Source:
IFIs Latin American Monitor
Sat Jul 01 2006
Ten days ahead of Mexico’s presidential election, the federal government announced the early payment of 7 billion dollars to the World Bank and Inter-American Development Bank (IDB), through the use of international reserves. This decision follows the prevailing trend in Latin America, that of external unindebtedness; thus, Brazil, Argentina, Venezuela and Uruguay did so in less than a year’s time.
The same as in the rest of Latin American countries, the Mexican operation involved large official events to make the measure known. President Fox recorded a message and then the Minister of Finance held a press conference to provide further technical details. Fox pointed out that this payment is a clear sign of strength and aims at protecting the economy from eventual turmoil in international financial markets. He underscored that the measure shows that “an efficient and prudent management of the economy bears good fruit”.
In spite of the nature of the transaction – replacement of one debt by another and stretching of terms – Fox presented it as the great financial ‘armor-plating’ to be left as legacy of his administration. Mexico is preparing for the national election to be held on July 2 and Fox should be handing over the presidency on December 1. In this way, accounts will be in order when that moment comes.
Meanwhile, as it was explained by Deputy Finance Minister, Alonso García, the debt owed to the IDB and World Bank amounted to just over 13 billion dollars, being thus 50 per cent of it paid off. This payment reduces the total amount of debt owed by the federal government from 32.5 per cent to 28.5 per cent. The total external debt falls then from 57 billion dollars to 50 billion dollars and in terms of GDP, its is reduced from 7.3 per cent to ‘only’ 6.4 per cent.
However, the total Mexican debt remains unchanged, since this payment will be financed by domestic debt. The government will issue the so-called development bonds (Bondes D), which will be used to obtain 7 billion dollars in international reserves managed by the Bank of Mexico. This operation implies to increase the domestic debt to the amount of 125 billion dollars, thus rising GDP rates from 15.1 per cent to 16 per cent.
According to García, a real decrease in the amount of outstanding debt is only possible when a budget surplus is registered and this has not been the case. Mexico, the same as other raw-material exporting countries, has considerably benefited from the rise in oil international prices.
International reserves held by the Bank of Mexico reached a record level of 76.7 billion dollars in the last week. According to the Deputy Finance Minister, the decision to use international reserves was made since “there is no point in having such a bulky amount”. He added that this prepayment will help to reduce the vulnerability of public finances and will allow to save about 53 million dollars, apart from considerably extending the maturity date.
Between December 2000 and April 2006, the federal government allocated 630.10 billion pesos (over 55 billion dollars) to payment of interests generated through domestic indebtedness; meanwhile, slightly over 272 billion pesos were allocated to payment of interests on the external debt, as it has been reported.
Repercussions
Spokespeople for the World Bank and IDB in Washington gave a warm welcome to the decision made by the Mexican government, while financial markets also showed a positive reaction the day after the announcement.
According to a presidential spokesperson, the world of finance considers this measure as a demonstration of fiscal discipline and good management of international reserves.
However, Mario Di Constanzo, financial advisor of the Democratic Revolution Party (of the opposition), considered that under the same dynamics, reserves could be better used for investment in infrastructure. “It is a mistake to allocate reserves to early payment instead of using the foreign-currency surplus resulting from rising oil prices for the country’s much needed investment in infrastructure”. It is then about “making people believe that President Fox has fulfilled the promise to reduce the external debt, while it is the domestic debt the one that is eating us up”.
In this respect, reports from the Finance Ministry indicate that interest payments on domestic debt exceed external debt service by 132 per cent.
Sources: La Jornada (México), El Observador (Uruguay), Bloomberg
Related Information:
See message from President Fox
Argentina and Brazil: challenges of the cancellation of debt to the IMF
Venezuela also analises an early cancellation of debt
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