debt negotiator during the eight years of the crisis, shrugged off the difference between the goal and the outcome as “horse trading.”

Mexico proposed that the banks forgive 55% of its debt; the banks offered 15%. They settled for 35%. That set the framework for the second option--the one on which Mexico and its banks finally agreed: a reduction to a 6.25% fixed interest rate from variable rates that had been over 9% in 1989.

The bottom line for Mexico, said Gurria, is that although it still owes a total of $87 billion to its various long-term creditors (including both banks and other governments), the interest rate savings mean that its payments are now equal to what they would have been on an $80-billion debt before Brady.

Outside analysts are skeptical about the gains, however.

The United Nations report concludes that neither the Philippines nor Mexico benefited more than they would have under the type of debt renegotiations that have been the norm over the last eight years.

On another point, however, bankers, analysts, and government officials all appear to agree: a key measure of success still eludes the countries that have struck Brady Plan deals. “When will banks lend again?” Citicorp’s Reed was asked.

“It will take a long time for bank and pension fund money to come back, outside of stock-market investments,” conceded the man whose bank has loaned Mexico $2.2 billion. “But Mexico will gain access to the markets and get new money. It could not be done today, but it could in the future.”

A Fiscal Remedy Called Brady Plan

Five countries have signed debt reduction agreements under the plan devised by U.S. Treasury Secretary Nicholas F. Brady, right. As many as 16 other nations are candidates for assistance.

Severly indebted. middle-income countries are the most likely to receive debt relief.

Debt in billions of dollars, at year-end 1988.

LATIN AMERICA

Country Long-term debt % bank debt (in billions of dollars) Argentina $58.9 82.3% Bolivia 5.5 18.9 Brazil 114.6 75.7 Chile 19.6 73.1 Costa Rica 4.5 48.5 Ecuador 10.9 61.3 Honduras 3.3 20.4 Mexico 101.6 81.9 Nicaragua 8.0 19.8 Peru 18.6 55.0 Uruguay 3.8 78.3 Venezuela 34.7 98.5

SUB-SAHARA AFRICA

Country Long-term debt % bank debt (in billions of dollars) Congo $4.8 50.9% Ivory Coast 14.1 59.2 Nigeria* 30.7 62.1 Senegal 3.6 7.0

EAST ASIA

Country Long-term debt % bank debt (in billions of dollars) Philippines $29.4 55.2%

EUROPE, MIDDLE EAST, NORTH AFRICA

Country Long-term debt % bank debt (in billions of dollars) Egypt** $50 14.2% Hungary 17.6 89.5 Morocco 19.9 25.3 Poland 42.1 34.5

*Considered a low-income country, but is researching Brady initiative. **Not considered severly indebted because 98% of debt is at fixed rate, but is researching Brady initiative. SOURCE: World Bank figures