Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 14518-ME

MEMORANDUM OF THE PRESIDENT

OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

COUNTRY ASSISTANCE STRATEGY

OF THE

WORLD BANK GROUP

FOR

THE UNITED MEXICAN STATES

MAY 22, 1995

Country Operations DivisionCountry Department IILatin America and the Caribbean Regional Office

This document has a restricted distribution and may be used by recipients only in the performance of

their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENT

Currency Unit Mexico New Peso (MexN$)US$1.00 = MexN$5.885 (May 18, 1995)

DATE OF LAST COUNTRY ASSISTANCE STRATEGYMay 13, 1994

FISCAL YEARJanuary I to December 31

ABBREVIATIONS AND ACRONYMS

BIS Bank for International SettlementsCETES Certificados de la Tesoreria de la Federacion (Treasury notes

denominated in pesos sold at a discount during weekly auctions,with maturities of 28, 91, 182, 364, and 728 days. These are themost important money market instruments.)

CID Comisi6n Intersecretarial de la Desincorporaci6n de EmpresasParaestatales (Interministerial Commission on Privatization)

ESF Exchange Stabilization FundFOBAPROA Fondo Bancario de Proteccion al AhorroIDB Inter-American Development BankIFC International Finance CorporationIMF International Monetary FundNAFTA North American Free Trade AgeementPACTO Tripartite pacts between government, business and labor on basic

macroeconomic policy parameters such as wage levels, exchangerate system, inflation targets, beginning in 1988 and renewedperiodically until 1995.

PEMEX Petr6leos Mexicanos (Mexican Petroleum Company)PRI Partido Revolucionario Institucionacional (Institutional

Revolutionary Party)SECOFI Secretaria de Comercio y Fomenta Industrial (Secretariat of

Commerce and Industrial Development)TESOBONOS Treasury notes with one-, three-, six- and twelve-month maturities,

with returns indexed to the market exchange rate against the dollar.

FOR OFFICIAL USE ONLY

TABLE OF CONTENTS

Page

A. Background and Recent Economic Developments ........................................ 2

Causes of the Current Crisis ...................................... .. 2Crisis and Response .. ........................................ 4Assessment of the Economic Program ......................................... 7Macroeconomic Prospects . ........................................ 8

B. External Environment ........................................ 10

C. Mexico's Development Objectives and Policies ................ 1........................ 1

Private Sector Development ......................................... 11Social Services and Poverty Alleviation ......................................... 1Political and Government Management Reform ........................................ 12Infrastructure ........................................ 12Environmental Sustainability ........................................ 12

D. The Bank Group's Country Assistance Strategy ............................ 12

Crisis Response ........................................ 13Restructuring the Portfolio ........................................ 14Developing a Medium-Term Strategy: New Directions ................................ 15Level of Bank Lending ........................................ 17Creditworthiness and Bank Exposure .............. .......................... 18International Finance Corporation (IFC) ................... ..................... 19

International Monetary Fund (IMF) ............ ............................ 21Inter-American Development Bank (IDB) ........................................ 21

E. Agenda for Board Consideration ........................................ 22

This document has a restricted distribution and may be used by recipients only in the perfornance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

LIST OF FIGURES, BOXES, TABLES and MAP

Page

Figure 1: Annual CPI Inflation Rate: 1987-1995 .................................. 5Figure 2: Real Exchange Rate Index: 1980-1995 .................................5Figure 3 Savings and Investment: 1989-1994 ..................................... 5Figure 4: Real Growth Rate of GDP and GDP Tradeables and

Non-Tradeables: 1989-1994 5Figure 5: Exchange Rate and Exchange Rate Band

November 1991 -December 20, 1994 ... 5Figure 6: Internal Debt Outstanding (Cetes vs. Tesobonos)

December 1993-December 1994 ......................................... 5Figure 7: Mexico: Bank Portfolio Share Projections, 1994-2003 ........ 19

Box I: Mexico-Bank Dialogue on Structural Issues .......................... 3Box II: The Bank's Response to the Crisis: A Snapshot .................. 13Box III: The Importance of a Quick Response to an

International Financial Crisis .15

Annex Table Al: Mexico - Selected Indicators of Bank PortfolioPerformance and Management

Annex Table A2: Mexico - Bank Group Fact Sheet FY92-98Annex Table A3: Mexico - Summary of Economic and Sector WorkAnnex Table A4: Mexico: Poverty Indicators

Mexico: Resources and ExpendituresAnnex Table A5: Mexico: Key Economic IndicatorsAnnex Table A6: Mexico: Key Exposure IndicatorsAnnex Table A7: Status of Bank Group Operations in Mexico

Annex B I: Methodological Note on Macroeconomic ProjectionsAnnex B2: Mexico: National AccountsAnnex B3: Mexico: Exports and ImportsAnnex B4: Mexico: Balance of PaymentsAnnex B5: Mexico: External Debt Stocks and FlowsAnnex B6: Mexico: Public Finance

Annex C1: Mexico: Bank Portfolio Share Projections, 1994-2003

Map of Mexico Bank Projects with Special Emphasis on Poor States

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTTO THIE EXECUTIVE DIRECTORS ON ACOUNTRY ASSISTANCE STRATEGY OF

TH1E WORLD BANK GROUPFOR THE UNITED MEXICAN STATES

I. The serious financial crisis in Mexico has prompted the Bank Group, in coordination with theInternational Monetary Fund, the Inter-American Development Bank (IDB), the United States andother G-10 countries, to respond swiftly with a major program of support for the Government'seconomic adjustment program.

2. This program and the generally depressed economic conditions throughout the country arenecessarily having a profound effect on the Bank's country assistance strategy for Mexico. In the shortterm (CY95), the Bank is planning to provide massive financial and technical assistance in three keyareas: (i) strengthening of the commercial banking system; (ii) support for social sector programsproviding essential services; and (iii) acceleration of infrastructure privatization. Operations in the firsttwo areas are being presented to the Board concurrently with this Country Assistance Strategy (CAS):the Financial Sector Restructuring Loan (US$1 billion) and Essential Social Services Program(US$500 million). The third will be presented early in FY96: Infrastructure Privatization TechnicalAssistance (US$30 million). Upon successful initiation of the first operation, a follow up FinancialSector Restructuring Loan (US$500 million) would also be presented to the Board in rnid-FY96.

3. At the sarne time, a number of ongoing Bank loans need to be restructured and/or partiallycanceled, as a reflection of new priorities. Also, the FY96-98 lending and ESW programs are beingreviewed with the Government to redesign them to better reflect current needs. Many of the medium-term development issues and objectives laid out in the 1994 CAS for Mexico remain valid, althoughthe kinds of instruments, and the volume, timing and sequencing of assistance must be reconsidered.They also need to be supplemented by strong support in several new areas which have emerged duringthe recent crisis.

4. Given the very fluid situation in Mexico, this CAS focuses on the nature of the immediate crisisand priorities for Government policy and Bank support over the next year. It also spells out theprinciples underlying the review with the Mexicans of the medium-term assistance program. The 1996CAS will provide a fuller statement of the resulting objectives and the likely shape of the Bank'sprogram during the outer years of this decade.

2

A. BACKGROUND AND RECENT ECONOMIC DEVELOPMENTS'

Causes of the Current Crisis

5. Following almost ten months of mounting pressure on Mexico's exchange rate, and the near-depletion of its foreign reserves, on December 20, 1994 the Government allowed the peso todepreciate beyond the limits of the band that it had previously defended. At first the ceiling of the bandwas simply raised by about 15 percent, but after two days of clearly unsustainable pressure against thenew rate (and a further loss of almost US$5 billion in reserves), the Government was forced onDecember 22 to allow the rate to float freely. The markets reacted with panic and investor confidenceall but disappeared. A currency crisis ensued and, as a result, the economy is contracting sharply thisyear.

6. The Mexican crisis was precipitated by a year-long series of domestic and external shocks.First, with 1994 a presidential election year and the economy in recession in the second half of 1993,the Government had approved an expansionary budget for 1994. Then on January 1, the Chiapasrevolt erupted, followed by the assassination on March 23 of Luis Donaldo Colosio (the Presidentialcandidate of the ruling party, the PRI). Other disruptions included the kidnapping in March of the headof Mexico's second largest bank and the assassination of the Secretary General of the PRI inSeptember. On the external front, increases in U.S. interest rates beginning in February 1994 weremaking U.S. assets relatively more attractive than before.

7. While it is not surprising that this series of shocks and the devaluation would shake investorconfidence in Mexico, the magnitude of the reaction has been remarkable. The reasons can be tracedboth to the relative vulnerability of the economy when the shocks began to occur, and to the waymacro policy was managed in 1994 in response to the shocks. Since 1987, Mexico had been pursuingan economic strategy that was plausible and consistent, but also carried certain risks. The mainelements of this strategy were: (i) the use of the exchange rate as a nominal anchor, with the aim ofbringing inflation down to the level of its trading partners; and (ii) an aggressive program of structuralreforms (including price and trade liberalization, privatization of public enterprises, tax reform, andderegulation), designed to raise the profitability of investing in Mexico, thus strengtheningcompetitiveness by attracting productivity-enhancing investment. A more complete description ofthese reforms is provided in the 1994 CAS. The risks were that exchange rate policy would cause anappreciation of the peso, and that the current account deficit would therefore grow and have to befinanced increasingly by foreign capital inflows. However, the Government believed firmly thatincreased investment (made possible by confidence in the exchange rate anchor and anti-inflationpolicy) and productivity gains (made possible by the structural reforms) would improve thecompetitiveness of the economy sufficiently to maintain the current account deficit at a sustainablelevel.

Over the past decade, the Mexican Government has forged a dramatic transformation of the national economy.For a review of that reform experience, readers may refer to the 1994 Mexico Country Assistance Strategydocument. This discussion has not been included this year to allow for a more complete analysis of recentevents.

3

8. For several years, the Mexican strategy seemed to be working well: inflation fell continuously,reaching 12 percent by 1992 (see Figure 1), and GDP growth recovered from an annual average ofzero between 1982-88 to 4 percent from 1989 to mid-1991. The real exchange rate appreciatedsubstantially, however, by about 30 percent from 1989-90 levels to end-1993 (see Figure 2), althoughforeign capital inflows also surged and easily covered the growing current account deficit. But theseinflows mainly supported a consumption boom, rather than an increase in domestic investment (seeFigure 3). In short, the growth in both public and foreign savings was offset by a decline in privatedomestic savings.

9. Productivity also did not improve sufficiently. Although important progress was made in someareas of structural reform, in others progress was too slow to have the desired impact on productivityand competitiveness. Notably, the incentive framework for private infrastructure development wasevolving only slowly (when compared to the pace followed in such countries as Argentina and Peru);PEMEX retained monopoly privileges for all oil and gas development; and labor market reforms andmodernization of the legal and judicial system were not adequately addressed. Despite a more opentrade regime, some agriculture subsectors remained highly protected; and although the commercialbanking system had been privatized, it too, remained highly protected and concentrated. It is true that,for the future, several of these areas will be addressed either by NAFTA (the phasing out of protectionfor agriculture and the financial sector) or by initiatives of the new Zedillo Administration (for privateinfrastructure, labor market modernization, legal and judicial reform, and government decentralization).But during the period through 1994, reforrns did lag and competitiveness of the Mexican economy as awhole improved only slowly.

10. Absent rapid productivity gains, the exchange rate appreciation through 1993 made itincreasingly difficult for Mexico's tradeable goodssectors to compete, slowing both their growth (see Box -Mexic-BankDialogue

Figure 4) and the growth of total GDP. This lackluster on Structural Issuesperfornance did not necessarily signal a need to alter Since 1992 our macroeconomic dialogue hasthe basic economic strategy (para. 7), but it did make it focused largely on the problems of the pesoclear that the exchange rate appreciation needed to be exchange rate system and the risk of Mexico'saddressed and that some critical micro reforms should excessive dependence on short-term foreign capitalnot be delayed. These issues have been at the center of inflows. On structural issues. our economic analysis

and project work have centered on liberalization ofthe Bank's dialogue with the Government for the last g m pagncu]ture markets, productivity groNvth, reform ofseveral years (see the 1994 CEM "Fostering Private the financial sector and the pension system.Sector Development in the 1990s," Report No. 11823- developing an appropriate framework for privateME, May 16, 1994 and Box I). infrastructure, and strengthening state and

municipal mranagement This work culminated in a

11. Slow productivity growth, lower private set of 18 Strateg Papers prepared in the Summer of1994 for the incoming Adminustralion.

savings, and an appreciated exchange rate togetherimplied a large expansion of the current account deficit, Ifrom an average of 3 percent of GDP in 1989-90 to 7percent in 1992-94. Although such large current account deficits would not be sustainable in the long-term, prior to 1994 Mexico was able to rely on extremely high levels of private foreign capital inflowsto finance them. In 1993, for example, foreign capital inflows of US$29 billion over-financed thecurrent account deficit of US$23 billionL leading to a reserve gain of US$6 billion. Then in 1994, theseinflows slowed to just US$10 billion, responding to the shocks (para. 6) and later in the year togrowing concern over the sustainability of the economic strategy being followed. Although the capital

4

inflows remained positive, their volume fell far short of what was needed to finance the current accountdeficit of US$29 billion in 1994, so that reserves declined by US$19 billion.

12. The Government's policy response to the slowing of capital inflows during 1994 was limitedand, in retrospect, inadequate. First, starting in mid-February, it allowed the exchange rate todepreciate by about 8 percent in real terms within the band (see Figure 5). However, it continued todecide against increasing the flexibility of the band system at that time, when it still would have beenpossible to do so with a substantial backing of reserves. Second, it induced a rise in short-term pesointerest rates in March and April, to make peso assets more attractive to investors. However, rateswere allowed then to ease back down through the Summer and Fall, partially offsetting the rise ofMarch/April. Third, it shifted the composition of domestic public debt, from peso-denominatedCETES to dollar-indexed Tesobonos, thus transferring the exchange rate risk from investors to theGovernment (see Figure 6). Fourth, it sold external reserves, which declined from their peak of overUS$30 billion in mid-February, to about US$5 billion by the time the currency began to float onDecember 22. Whether these various decisions reflected the pressures of the Mexican political cycleremains an open question. With hindsight, of course, almost all observers now agree that the third andfourth measures -- allowing this heavy shift into Tesobonos and massive selling of reserves -- wereserious policy mistakes. As with delays in the release of negative economic information to the financialmarkets (such as the level of reserves), these measures did not address fundamnental problems, butrather postponed their eventual resolution; at the same time, they made it more difficult to manage thecrisis when that time came.

Crisis and Response

13. At the time of its December 22 announcement that the peso exchange rate would float, theGovemment informally outlined its economic strategy but made no official pronouncement. Themarkets reacted chaotically. When the specifics of a program were announced 10 days later, this didlittle to settle the markets, and so the exchange rate continued to depreciate. The Executive Branch ofthe U.S. Government then announced on January 12 that it would seek to provide up to US$40 billionof support to the Mexican program. However, this required the approval of the U.S. Congress andwhen this was not forthcoming, the U.S. authorities assembled an alternative package under which:the U.S. Government would provide up to US$20 billion in support; the IMF, US$7.8 billion (300percent of Quota) under a Stand-by, plus up to a further US$10 billion (388 percent of Quota) to theextent required to top-up a fund from non-G-10 Governments; the BIS, US$10 billion through swaplines; Canada, Can$2 billion (approximately US$1.4 billion equivalent); and commercial banks, US$3billion (which has since been canceled by mutual agreement).

14. The financial markets continued to exhibit great volatility in February and early March, with thepeso at one point depreciating to 7.5 pesos per U.S. dollar (more than double the rate of 3.4 onDecember 19, 1994). The Government responded on March 9 with a tighter macro program. Themain elements of this program included:

5

Figure 1 Figure 2

Mexico: Annual CPI Inflation Rate Mexico: Real Exchange Rate Index

(End-of-Period) (US PPIIMEX PPI)

1601

170140 .. 0

120~~~~~~~~~~~~~~~.8

~150

20. .100 q ....0. . ...

c80 .0~~~~~~~~~~~~3

~~~~~~~~~~80 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~1

~~~~~~~~~40 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~90

87 88 89 90 91 9n 93 94 Eas so

3/95 80 83 86 89 92 IQ 95

Figure 3 Figure 4

Mexico: Savings and Investnent Mexico: Real Growth Rate of GDPl ~~and GDP Tradeables and Non-Tradeables

-5 -

20 5=1 F15~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

89 90 91 97 93 94 89 90 91 92 93 94

*Total Investment DPriv Domestic Savings | Pidwt (;DPTd-bbs

| Pub Domestic Savings U Foreign Savings GDPNOs-To4RbleS

Figure 5 Figure 6

Mexico: Exchange Rate and Mexico: Internal Debt OutstandingExchange Rate Band, Nov '91-Dec 20, '94 Cetes v. Tesobonos

4.- 100,000-

4.0 .180.000

3.8 6 0,ODO3S .. .. ... 650,1ODO

- .~~~~~~~~~~~~~~~~~ ~~~~40,000 33. 6

.~20,13

3I I . - _0

1 3.0 . I I _ _I I I I I I I I I I I I I I I I ' - ' Cetes

- Tesobonos

- ... De. Tesobonos at Nov. 30 Exchange, Rate

6

(a) Further Fiscal Adjustment: The 1995 primary budget surplus is programmed to rise to 4.4percent of GDP, up from 2.2 percent in the original budget. This is to be achieved by adjustingprices of public sector goods, increasing the VAT rate from 10 to 15 percent on 70 percent ofgoods and services, and reducing the real level of total public sector expenditure by 9.8 percentcompared to 1994.

(b) Exchange Rate and Monetary Policy: The Government reconfirmed its commitment to afloating exchange rate regime, with the Bank of Mexico using monetary policy to help stabilizedomestic prices. To achieve an inflation target of 42 percent for 1995, the Bank of Mexicoremains committed to holding net domestic asset expansion to NP 10 biUlion (a nominalincrease of 23 percent) in 1995. By focusing explicitly on monetary aggregates, this programdeparts from past reliance on nominal price anchors (the exchange rate, goods prices, andwages). To reduce exchange rate risk and stabilize the peso, the Government is supporting theintroduction of a futures foreign exchange market and is using part of the international financialsupport package to retire short-term public debt.

(c) Banking System Support: The crisis has threatened to create solvency problems for asignificant portion of Mexico's banking system. The Government has responded with measuresboth to prevent banking problems and to deal with those problems that arise. To preventbanking problems, supervision has been intensified and regulation improved, includingincreases in the minimum bank capital requirement, in required loan loss reserves, and in theceiling for foreign ownership of domestic banks. In addition, a share of creditworthycommercial and mortgage borrowers will have their loans restructured and converted intoinflation indexed instruments. To deal with problems that arise, the Government: (i)established a foreign currency line of credit to enable domestic banks to meet their internationalcommitments; (ii) established a subordinated convertible debt program to help banksexperiencing a temporary fall in their capital requirement; and (iii) gave FOBAPROA, the trustfind that channels funds to banks, the right to convert into capital the subordinated debt ofbanks that experience a significant capital reduction and to take over the banks (with acommitment to reprivatize the banks as soon as possible).

(d) Social Sectors: For several years following the onset of the economic crisis in 1982, socialservices shouldered a disproportionate share of the necessary public spending cuts. Withnegative growth, poverty worsened through about 1988. Conditions then began to improve,but about 34 percent of the Mexican population still lives in moderate or extreme poverty. Thecurrent Government is fully cognizant of the undesirable long-term impact of large cuts insocial programs -- particularly for the poor -- and to the extent possible has committed toprotecting the most cost-effective and well-targeted programs, taking into consideration theneed for fiscal austerity. In particular, the social safety net has been strengthened during thecrisis through an expansion of the negative income tax (introduced in January) to workersearning up to 4 times the minimum wage; an extension of public health insurance forunemployed workers from 2 to 6 months; the initiation of a public works program targeted tothe poorest of the unemployed; and the expansion of Mexico's labor retraining program.

7

Assessment of the Economic Program

15. Mexico's economic prograrn focuses directly on the critical issues at hand; and it is clear thatthe Government recognizes both the urgency and the risk of the current situation. The program buildson the economy's strengths and attempts to mitigate many of the most important risks. Our mainobservations about this program are as follows:

16. Strengths. The program is based, correctly, on the premise that the immediate problem islargely one of short-term cash-flow, and not of insolvency, and so its first objective is to restorestability by rebuilding international confidence. Mexico does not need to finance a large fiscal deficit; infact, the economic balance in the fiscal accounts is expected to show a deficit of just 0.4 percent ofGDP in 1995. The situation bears no resemblance to 1982 when the fiscal deficit was 16 percent ofGDP. Accordingly, the program aims to generate the cash-flow required to cover maturing publicdebt, both foreign and domestic, about 80 percent of which has a maturity of less than one year. Thestock of public debt is not large; in 1994, it was 14 percent of GDP for domestic public debt and 23percent of GDP for foreign public debt. However, with confidence an issue and the bulk of thedomestic debt coming due very quickly, the Government faces severe liquidity problems. For thisreason, the international rescue package provides critical liquidity support, and the knowledge that it isavailable has begun to restore confidence in the markets. The package will not add to totalGovernment debt (with the non-financial public sector accounts in approximate balance), but rather willallow the conversion of public debt to a less vulnerable maturity profile.

17. Second, the program recognizes the existence of key structural barriers to economic growth,and calls for accelerated reform efforts that will have important long-term effects. In particular, theGovernment is now moving more aggressively on infrastructure privatization, governmentdecentralization to state and municipal levels, reforms in the legal and judicial systems, and improvingthe effectiveness of social programs. These are described in Section C below.

18. Third, exports should be able to lead a recovery of economic growth.. Since the tradeablegoods sectors will now enjoy a much more competitive real exchange rate, the production of exportsand import substitutes will be far more attractive than in recent years, and a reversal is likely of therecent growth pattern favoring non-tradeables (shown in Figure 4). In fact, signs of such a reversalwere seen in 1994, when the real exchange rate depreciated (within the band) by 8 percent. Inaddition, Mexico will have less of a problem than others would with foreign barriers to its exports,since over 80 percent of the country's trade is now with partners with which it has signed free tradetreaties (NAFTA as well as others).

19. Risks. The clearest risk to the economic program concerns the banking sector, which isunder systemic stress due to the crisis. If not managed properly, bank failures could undermine therecovery efforts. In addition, while the cost of resolving the banking sector's problems are likely tobe high, the full amount is still not certain. Strengthening bank regulation and supervision, andestablishing schemes to provide liquidity to banks and clear rules of intervention, are all importantsteps in the right direction. These problems, and how they are being addressed, are discussed morefully in the Memorandum of the President for the proposed Financial Sector Restructuring Loan.

20. The second risk concerns the social costs of the crisis, which is already causing widespreadtransitional unemployment. By February 1995, open unemployment had risen to its highest level since

8

1987; and the Government estimates that up to one million jobs will be lost in the formal sector in1995, as the expansion of labor in the tradeables sectors lags job losses in the non-tradeables sectors.Hence, there is added concern for the "new poor" -- those living in urban areas who have lost formalsector jobs. High unemployment could lead to more political instability, which would in turnundermine the Government's ability to persevere with the economic prograrn. It is thus essential thatmeasures be taken to address the needs of the unemployed and other vulnerable groups that would bemost affected by a reduction in social services or increases in prices for basic consumption items. Thenumber of Mexicans already living in poverty is still very large: about 29 million in 1992 (of whichnearly 7 million live in extreme poverty), or 34 percent of the population. The income share for thoseat the bottom remained relatively unchanged from 1989 to 1992: for both years, the bottom five and 20percent of households accounted for only 0.6 and 4.1 percent of total expenditure, respectively; incontrast, the top five percent accounted for 26.6 percent.

21. Third, the Government will face other pressures as well for special subsidies or other supportmeasures to relieve the very real burden of the crisis on many sectors of the economy. These couldcome both from producers suffering severe cash-flow or solvency problems and from workersunwilling to accept the large cut in real wages that will be necessary. The Government will need tostrike a fine balance between meeting legitimate needs and maintaining the overall fiscal course it hasset to restore stability.

22. Finally, there is a risk that the structural reform measures of the econornic program may notgo far or quickly enough to stem the crisis and reassure investors. The chief concerns include theslow pace of privatization for a few of the large-scale public enterprises; outmoded regulatoryframeworks and supervisory institutions in sectors with important market failures; inflexibility offormal labor markets; the poor-functioning public pension system; and the limited extent of publicparticipation in decision-making.

Macroeconomic Prospects

23. The Base Case. This scenario, which we consider to be the most likely, assumes that theMarch 9 program is followed, with the continued support of the IMF; and that the costs of the bankingcrisis are modest and do not require budgetary resources beyond levels now planned. Over the longerterm, it assumes that a number of structural policies are implemented, in accordance with currentGovernment plans. Among the key ones would be the following:

(a) Measures to raise domestic savings, including effective pension reform (moving more to afully-funded, defined contribution, privately-directed, scheme); a further shift toconsumption-based (rather than income-based) taxes; and further capital market development(including development of inflation-indexed, long-term savings instruments).

(b) Measures to improve labor market flexibility and labor productivity, including actions tofacilitate labor mobility; improved labor training programs; and a reduction in the "wedge"created by high wage taxes.

(c) Provision of adequate and cost-effective infrastructure services, through an aggressiveprogram of infrastructure privatization.

9

(d) Improved capacity of Government to deliver public services effectively and efficiently,including greater decentralization of responsibilities, resources, and accountability to the stateand municipal level; and the redesign of many aspects of the legal and judicial systems toreduce the cost and uncertainty of doing business.

24. The standard annex tables to this CAS present the results from the Base Scenario. Under theassumptions made, GDP declines by a substantial 4.8 percent in 1995, as very tight fiscal and monetarypolicies sharply reduce internal demand. While some banks fail, the costs can be covered under currentplans, and the sector's problems can be effectively contained. Sharp budget cuts do reducegovernment consumption and investment demand, and the high interest rates and contractionarypolicies of the program also lead to a sharp fall in private investment. As a consequence, privateconsumption also falls, by about 8 percent.

25. An export-led recovery starts during 1996, bringing growth of about 5 percent a year from1997 onward. Export growth will be led by manufactured exports (which have grown at a faster pacethan other exports in the past, and should do similarly in the future). Total exports have been projectedconservatively to grow in volume terms by 15 percent in 1995 and an average of 10 percent thereafter.This projection relies on two key assumptions: (i) that tight fiscal and monetary policies wil prevent anerosion of the competitive advantage conferred on Mexico by the real depreciation of its currency, and(ii) that exporters enjoy sufficient access to credit so that they can respond to the strong foreigndemand for their goods. Imports should contract sharply in 1995, but would then recover quickly fromthe depressed 1995 levels beginning in 1996. As a result, Mexico's current account deficit falls sharplyin 1995 -- from 7.7 percent of GDP in 1994 to 0.3 percent in 1995 -- and then begins to grow, as arestoration of stability and confidence leads to a modest level of net capital inflows. A deficit of 1.9percent of GDP is projected for 1999.

26. Mexico's total public sector debt (domestic plus external) is actually projected to fall somewhatin dollar-equivalent terms. Annex tables show that external public sector debt rises in 1995 in dollarterms to US$99.7 billion, and then starts to fall. As a percentage of GDP, this rise appears larger,reflecting the decline in the dollar-equivalent value of GDP that results from the sharp real depreciationof the exchange rate. In contrast, the stock of domestic public sector debt declines in 1995 as it isconverted to longer-term extemal debt upon maturity using the U.S.-supported Exchange StabilizationFund. A further reason for the decline in domestic debt is the accelerated repayment of principal in realterms that occurs in periods of high inflation.

27. Clearly, the outcome in terms of growth will depend on how aggressively actions in these andrelated areas are pursued. Although the base scenario of 5 percent GDP growth per annum willrequire a major effort to achieve, it is also possible to conceive of an even more ambitious programwhich, in the absence of unexpected external shocks, would put the Mexican economy on a still highergrowth path. Such a program would consist basically of actions in the same policy areas as the basecase, but at a much more rapid pace and in a more comprehensive manner. This, in turn, would permita more aggressive reduction in poverty than is forecast in the base case.

28 Downside Scenario. While Mexico's program is sound, the risks arising from both thefragility of the banking system and vulnerability to social and political disruptions cannot be dismissed,and therefore we have also constructed and analyzed a downside scenario. For this scenario, it isassumed that the Government would try to implement its economic program, but that continuing high

10

real interest rates and worsening bank portfolios would cause severe solvency problems in someadditional banks. The Government would intervene in these banks and infuse a significant amount ofdebt-financed public resources. We do not consider this to be very likely but, if it did occur, a deeprecession would ensue in the second half of 1995. We project a fall in 1995 GDP of perhaps 10percent, with a further decline in the first half of 1996, before a recovery begins. The fiscal deficitwould swell substantially in both 1995 and 1996, due to lower revenues, higher financing costs forpublic debt, and higher expenditures to support the banking system. Investment, governmentexpenditure, and hence domestic consumption would all fall more sharply than in the base case, furtherexacerbating the unemployment problem. Under the particular assumptions made, privateconsumption would fall by about 11 percent in 1995 and by a further 4 percent in 1996. At the sametime, these factors would also lead to a sharper initial fall in imports, followed by a roughly balancedcurrent account in 1996. Although the external debt picture is actually somewhat better than in thebase case scenario, per capita real income figures would fall and the implications for poverty wouldclearly be serious.

B. THE EXTERNAL ENVIRONMENT

29. The events of the past year have served to underline the importance of the global context inwhich an economy such as Mexico's operates. Two specific factors should be highlighted: the heavydependence on volatile capital inflows and the associated effects of the increase in U.S. interest rates in1994, and the entry into force of NAFTA.

30. From February 1994, a series of increases in short-term interest rates in the United States madeinvestments there more attractive and therefore reduced the incentive for investors to place funds inMexico. Although this was clearly one of the factors that explain the reduction in foreign capital flowsto Mexico, it is impossible to isolate just one effect. Professional views vary on the relative importanceof each factor. The real issue, in any case, is Mexico's policy response to this and other events whichled to the slowdown in capital inflows, as well as the appropriateness of the set of policies whichoriginally led to the dependence on these volatile flows.

31. The financial markets (both foreign and domestic) reacted extremely negatively to theannouncement on December 20 that the ceiling of the exchange rate band would be raised by about 20percent, forcing the Government to allow the exchange rate to float from December 22. With afloating exchange rate, in the short-term the negative views of the market are reflected both in thedegree to which the exchange rate depreciates (about 70 percent in nominal terms, as of this writing),and in the high nominal interest rates (currently about 60 percent for short-term Government paper)demanded by the market forpeso-denominated assets. These high rates are forcing the rapid and sharpadjustment in the external accounts of Mexico, with the external current account deficit expected to fallby 7 percentage points of GDP this year. With this adjustment made, it will be important to maintainprudent monetary and fiscal policies, particularly in light of the mobility of capital in modern markets.

32. The NAFTA Agreement entered into effect on January 1, 1994. Its approval in the U.S.Congress in November 1993 led to a spurt in confidence (as measured by the strength of capitalinflows), which lasted until mid-February, 1994. The entry into force of NAFTA may also have been afactor in explaining the strength of the growth of imports in 1994. Looking forward, NAFTA will beespecially important to Mexico in its recovery from the crisis. The recovery will be led by exports (seeparas. 18 and 25), and with this free trade agreement in place, Mexican exporters will be able to act

11

with greater assurance that potential markets will not be closed to them. More generally, Mexico nowhas free trade agreements with partners that account for more than 80 percent of its external trade,which will help ensure against restrictions on its exports in its major markets.

C. MEXICO'S DEVELOPMENT OBJECTIVES AND POLICIES

33. During FY96, much of the Government's attention will necessarily be devoted to stabilizing themacroeconomy, as discussed in Section A. Nevertheless, President Zedillo has also made a strongpublic commitment to fundamental structural changes aimed at accelerating private sector led growth,alleviating poverty, and reducing Mexico's long-term vulnerability to periodic financial crises.

34. Private Sector Development. The new administration is convinced of the need to eliminateremaining constraints on productive efficiency at the firm level, emphasizing four areas:

* Legal System Modernization. The Government has begun some important preliminary reforms toMexico's archaic legal system, including preparation of new legislation to redefine bankruptcy,secured transactions, and registries. It also plans to revise Mexico's commercial code to reduceuncertainty in contractual relations. Other legal and judicial reform plans are discussed in para.36below.

* Labor Market Flexibility and Pension Reform. Costly labor market rules act as a brake on jobgrowth. The Government has recently endorsed a policy of moving away from wage-settingagreements at the national level, in favor of decentralized negotiations at the firm level. It is nowexamining ways to make labor regulations more flexible, to reduce excessive mandatory non-wagepayments, and to increase the role of fully-funded, privately-managed pension funds.

* Business Deregulation. Excessive business regulation and industrial concentration haveprecipitated strong government interest in regulatory reform and an explicit competition policy.The President has announced initiatives to: find less-costly modes of environmental regulation,foster business deregulation at sub-nationals level of government, and accelerate plans to allowcompetition in telecommunications. The Government has also recognized the disproportionateburden of poor regulation and of barriers to entry on smaller enterprises, and will create a councilto review such problems in active consultation with business.

* Savings and Productivity Growth. A sharp fall in private savings in recent years has reduced bothinvestment levels and productivity growth. Recent tax revisions will encourage investment, whilefinancial and legal sector reforms promise to increase productivity by encouraging enterpriserestructuring and improved enterprise management. The Government will also facilitate anexpansion of the range of financial instruments to increase savings and improve its allocation.

35. Social Services and Poverty Alleviation. Beyond its direct crisis response (para. 14), theGovernment's longer-term strategy accords high priority to human capital development, with specialemphasis on pre-school and basic education and technical training. With 55 percent of theprogrammable federal budget now allocated to social sectors, the main concern is to increase theefficiency of expenditures and improve the quality of services. The Government has also announced arange of services to combat poverty -- nutrition, basic health, literacy, low-income housing -- and toexpand coverage in areas that have traditionally been least served. In particular, it will overhaul its

12

system of staple food subsidies to make them simpler, more transparent, and more effectively targeted.It has also given the Agriculture Ministry the mandate to promote rural development, which shouldhelp it adopt a more comprehensive view to poverty alleviation.

36. Political and Government Management Reform. The hallmark of the Zedilo Administrationhas been its strong commitment to political reform. Its goals are to increase democratic participation,respect for the rule of law, and domestic security. The most visible manifestations of this commitmenthave been the complete reform of the Supreme Court -- with a broader judicial reform planned -- andthe appointment of an esteemed Attomey General from an opposition party, with a strong mandate toinvestigate political improprieties. The President has also called for fuill autonomy of electoralinstitutions by 1997, campaign finance reform, and fair media access. With respect to the machinery ofgovemment itself, the President announced his intention to increase public sector responsiveness andaccountability by revising employee incentives and increasing social participation and transparency.The Administration also hopes to improve public resource allocation through improved planning,coordination and program evaluation; a comerstone of this new agenda is a "new federalism," includinga substantial decentralization of authority to states and municipalities, which will begin with aredefinition of intergovernmental fiscal relations in the 1996 budget.

37. Infrastructure. While Mexico's infrastructure needs are formidable, the Govemment has longrecognized its limitations in closing this gap. The infrastructure privatization initiative begun in the lastadministration is being accelerated under a new ministerial-level privatization committee. Lessonslearned in the concessioning of toll roads have been incorporated into a new framework forconcessions, which will be applied to seaports, airports, and satellite communications. Preparations areproceeding for the privatization of the national railway and of secondary petrochernicals. In addition,efforts are underway to ensure that the intended opening of electricity generation to private suppliers,as embodied in a Constitutional amendment in 1992, begins to take effect quickly.

38. Environmental Sustainability. Mexico's severe environmental problems -- including waterand air pollution, depletion of aquifers, soil contamination and erosion, deforestation, loss of uniquespecies, and degradation of marine and coastal ecosystems -- are damaging to human health and toeconomic productivity. These problems stem largely from decades of unchecked industrialization,inadequate pricing of resources, and rapid urbanization without basic infrastructure. The previousadministration took impressive first steps to address these problems and the new Government hasemphasized its continued commitment to this effort; toward this end, it reorganized the EnvironmentalMinistry and plans to introduce new initiatives, such as integrating environmental concerns inGovernment operations, decentralizing environmental responsibilities, increasing emphasis on naturalresource issues, and establishing meaningful involvement of local authorities and communities inproblem-solving.

D. THE BANK GROUP'S COUNTRY ASSISTANCE STRATEGY

39. The Bank's strategy over the next year concentrates on: (i) helping the Mexican Governmentto address the short-term crisis through a special lending and technical assistance program totalingabout US$2 billion, with additional resources provided by the Inter-American Development Bank; (ii) arestructuring of the ongoing loan portfolio to reflect current budget constraints and new priorities; and(iii) a review with the Government of the country's medium-term development strategy and priorities,and of the most appropriate mix of Bank instruments to assist in addressing them. The rapidity and

1 3

flexibility of the Bank response is illustrated in Box II, where restructuring activities, technicalassistance and two major new operations are being processed within six months, relying on closedialogue by Bank senior management with the Mexican authorities, and on the deployment of keyheadquarters staff for extended periods in Mexico. More generally, the Mexican financial crisis hasillustrated the importance of a fast and well-coordinated international response (Boxes II and IIl)

Crisis ResponseBox 1 - The Bank's Response to the Crisis:

40. As indicated above, in response to the A Snapshotimmediate financial crisis, the Bank is planning to The Bank responded quickly to the crisis in Mexico. Aprovide financial and technical assistance for: (i) small mnission arrived in late December to discuss thefinancial sector restructuring, including failure situation and provide advice to the authorities. In earlyresolution in the commercial banking system; (ii) January, a larger mission led by the Director visitedstrengthening of social sector programs to Mexico to explore a range of possible assistance options.stehoreng thening effect of the crisis on thepoorand Shortly thereafter, in early February, Managing Directoramneliorate the effect of the crisis on the poor; and Richard Frank and Vice President Javed Burki agreed with(iii) acceleration of infrastructure privatization. The Minister of Finance Guillermo Ortiz that the Bank wouldBank has been able to respond swiftly because of focus its efforts on three critical areas: (i) management ofpreparatory work carried out on the financial sector the crisis in the banking sector. (ii) strengthening ofduring the past two years, a strong ongoing program programs to assist the poor and those most affected by thein the social sectors, and the Bank's worldwide crisis, and (iii) the framework for infiustncture

privatization. World Bank Acting President Ernest Stemexperience in privatization (particularly in the areas was in communication about the joint operations vwithof competition, industry and sector structure, and President Zedillo. By the time an Aide Memoire settinglegal and regulatory issues) combined with long- out the operations in more detail was signed by Richardstanding relationships with institutions and sectors Frank and Finance Minister Ortiz on March 9, Workingbeing considered for privatization. The Bank's Teams were already set up in both the Bank and

Government, and they collaborated intensively in Mexicowork on these operations, in Itself evidence of our and at Bank headquarters over the next several months toconfidence that the fundamentals of the Mexican prepare three new lending operations. Throughout thiseconomy remain sound, is undoubtedly contributing process, Bank staff worked very closely with the IMF andpositively to the intemational effort to calm the IDB, and naintained constant contact with other donors,markets. The operations will provide an infusion of pnvate investors and financial institutions to facilitate the

flow of information on developments in Mexico. Boardrapidly-disbursing resources which will contribute presentation, signing, effectiveness and initialdirectly to the financing of Mexico's balance of disbursement of two of the new loans are expected in June.payments while maintaining and deepening reforms.

41. Financial Sector Restructuring. Theproposed loan (US$l billion followed upon successful initiation by a possible second operation ofUS$500 million in FY96) aims to: (i) restore the solvency and soundness of Mexican financialinstitutions and thereby improve confidence in the financial system, beginning with immediate measuresto manage the problems of troubled financial groups, (ii) reform the prudential regulations andaccounting standards and strengthen supervision to prevent future recurrence of systemic problems;(iii) improve the legal and regulatory framework to facilitate corporate workouts and debtrestructuring, to enable competitive firms to benefit from the new prices and thereby mininiize thenegative impact on the real economy; and (iv) consolidate or downsize Development Bank operationsand limit the size of the safety net afforded to classes of financial institutions or liability holders.

42. Essential Social Services. This loan (US$500 million) will support ongoing high prioritysocial sector programs in (a) basic education, (b) basic health, (c) employment, and (d) targeted food

14

and nutrition programs for vulnerable groups. The programs aim to preserve essential social servicesfor the poor; provide training and employment enhancement opportunities for 800,000 unemployedand underemployed workers over two years, plus 550,000 short-term jobs annually for the unemployedpoor; and provide food and nutrition supplements in priority areas to pregnant and lactating womenand to children under 5 years of age. Indigenous populations will benefit in particular from the servicesprovided under the basic education, health and nutrition components as these programs are targeted tothe poorest areas of Mexico where the indigenous populations are concentrated. In each component,efficiency gains will be sought, using agreed monitoring and evaluation indicators.

43. Infrastructure Privatization Technical Assistance. The proposed project (US$30 million)would support the technical work of the new Interministerial Commission on Privatization (CID),including: (i) analysis and selection of sound structural options for sector reform; (ii) development of asound legal and regulatory framework for privatization; (iii) the elimination of constraints toprivatization in specific sectors; and (iv) actual sales, auctions and concessions. Initial work wouldfocus on energy, transport and telecommunications.

Restructuring the Portfolio

44. The Bank's current portfolio comprises 37 loans, with a total in original loan amounts (net ofcancellations) of US$8.4 billion (of which US$4.3 billion is undisbursed), as shown in Annex A7 onStatus of Bank Group Operations in Mexico. The portfolio has been one of the better performing inthe Bank2 and currently has only four projects rated as unsatisfactory in terms of implementation status(Annex Al on Selected Indicators of Bank Portfolio Performance and Management). However, inlight of the current budgetary austerity program, discussions are taking place with the Government,sector by sector, to review the portfolio. Restructuring and partial cancellations, on the order ofUS$650 million, are being considered and are expected to be agreed shortly. We have formed aDisbursement Task Force, comprising both headquarters and field staff and Governmentrepresentatives, to expedite disbursements in priority areas through more effective use of specialaccounts and the capacity of the Bank's Resident Mission to help supervise small investments andprovide quick response technical support. In this regard, following the peso devaluation in December,the Bank granted the Government's request to extend application of the historical exchange rates forreimbursement of local currency expenditures incurred within 180 days prior to the date ofdevaluation.3

2 Annual Report on Portfolio Performance, Fiscal Year 1994, March 22, 1995. Mexico was rated as one of thecountries with a high likelihood of achieving development objectives, based on having less than 10 percentproblem projects.

3 This period was extended in May to cover all of 1994.

15

Developing A Medium-Term Strategy: New Directions

45. Over the next several months the Bank and Box mt -The Importance of a Quick Response to anGovernment will work together in reviewing International financial CrisisMexico's medium-term strategy and priorities, and In an open economy kike that of Mexico, the stability ofthe most appropriate mix of Bank instruments to fnancial markets and of international capital flowsassist in addressing them. Based on discussions depends on public confidence that macroeconomic andcarried out during a preliminary Country Strategy sectoral problems will be dealt with quickly, effe;tively,and Implementation Review (CSIR) in March, we and fairly. Otherwise, a difficult situation - such as awill be considering new directions in both tempormy liquidity cunch - could quickdy escalate intowlll be conslenng new dlretlons m both a deeper crisis.development priorities and the Bank's role inMexico. While macroeconomic and financial imediately following Mexico's peso devaluation,sector management, poverty reduction, human private investors looked to the multilateral institutionsresource development, infrastructure development, for confinnation that (i) the Government's stabilizationpublic sector management, and the environment program was feasible and responsive to Mexico's

remain key areasforchieineconomic needs, (ii) international experience withremain key areas for achieving growth and similar problems would be brought to bear in designingsustainable development in Mexico4, the volume a policy response, and (iii) the multilaterals andand sequencing of Bank activities certainly needs bilaterals would signal their confidence by togetherto change, as well as the mix of instruments used providing sufficient financial support to contain theand the relative balance among them. By early scopeoftheproblem.FY96 we expect to have completed in-depth In tlis context, the tmly multiateral and biateraldiscussions with the core agencies and sectoral efforts on behalf of Mexico have been credited withMinistries on their policies and priorities. Over the helping arrest the deterioration of the country'scourse of the year, as the stabilization program financial condition and beginning to revive investortakes effect and there is greater certainty about confidence. In so doing, these efforts will minirmize thebudget prospects for 1996 and beyond, it will be penod, as well as the severity, of the disruption inpossible to define more caref'lly the rate at which Mexico's access to private international capital markets.

the Governrment can move in addressinginvestment priorities and, within that context, theFY96 CAS will provide a fuller statement of the likely shape of the Bank's lending program in Mexicofor the outer years of this decade.

46. While the Bank's activities will remain focused on poverty reduction and human resourcedevelopment, a predominant theme over the past few years, a significant volume and focus of activitieswill now be shifting toward the financial sector and to activities which will fuirther enhance thecompetitiveness of Mexico -- prudent macroeconomic management and improved public sectormanagement at national and sub-national levels. The current financial crisis has underscored theimportance of sound macroeconomic management -- the appropriate balance of fiscal and monetarypolicies, a sustainable exchange rate regime, prudent liability management, financial sector stability, andpolicies to raise savings. The MIF will be leading the dialogue on the stabilization program andexchange rate and liability management generally. The Bank will be concentrating on the composition

4 The Bank prepared a set of Strategy Papers for the new Adrninistration (Box I) which set out policy optionsand priorities for 18 sectors and subsectors, including competitiveness, labor market, legal system, power.transport, water supply and sanitation, housing, capital flows, post-NAFTA trade, pensions, FederalGovernment management, and local services. These papers are providing the basis for on-going discussionson sectoral strategies.

16

and quality of public expenditures, financial sector stability, and domestic savings and productivity.The Bank also has a particular opportunity to increase activities in public sector management andgovemance, building upon President Zedillo's strong commitment to government reform (para. 36).

47. In our post-devaluation discussions, besides the crisis operations described in paras. 41-43, wehave agreed on the following key elements of our future relationship with Mexico:

* Economic and Sector work is absolutely critical and will be intensified and carried out inpartnership with local institutions. During the next year the Bank will be completing studies onsavings and capital flows, restructuring and productivity, labor market issues and training, state andlocal govemment, and rural poverty. The importance of these issues has been highlighted in thecrisis, in particular the need to increase domestic savings and productivity which are key tomacroeconomic stability and export-led growth.

* There is also strong interest in increasing the number offree-standing technical assistance loans,in areas where more in-depth analytical work is needed, particularly to improve institutions andimplement policy reforms. The Infrastructure Privatization Technical Assistance Loan will be animportant element of the Bank's efforts over the next year in helping to formulate sectorprivatization strategies, which in tum will shape Bank participation in ports, power, transport andother infrastructure subsectors in the medium term. A state and local government technicalassistance loan, and other operations geared to public sector modernization, will be also consideredas candidates for building upon President Zedillo's broad emphasis on public sector reform.

* Significant financial support from the Bank will also be important. Besides the possibility offurther adjustment lending, the need for which will have to be assessed over the course of this nextyear, Bank financial support may also take more diversified forms. Three likely developments areworth noting:

- The future program will probably incorporate a shift to more "time-slice" operations whenthere is agreement on sectoral policies as well as the existence of strong, mature institutions toappraise sub-projects. Over the next year investment operations, of either the traditional orsector type, will be carried out in basic health and nutrition, basic education, rural developmentand poverty reduction in the poorest states, and the highest priority environment areas (waterand air quality, water and forestry resources).

- The use of guarantees -- either for specific projects or a pool of projects through aninfrastructure finance facility -- may be particularly helpful, both in supporting the varioussectoral privatization strategies and in stimulating private infrastructure investment.

- The Government has also indicated strong interest in single currency loans to facilitate itsliability management and can be expected to request such loans if the Bank decides to expandthis program.

* The expansion of the Resident Mission has been endorsed by the Governnent, not only tostrengthen project design and implementation but also as a vehicle to respond more quickly andproactively to the country's needs for consultation, policy advice and a close dialogue generally.The financial crisis has highlighted the need for a larger presence in-country.

17

Level of Bank Lending

48. Past Lending. The Bank vigorously supported Mexico's economic adjustment and debtreduction programs during the FY86-91 period, with loans totaling almost US$11.4 billion (reaching apeak of US$2.6 billion in FY90), more than half of which were quick disbursing sector adjustment andinterest support loans. This program led to a rise in Bank exposure in Mexico, from 8.8 percent of theBank's total portfolio in 1989, to about 12 percent currently. Since FY92, annual lending has averagedUS$1.4 billion, with no adjustment loans proposed until now. By FY91 adjustment lending fell to 25percent of total commitments; the focus of operations shifted to poverty reduction, human resourcedevelopment and the environment, while maintaining a strong program in infrastructure (Annex TableA2, Mexico Bank Group Fact Sheet FY92-98).

49. Future Lending. The strategy outlined here would incorporate US$2 billion of additionalcommitments in CY95, bringing total lending to US$2.4 billion in FY95, thereafter dropping back toabout US$1.5 billion annually, as a maximum. In view of exposure limitations, a higher level of lendingis not feasible even if Mexico's performance were to exceed expectations such that the country clearlymoved onto a higher growth path. If a significant further deterioration in conditions were to emerge,we would return to the Board for a full discussion of the appropriate Bank response. Therefore, giventhese circumstances, a detailed elaboration of alternative lending scenarios is not included. Thevolumes indicated would be appropriate, provided Mexico remains in the base case macroeconomicscenario outlined in Section A.

50. JustificationforAdjustmentLending. Thanks to the strong adjustment measures beingundertaken by Mexico, complemented by official sources of international financial assistance,investors are beginning to regain confidence and a gradual resumption of voluntary financing isprobable. Yet international experience with confidence crises indicates that it will take time forMexico to fully regain broad access to private capital markets. In the interim, adjustment lendingby the World Bank and other multilaterals can play a pivotal role, by making possible a smoothertransition out of the crisis than would otherwise take place, and by helping Mexico to: (i) follow abalanced program of reform, while limiting social costs; (ii) regain access to international financialmarkets; (iii) sustain a level of reserves that is adequate to dissuade speculative attacks, and (iv)limit excessive reliance on costly domestic debt financing. In the absence of such lending, an evenlarger current account adjustment would be needed in 1995, which would require a sharpereconomic contraction. This kind of contraction would have excessive social costs, withunforeseeable political consequences. These risks alone would likely postpone the time whenMexico regains access to international financial markets.

51. The fragility of Mexico's banking sector is a source of concern for international investors,and policy-based multilateral lending in this area can help by giving confidence to internationalfinancial markets that Mexico is taking forceful and appropriate measures -- endorsed by theWorld Bank and the IDB. As the banking sector strengthens, Mexico will gradually regain accessto voluntary finance to help it meet its amortization needs. Barring any unexpected shocks,balance of payments projections indicate that the economic program will be adequately funded(see Section A and Annex Tables). But Mexico's tight international reserve position untilvoluntary capital inflows resume -- net reserves are projected to be only about US$1.3 billion atend-1995, and still low as of end-1996 -- could make it vulnerable to further speculative attacks.

18

The proceeds of adjustment lending can make it easier for Mexico to withstand such pressures,and so dissuade speculators from mounting an attack.

52. Finally, additional internal borrowing as an alternative to the external resources beingprovided would clearly be both extremely difficult and costly. The crisis has eroded investorconfidence and, as a result, for the time being has dramatically raised real interest rates on publicsector domestic debt. Resorting to additional internal debt finance beyond the level currentlyplanned would only expand the fiscal deficit which, in turn, would boost inflation and underminethe economic program.

Creditworthiness and Bank Exposure

53. The crisis itself will have important adverse effects on creditworthiness. In the short-run,the financial markets have focused on the adequacy of the Government's cash-flow to cover short-term domestic debt (CETES and Tesobonos principally) coming due. These concerns, and theconsequent reluctance now to roll-over maturing debt, are themselves making it more difficult forthe Government to cover its immediate cash flow needs. The support of the IMF and the UnitedStates (through the ESF) has been important in relieving this constraint. Once this immediatecash-flow crunch is over, with the debt transformed to a more sustainable maturity structure, thefocus will again be on fundamentals. In this regard, the crisis is also leading to some importantchanges, which will have positive longer-term effects. In particular, the exchange rate will now bemore competitive, which will help not only exports but the tradeable goods sectors moregenerally. Second, the new Government of President Zedillo plans to pursue more aggressivelystructural reforms in critical areas, such as in infrastructure privatization and governance. Withthe consequent improved productivity, plus the new value for the real exchange rate, an export-led recovery can be achieved.

54. The longer term prospects should thus be seen as positive, notwithstanding the reality thatthe market perceptions of those prospects are now less favorable than what they were before.These perceptions can be expected to improve over time, however, as results materialize. In thisenvironment, it is appropriate that the Bank (together with the Fund and the EDB) is providingsignificant financial and technical support to Mexico, and that this assistance is linked directly tokey issues in the crisis: support for the banking system, maintenance of essential social services,and for infrastructure privatization. The Bank's financial support will, of course, lead to a rise inour exposure above what it otherwise would have been. Active measures have been taken tocontain this, including a program to cancel undisbursed amounts of previous loans which may notbe a priority in current circumstances (the projections assume a total of US$650 million of suchloans will be canceled), as well as the postponement of some operations previously planned forFY95 and FY96. As shown in Figure 7, under the new planned program, Bank exposure toMexico as a share of the Bank-wide portfolio will remain at a level of a little above 12 percent (anestimated 12.3 percent at each fiscal year end-point) for a further two years, before resuming itspreviously declining trend. Under last year's approved lending program, of up to US$1.5 billionper year in commitments, it had been anticipated that the portfolio share would have declinedsteadily to the guideline level of 10 percent by 1998. It is now projected that this will occur in theyear 2000.

19

Figure 7

M BkPdb S _ 55. World Bank exposure as apercentage of Mexico's exports is expectedto remain well below the guideline level. It

IZO ....................................... .... lwas an estimated 3.5 percent in 1994, andis projected to fall to 2.4 percent by 1999

I 1.0% (see Annex B5). IBRD debt service as a.. ... .. ... . . ... .... share of total public and publicly

guaranteed debt service is also expected toremain below the guideline level. The

8.0%. preferred creditor (IBRD, IDB, and IM)

7.0 share of total public and publiclyPY94 PY95 PY96 PY97 F9S FY9 FY00 I FM FY guaranteed debt service, however, isl -=s.5BsP&l expected to grow to above the guideline-- poNd lamb& Propm- SLOB in FY95 mdFY96 - "M A s level in 1999, but then fall equally rapidly.

This ratio rises due to the bunching of IMF repayments in the years 1998 to 2000. Based onanticipated drawings under the currently approved IMF Stand-by, total payments to the IMF byMexico will rise from US$2 billion in 1997 to US$8.2 billion in 1999, but then fall to US$6 billionin 2000, US$1.6 billion in 2001, and to just US$35 million in 2002. This very short peak, knownwell ahead, should be manageable by Mexico.

56. In conclusion, while significant risks continue to exist in Mexico, we do not expect thatthis will lead to debt servicing problems for the Bank. Mexico has maintained a perfect repaymentrecord, since the first IBRD loan to Mexico 46 years ago, even during the most difficult years inthe 1980s. While the Bank's response to the crisis with US$2 billion of new loans will temporarilykeep our exposure over what it otherwise would have been, we believe the response is anappropriate one for the Bank.

International Finance Corporation (EFC)

57. In recent years, IFC's operational strategy in Mexico has supported the private sector inadapting to the opening of the economy and in re-entering the international financial markets (AnnexTable A2). Although greater emphasis is presently being given to second-tier companies, IFC'sinvestments in Mexico have in the past been primarily directed at the large corporate concerns and havemainly involved capacity expansions and modernization. Mexico's capital markets, tourism, foodprocessing, general manufacturing, and, to a lesser extent, petrochemicals have benefited most fromIFC's recent operational activities. Operations in infrastructure have remained modest due to the slowprogress achieved by the Government in resolving outstanding regulatory issues.

58. During the last fiscal year, lFC's Mexican activities led to the processing of eight transactionsinvolving net aggregate approvals of US$152.7 million, including equity and/or quasi-equityparticipation of US$20.0 million. Based on the current status of its Mexican project pipeline, theCorporation expects to finalize 13 new investments totaling US$229.4 million this fiscal year. Newequity and quasi-equity (US$39.4 million) will account for 17 percent of the latter approvals. As ofyear-end 1994, IFC's portfolio in Mexico involved 39 clients and stood at US$632.8 million, includingUS$582.3 million (92 percent) in loans investments and US$50.5 million (8 percent) in equity

20

participation. IEFC's Mexican exposure amounted then to 8.9 percent and 7.4 percent of totalinvestments disbursed and held respectively by the Corporation world-wide.

59. Crisis Response. The Bank and IFC have been cooperating closely in response to the crisis.IFC staff have been members of the Bank teams responsible for the development of the FinancialSector Restructuring Loan as well as the Infrastructure Privatization Technical Assistance Loan. IFChas also been working closely with the Bank on the formulation of a possible fund for privateinfrastructure financing.

60. The special problems confronting Mexico today will give IFC a unique opportunity to increasethe pace of its investments in that country. Besides giving IFC an opportunity to build on the corporaterestructuring experience it acquired in Mexico in the mid-1980's, the recent events will provide theCorporation with renewed opportunities to diversify its local equity at a time when these had becomelargely limited to quasi-equity transactions among second-tier and unlisted companies. Based on theemerging needs of the local private sector, the anticipated portfolio growth will be primarily driven bynew investments in the general manufacturing, capital markets, and infrastructure sectors. The Bankand IFC will be closely collaborating through the Financial Sector Restructuring Loan to identify banksand companies for financial assistance. IFC is similarly working with the Bank through theInfrastructure Privatization Technical Assistance operation in exploring ways to support theprivatization process and to arrange financing and securitization for new investment projects.

In the manufacturing sector, IFC will continue to give priority to the second-tier companies.However, the special circumstances facing Mexico will also dictate that it provides selectivesupport to those larger industrial groups which it had helped graduate to the internationalfinancial markets in recent years and which are once again submitted to unusual investmentfinancing constraints.

* In capital markets, IFC will focus on providing liquidity to give stimulus to sectors such asSMEs, infrastructure, and housing at a critical time when the Government's response tocurrent economic irnbalances is likely to be recessionary. Additionally, it will seek to enhancethe Mexican securities markets through underwriting facilities and institution-building activities.

In the infrastructure sector, J:FC will respond to the Government plans to accelerateprivatization in power, satellite communications, ports, airports, railways and highways. Tothat effect, it will assist the local private sector in remedying some of the financing constraintswhich have thus far adversely affected the pace of infrastructure privatization in the country.This said, IFC's success in diversifying its activities in that sector will depend heavily on thesteps the Government will take to establish shortly the regulatory framework required to attractprivate investors into infrastructure services.

61. As part of the above strategy, IFC expects to process 44 new projects in Mexico over theFY96-98 period. These transactions could result in aggregate new approvals of US$1.2 billion(US$29 million/transaction) of which US$951 million (80 percent would involve loan investments andUS$236 mnillion (20 percent) equity participation.

21

62. The Foreign Investment Advisory Service (FIAS), a joint activity of the IFC and the IBRD, isproviding advice to SECOFI on strengthening Mexican producers of parts, components andintermediate goods in the post-NAFTA context.

International Monetary Fund (IMM)

63. The Bank has been working closely with the [MF in monitoring the macroeconomic situationin Mexico and advising the Government in this area. Given the IMF's direct role in financing thestabilization program, their team has led the dialogue on macroeconomic stabilization measures,exchange rate policy, and liability management issues. In fiscal policy, the IMF has concentrated ondeveloping macro-level targets, while the Bank's sectoral background has enabled us to advise onsectoral policies. In the financial sector, the Bank has a lead role, due to our prior experience inpreparing both last year's Financial Technical Assistance Loan and the proposed Financial SectorRestructuring Loan; at the same time, the 1MF and the Bank will coordinate especially closely inimplementing the Financial Sector Restructuring Loan, because of the inter-dependence of financial andmacroeconomic stability. The impact of macroeconomic adjustment on social programs is of concernto both institutions, and the Bank is sharing with the IMF its analysis in this area during the course ofthe stabilization program. Finally, macroeconomic stability will depend critically on Mexico's ability toincrease domestic savings and productivity; the Bank's planned analytical work in these areas will beshared with the IMF, so that it can feed into the evolving macroeconomic framework.

Inter-American Development Bank (IDB)

64. Given the current economic situation, the IDB's strategy for Mexico is divided into short- andlonger- term components. The IDB's short-term objective is to support government efforts toreestablish macroeconomic stability through (i) program lending aimed at assuring the solvency of thefinancial sector and (ii) helping finance the basic needs of those most affected by the crisis. To theseends, the IDB will cofinance both of the World Bank's large crisis-related projects: the proposedFinancial Sector Restructuring Loan and the Essential Social Services Loan.

65. The IDB's longer-term objectives are to support government efforts to: (i) achieve sustainedeconomic growth, via infrastructure investments aimed at private sector development, agriculturalproductivity growth, and human resources development; (ii) promote equitable growth, throughprograms to reduce poverty and to improve provision of social services (education, nutrition, andhealth) -- relying on and reinforcing the capacity of states and municipalities and of the private sector;and (iii) achieve environmentally sustainable growth, through programs geared to protect theenvironment and natural resources.

66. The IDB will closely watch the performance of the Government's macroeconomic stabilizationprogram and prospects for the future, as well as the reestablishment of the solvency of the financialsector as a requisite for economic growth. Other areas of particular interest to the IDB for continuingcountry dialogue are state modernization and reform, especially in the social sectors, the judicialsystem, and increasing participation of civil society organizations. The IDB will also supportprivatization efforts, especially in regard to infrastructure investments and management in which the1DB has played an important financial role over the years. Issues on the agenda for discussion withauthorities include multiyear budgeting for investment projects and related issues of timely andadequate transfer of resources to state and municipal executing agencies.

22

E. AGENDA FOR BOARD CONSIDERATION

67. Current Situation and Issues. While the crisis was precipitated by a speculative attackon the Mexican peso and large capital outflows, the economy was vulnerable due to factors thathad been building for a number of years; among the most important factors were the large currentaccount deficit financed by massive external short-term capital flows, a fall in domestic savings,and low growth. While the Government has introduced measures to stabilize the economy in theshort term, it is also moving aggressively with further structural reforms that will promoteincreases in savings and productivity and achievement of higher growth rates in the longer term.

68. Prospects and Risks. The immediate problem is one of short-term cash flow andrestoration of confidence in international financial markets. The international support packagewill provide the required liquidity support and the knowledge of its availability has been importantin helping to restore confidence in the markets. The Government's March 9 economic program is,of course, central, through introduction of tight fiscal and monetary measures, a commitment to afloating exchange rate regime, more transparency in providing the markets with data on economicfundamentals, implementation of measures to support the banking system, and a commitment toprotecting social programs. As a consequence of the economic program and support package,Mexico's current account deficit is expected to fall to under 1 percent of GDP in 1995. While asignificant fall in GDP is forecast for 1995 (by about 5 percent), a recovery is expected to begin in1996 and the economy is projected to grow by about 5 percent a year by 1997 onward.

69. The most important risks to achieving the targets set out in the program are the stability ofthe banking system, which is under great stress due to high interest rates generated by the crisis,and social and political stability, which could worsen because of increasing unemployment. TheGovernment has put in place programs to deal with these risks, and the Bank Group and IDB areactively supporting these programs with both financial and technical assistance.

70. Bank Strategy. The Bank proposes in the short term to (i) provide an additional US$2billion of lending in support of financial sector reform and a safety net for the poor, (ii) restructurethe current lending portfolio in light of budgetary reductions and current priorities, and (iii)intensify technical assistance for the planning and implementation of infrastructure privatization.As a consequence of the additional lending, Bank exposure is expected to remain at about 12percent of the Bank's portfolio for a further two years beyond what had previously beenanticipated. Over the next several months the Bank and Government will work together inreviewing the country's medium-term strategy and priorities, and the most appropriate mix ofBank instruments to assist in addressing them. While the central issues underlying theGovernment's medium and longer term agenda and the Bank's strategy remain macroeconomicmanagement, poverty reduction, human resource development, public sector management,infrastructure and the environment, the Bank can be expected to shift more attention to thefinancial sector, privatization and other aspects of public sector management which will enhanceMexico's competitiveness.

Richard H. FrankPresident ad interim

Washington, D.C.May 22, 1995

Annex AlPage 1 of 2

MEMCO - Selected Indicators ofBank Portfolio Performance and Management

-~~~~~~~~~~~~~~~~~~~~F ;1- VW:S

Portfolio Performance

Number of projects under implementation 46 45 43 37Average implementation period (years) a/ 4.1 4.5 4.5 4.3Percent of problem projects (rated U or HUfor past year) b/

Development objectives c/ 2.7 2.6 7.9 8.1Overall status/Implementation Progress 11.6 4.5 7.0 10.8 g/

Canceled during FY (US$ million) 7.8 57.3 8.2 36.2 h/Disbursement ratio (%) d/ 34.2 31.3 22.7 14.0 i/Disbursement lag (%) e/ (25.6) 18.2 31.2 20.0Memorandum item: completed projects

rated unsatisfactory f/ 2 5 4 NA

Portfolio Management

Supervision resources (total staffweeks) 772.8 787.5 627.8 464.3 j/Average supervision (staffwveeks) 16.8 17.5 14.6 12.5Supervision resources by location (in %)

Percent headquarters 100 96 96 97Percent resident mission 0 4 4 3

Supervision resources by rating category(sAv/project)

Projects rated I or 2 15.7 16.3 - -Projects rated 3 or 4 21.1 53.5 -

Projects rated HS or S for Development NA NA 15.3 12.9Objectives

Projects rated U or HU for Development NA NA 20.0 8.7Objectives

Memorandum item:Date of last CSIR - March 1995

Notes:a. Average age of projects in the Bank's country portfolio.b. U or HU denotes "Unsatisfactory" or "Highly Unsatisfactory."c. Extent to which the project will meet its development objectives.d. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year:

investment projects only.e. For all projects comprising the Bank's country portfolio, the percentage difference between actual cumulative disbursements and

the cumulative disbursement estimates as given in the "Original SAR/PR Forecast" or, if the loan amounts have been modified,in the "Revised Forecast. " The country portfolio disbursement lag is effectively the weighted average of disbursement lags forprojects comprising the Bank's country portfolio, where the weights used are the respective project shares in the total cumulativedisbursement estimates.

f For projects rated in the FY only: from the OED database.g. The number of problem projects remain the same; the total number of projects under implementation will change by the end of

the fiscal year so the percentage is likely to remain unchanged from FY94.h. As explained in Section D, further cancellations of some US$650 million are being reviewed with Government.i. After disbursements during the fourth quarter, this ratio will likely remain unchanged from FY94.j. Supervision resources allocated during the fourth quarter are estimated to bring the total for FY95 close to that of FY94.

Annex AlPage 2 of 2

MEXICO: Status of Projects with Unsatisfactory Implementation Progress

Four projects with serious implementation problems have been resolved or are inthe process of being reviewed as part of the general restructuring exercise. The IndustrialRestructuring Loan's (3047) implementation issues have been resolved and the loan isclosing December 31, 1995; Initial Education (3518) was delayed as a result ofinstitutional changes brought about by the decentralization of the education system andchanges in personnel and is now being reviewed for possible restructuring and partialcancellation; Agricultural Technology (3468) is now being restructured as a result of areview being conducted of the Government's overall strategy for agricultural research andextension; and Mexico Environment (3461) was delayed because of changes inmanagement of the implementation agency, and is now being restructured to reflect thecreation of the new Ministry for the Environment.

Annex A2Page 1 of 1

MEXICo - Bank Group Fact Sheet, FY92-98IBRD Lending Program, FY92-978

Comnmitments (US$m) 1489 1154 1530 2374 1500 1500 1500Sector (%)

Agriculture & Forestry 37 0 13 25 - - -Power, Energy & Industry 13 0 0 0 - - -Finance 0 0 0 43 - - -Infrastructure & Urban 30 59 23 0 - - -

DevelopmentHuman Resources 17 22 27 32 - - -Environment 3 19 37 0 - _ _

Total 100 100 100 100 100 100 100

Lending instrument (%)Specific investment loans /others 100 100 100 37 67 - -Adjustment 0 0 0 63 33

100 100 100 100 100 100 100

Disbursements (US$m)Specific investment loans/others 1519.4 1200.8 997.1 912 538 592 681Adjustment 0 0 0 0 1450 550 0

Total 1519.4 1200.8 997.1 912 1988 1142 681

Principal Repayment (US$m) 974.3 993.0 1007.2 1124 1301 1359 1370

Interest (US$m) 862.5 918.8 907.4 949 959 1005 968

Notes:a. Ranges that reflect the most likely scenario.b. Through April 14, 1995 and projected for end of year.

MEXICO - IFC FY92-98

IFC Approvals (USSm) 91 72 123 229 375 385 427Sector (%)

Agribusiness 0 0 17 0 8 0 7Capital Markets 34 4 1 25 24 21 25Petrochemicals 2 27 32 22 11 13 9Infrastructure 42 17 5 11 19 34 22Manufacturing 22 52 29 31 29 32 32Oil/Gas 0 0 16 11 9 0 6

TOTAL 100 100 100 100 100 100 100

Investment instrument (%)Loans 70 65 87 83 78 79 83Equity 30 35 13 17 22 21 17

TOTAL 100 100 100 100 100 100 100

Notes:a. Includes quasi-equity types of both loan and equity instruments.

Annex A3Page 1 of 1

MEXICO - Summary of Econonmic and Sector Work a/

Agriculture & Rural Poverty X XFinance X X XIndustry and Power X XUrban Development and Inlfrastructure XEducation and Training XPopulation, Health, and Nutrition X X XPublic Sector Management X XEnvironment and Natural Ressources XPoverty Assessment XPrivate Sector Assessment XCountry Economic Memorandum X X X

Notes:a. "X" indicates planned work.

Annex A4

Page 1 of 2MexicoMost Same region/income group Next

Latest single year recent Latin Upper- higherUnit of estimate America middle- income

Indicator measure 1970-75 1980-85 1988-93 Caribbean income group

Priority Poverty IndicatorsPOVERTYUpper poverty line local curr. 32.424Headcount index % of pop. 20 10

Lower poverty line local curT. 7,742Headcount index % of pop. 1 0

GNP per capita USS 1.590 2.180 3,610 2.930 4.350 23.680SHORT TERM INCOME INDICATORSUnskilled urban wages local curr ..

Unskilled rural wages .Rural terms of trade ..

Consumer price index 1987= 100 1 23 506Lower incomeFood"4 . 23 449UrbanRural

SOCIAL INDICATORSPublic expenditure on basic social services %7 of GDPGross enrollment rauosPnmary %schoolagepop. 109 119 113 107 105 103Male 112 120 114 .. .. 103Female 106 117 111 .. .. 103

MortalityInfant mortaliry per thou. Iive births 68.0 49.0 35.4 43.0 35.8 7.0Under 5 mortality .. .. 43.0 52.2 42.6 8.5

ImmunizauonMeasles % age group .. 30.0 78.0 78.7 82.0 82.5DPT .. 26.0 64.0 73.7 74.2 90.2

Chid malnutrition (under-5) .. .. 13.9Life expectancyTotal years 63 68 71 69 69 77Female advantage 4.7 6.1 6.1 5.3 5.9 6.4

Total fertility rate births per woman 6.4 4.3 3.1 3.1 2.9 1.7Maternal mortality rate per 100.000 live births .. 92

Supplementary Poverty IndicatorsExpenditures on social secunty % of total govt exp. 23.5 9.6 12.4Social security coverage % econ. actve pop. ..

Access to safe water: total % of pop. 62.0 80.0 77.5 80.0 86.7Urban 70.0 95.0 89.0 90.1 93.9Rural 49.0 47.0 49.0 57.6 66.7

Access to health care 50.7 91.0

Population growth rate GNP per capita growth rate Development diamond b(anXnualaverage. prrentm)(annUalaVerge.PerCent)(annualaverage.percentgLifepepecennc

42

2!I K-. * w- -- C 1 p0 , .-' < 4 x fGNP Grossper pimary

0 I , | 1,l 5 1 2 capita enrollment

.10- 11970-75 1980-85 1988-93 1970-75 1980-85 1988-93 Access to safe water

=_ Mexico Mexico- Upper-middle-tncome Upper-middlc-income

a See the technical notes. p 387. b The development diamond. based on four key indicators, shows the average level of development in the counr-ycompared with its income group. See the introduction.

Annex A4Page 2 of 2

MexicoMost Same region/income group NVext

Latest single year recent Latin Upper- higherUnit of estimate America middle- income

Indicator measure 1970-75 1980-85 1988-93 Caribbean income group

Resources and ExpendituresHUnIAN RESOURCESPopulation (mre=1993) thousands 58.871 75.526 90.027 466.304 500.507 812.447Age dependency rano rauo 1.0i 0.82 0.69 0.66 0.62 0.49Urban % of pop. 62.8 69.6 74.2 71.2 71.2 77.9Populauon growth rate annual % 3.1 2.4 2.2 2.0 1.7 0.6Urban 4.3 3.3 2.9 1.9 1.8 0.8

Labor force (15-64) thousands 17,928 26.081 33.362 . 9.839 190.136 395.641Agnculture % of labor force 40 37 ..Industry 27 29 ..Female 23 27 27 27 29 38Females per 100 malesUrban number 103Rural 92

NATURAL RESOURCESArea thou. sq. km 1.958.20 1.958.20 1.958.20 20.505.92 21.848.14 32,146.15Density pop. per sq. km 30.06 38.57 44.97 22.29 22.51 25.11Agnrcultural land % of land area 51.52 51.97 51.99 40.00 41.26 42.80Change in agncultural land annual % 0.15 0.01 0.01 0.39 0.08 -0.48AgneulturaJ land under imgauon % 4.55 5.33 6.15 3.41 8.84 13.96Forests and woodland thou. sq. km 0.55 0.49 9.87 8.04 10.56Deforestauon (net) annual % 1.30

INCOMEHousehold incomeShare of top 20% of households % of income 61 56 ..Share of bottom 40% of households 10 12 ..Share of bottom 20% of households 3 4 ..

EXPENDITUREFood %ofGDP 29.0 22.0 .. .. .. 8.4

Staples 6.8 .. .. .. .. 1.6Meat. fish, milk. cheese, eggs 12.7 .. .. .. .. 3.8

Cereal imports thou. metric tonnes 3.720 4,780 6.223 27.700 48.947 77.530Food aid in eereals .. 6 45 1.565 544 8Food production per capita 1987 = 100 93 102 95 101 102 95Ferulizerconsumpuon kg/ha 10.9 17.3 16.3 16.1 67.8 150.0ShareofagricultureinGDP %ofGDP 10.8 9.1 8.5 9.0 8.0Housing %ofGDP 6.4 5.1 .. .. .. 11.7Average household size persons per household 6.0 5.5 ..

Urban 6.0 .. ..

Fixed investment: housing % of GDP 6.3 4.4 . . .. 5.0Fuel and power % of GDP .. .. . .. 2 0Energy consumpLon per capita kg of oil equiv. 869 1.362 1,439 913 1.632 5.203Households with electrcity

Urban % of households . . ..Rural

Transport and comrnunication % of GDP 6.0 7 7 .. .. .. 8.8Fixed investment: transport equipment - 2.2 3 0 .. .. 2.1Total road length thou. km 193 224 237

INVEST'MENT IN HUMAN CAPITALHealthPopulation per physician persons 1.426 1.186 .. .. .. 453Population per nurse 1371 844Population per hospital bed 760 8. 29 517 395 145Oral rehvdyration therapy Iunder-5j c of cases . 87 61 51EducationGro s enrollment ratioSecondarv % of school-age pop 34 53 55 47 53 92Female 28 52 55 94

Pupil teacher ratio: primary pupils per teacher 45 34 30 26 25Pupil-icacher ratio. secondary 18 18 17Pupid reaching grade 4 °7 of cohort 59 83 86Repeater rate pnmary % of total enroll II 10 9IlIicrac; %of pop. (age 15+) 26 15 13 15 14FemaJc % of fem. (age 15+) 18 15 IS 17

N.e Apaper circulation per thou. pop. 132 116 85 125 320\i7ir Bank Intemational Econoniics Department. Apni 1995

MEXCO: Key Economic Indicators Annex A5(Base Case) Page I of 3

Actual Est*nated ProjectedIndicator 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

National Accounts(% GDP at current market prices)

Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Agriculture 7.9 7.6 8.3 8.2 - - - - - -

Industry 30.3 29.6 27.9 27.9

Services 61.8 62.8 63.7 63.9 - - - - - -

Total Consumption 78.3 79.7 81.0 81.4 80.8 77.4 76.8 76.9 76.7 76.1

Gross Domestic Fixed Investment 18.4 19.2 20.5 20.1 20.7 18.8 19.1 20.0 21.5 22.4

Govenmnent Investment 4.8 4.5 4.1 4.1 4.0 3.9 4.0 4.2 4.3 4.4

Private Investment 18.0 19.0 20.3 18.7 20.5 14.9 15.6 16.8 17.6 18.7(includes increase in stocks)

Exports (GNFS) 15.6 13.6 12.4 12.3 13.3 24.0 24.5 25.1 25.4 26.1

Imports (GNFS) 16.7 16.8 17.9 16.5 18.6 20.1 20.8 23.0 24.0 25.3

Gross Domestic Savings 21.7 20.3 19.0 18.6 19.2 22.6 23.2 23.1 23.3 23.9

Gross National Savings 19.8 18.3 17.0 16.4 17.0 19.2 20.0 20.5 20.9 21.6

Memorandum Items

Gross Dometsic Poduct 247,057 290,529 334,356 365,857 375,471 250,303 287,301 313,573 343,247 382,354(US 5 million at current prices)

Gross National Product per capita 2,580 2,976 3,425 3,722 4,006 3,259 3,017 2,913 3,234 3,547(Current Price USS, Atlas method)

Real annual growth rates(%, calculated from 1987 prices)

Gross Domestic Product at market prices 4.5 3.6 2.8 0.4 3.8 -4.8 2.0 4.7 5.5 5.0

Gross Domestic Income 5.7 3.2 3.1 0.6 3.6 -4.2 2.3 5.1 5.6 4.9

Real annual per capita growth rates(%, calculated from 1987 prices)

Gross Domestic Product at market prices 2.7 1.5 0.7 -1.7 1.7 -6.5 0.1 2.8 3.6 3.0

Total Consumption 3.2 2.6 1.6 -1.8 1.5 -13.2 0.5 3.0 2.4 1.2

Private Consumption 3.7 2.8 1.8 -2.2 1.8 -9.6 -0.6 3.0 3.3 1.7

5/19/95 1:45 PM

Annex A5 MEXICOi Key Economiie IndicatorsPage 2 of 3 (Base Case)

Actual Estimated ProjectedIndicator 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Balamce of Payments(US$ million)

Exports (GNFS) 38,411 39,695 41,451 44,806 50,883 60,190 70,755 79,297 89,444 103,602

Merchandise f.o.b. 30,390 30,905 32,259 35,453 41,146 49,264 57,645 63,924 71,713 83,542

Imports (GNFS) 41,214 49,037 59,681 59,952 71,597 52,325 61,801 74,723 86,889 102,014

Merchandise f.o.b. 31,272 38,496 48,193 48,924 59,687 43,183 52,024 63,885 75,408 89,509

Resource Balance -2,803 -9,342 -18,230 -15,146 -20,714 7,864 8,953 4,574 2,554 1,588

Net Current Transfers 3,978 2,745 3,021 2,688 4,014 3,096 3,238 3,387 3,544 3,708(including official current transfers)

Current Account Balance -7,450 -14,893 -24,804 -23,391 -28,863 -754 -287 -3,565 -5,660 -7,239(after official capital grants)

Net Private Foreign Direct Investment 2,633 4,761 4,393 4,901 8,030 6,000 7,800 8,000 10,000 11,000

Long-Term Loans (Net) 8,542 3,888 -348 3,057 1,470 19,851 -4,092 -5,075 -8,696 -5,126

Other Capital -491 14,381 21,932 21,475 477 -26,500 0 3,400 6,000 6,000(Net, including errors and omirsions)

Change in Reserves -3,234 -8,137 -1,173 -6,043 18,885 1,404 -3,422 -2,760 -1,644 -4,635

Memorandum items:

Resource Balance -1.1 -3.2 -5.5 -4.1 -5.5 3.1 3.1 1.5 0.7 0.4(% of GDP at current market prices)

Real annual growth rates(1987 prices) ($)

Merchandise Exports f.o.b. 10.3 9.3 3.4 12.5 8.2 17.6 14.2 7.3 8.7 12.9

Primary 5.0 3.7 -3.3 -8.1 -6.7 12.4 -5.3 -0.1 4.5 7.7

Manufactures 12.3 12.0 9.5 20.9 13.8 20.0 19.1 8.7 9.9 14.4

Merchandise Imports c.i.f. 20.9 21.9 24.0 0.3 19.7 -28.8 18.4 19.6 15.1 15.7

Public Finance(% of GDP at current market prices)

Current Revenues 20.4 19.0 19.8 18.4 18.9 21.8 21.1 21.5 22.0 22.3

CurrentExpenditures 15.1 12.0 10.8 11.2 12.0 15.1 14.5 15.0 15.8 16.3

Current Account Surplus or Deficit 5.2 6.9 9.0 7.1 6.9 6.7 6.6 6.5 6.3 6.0

Capital Expenditure 3.8 3.8 3.9 3.3 3.9 4.0 4.1 4.5 4.8 5.0

5/19/95 1:45 PM

MEXICO: Key Economic Indicators Annex A5(Base Case) Page 3 of 3

Actual Estimated ProjectedIndicator 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Monetary Indicators

M2/GDP 26.6 31.1 31.8 33.0 34.6 n.r. n.r. n.r. n.r. n.r.(at current market prices)

Growth of M2 (%) 46.2 47.2 20.4 14.4 18.3 n.r. n.r. n.r. a.r. n.r.

Private Sector Credit Growth/ 222.4 212.3 243.0 238.5 87.2 n.r. n.r. n.r. n.r. n.r.Total Credit Growth (%)

Price Indices (1987=100)

Merchandise Export Pricelndex 111 103 104 102 109 III 114 118 121 125

MerchandiseeimportPricelndex 113 114 115 116 119 120 123 126 129 132

Merchandise Terms of Trade Index 98 91 91 87 92 92 93 93 94 95

Real Exchange Rate (LCU/US$) 1.3 1.2 1.1 1.0 1.1 1.6 1.4 1.4 1.3 1.3

Real Interest Rates 11.7 4.6 5.1 8.2 10.5 21.2 12.6 10.1 7.3 3.5

Consumer Price Index 26.7 22.7 15.5 9.8 7.1 34.4 22.9 17.8 16.3 14.7(% Growth Rate) (Period Average)

GDPDeflator 29.7 21.8 14.8 9.7 7.1 34.8 22.9 14.5 14.4 14.8(% Growth Rate)

n.r. = projections not required 5/19/95 1:45 PM

Annex A6 MEXICO: Key Exposure IndicatorsPage I of I (Base Case)

Actual Estimated ProjectedIndicator 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Total Debt Outstanding 106,026 115,362 113,424 118,027 131,206 160,818 162,946 158,023 146,703 135,094and Disbursed (USS million)

Net Disbursements (US$ million) 16,954 9,834 1,762 4,628 1,804 29,680 2,129 -4,923 -11,320 -11,609

Total Debt Service (US$ million) 11,455 13,727 20,774 20,900 24,539 18,108 25,158 23,742 29.214 28,781

Debt and Debt Service Indicators (%)

TDO/XGS 243.0 252.8 239.8 236.6 230.2 248.9 215.4 185.2 153.1 122.9

TDO/GDP 42.9 39.7 33.9 32.3 34.9 64.2 56.7 50.4 42.7 35.3

TDS/XGS 26.3 30.1 43.9 41.9 43.1 28.0 33.2 27.8 30.5 26.2

IBRD Exposure Indicators

IBRD DS/Public DS 16.0 16.4 11.2 15.9 14.4 17.1 12.4 13.3 11.2 10.8

IBRD DSIXGS 3.6 4.0 4.0 3.8 3.5 3.6 3.4 3.0 2.6 2.4

IBRD Portfolio Share (by FY) 11.5 11.7 12.0 12.0 12.0 12.3 12.3 11.9 11.2 10.7

IFC (US$ million) (by FY)

Loans 119 69 67 53 133 190 293 304 354

Equity and Quasi-Equity 20 60 64 36 21 39 83 81 73

MIGA

iMGA Guarantees (US$ million) 0 0 0 0 0 0 0 0 0 0

5/19/95 1:45 PM

Annex A7Page 1 of 3

STATUS OF BANK GROUP OPERATIONS IN MEXICO

A. STATEMENT OF BANK LOANS(As of March 31, 19951

:o. N*. . . :.- : : :.: : - ~ -~ - : : -. -: .... - ......

114 loans fully disbursed 14,551.84

Of which SECALs, SALs, Program Loans, and Interest Support

Ln. 1929-ME 1981 BANOBRAS Railway IV 149.88Ln. 2331-ME 1983 BANCOMEXT Export Development 349.33Ln. 2745-ME 1987 BANCOMEXT Trade Policy Loan I 498.63Ln. 2777-ME 1987 BANCOMEXT Export Development II 246.37Ln. 2882-ME 1988 BANCOMEXT Trade Policy Loan II 500.00Ln. 2916-ME 1988 NAFIN Steel Restructuring 100.00Ln. 2918-ME 1988 NAFIN Agricultural Sector Loan 300.00Ln. 2919-ME 1988 NAFIN Fertilizer Sector 200.00Ln. 3085-ME 1989 BANOCOMEXT Financial Sector Adjustment 486.41Ln. 3087-ME 1989 NAFIN Industrial Sector Policy 497.51Ln. 3086-ME 1989 NAFIN Public Enterprise Retorm 499.39Ln. 3159-ME 1990 BANCOMEXT Interest Support Loan 1,260.00Ln. 3207-ME 1990 BANOBRAS Road Transport & Telecom. 380.00Ln. 3309-ME 1991 BANCOMEXT Export Sector 25.00Ln. 3357-ME 1991 NAFIN Agricultural Sector Adj. If 400.00

Subtotal 5,892.52

Ln. 2658-ME 1986 NAFIN Agricultural Dev. Proderith II 88.30 26.91Ln. 2666-ME 1986 BANOBRAS Municipal Strengthening 40.00 0.34Ln. 2669-ME 1986 BANOBRAS Solid Waste Management Pilot 25.00 8.24Ln. 2824-ME 1987 BANOBRAS Urban Transport I 90.98 15.50Ln. 2858-ME 1987 NAFIN Small/Medium-Scale Industry IV 100.00 0.32Ln. 2916-ME 1988 NAFIN Steel Sector Restructuring 321.01 49.78Ln. 3047-ME 1989 NAFIN Industrial Restructuring 250.00 9.01Ln. 3083-ME 1989 NAFIN Hydroelectric Development 460.00 38.42Ln. 3140-ME 1990 BANOBRAS Low-income Housing II 350.00 5.37Ln. 3189-ME 1990 NAFIN Transmission & Distribution 450.00 66.14Ln. 3208-ME 1990 BANOBRAS Telecomm. Technical Assistance 22.00 0.44Ln. 3271-ME 1991 BANOBRAS Water Supply & Sanitation 300.00 0.56Ln. 3272-ME 1991 NAFIN Basic Health Care 180.00 63.80Ln. 3310-ME 1991 NAFIN Decentralization & Regional Develop. 350.00 11.97Ln. 3358-ME 1991 NAFIN Technical Training III 152.00 51.27Ln. 3359-ME 1991 NAFIN Mining Sector Restructuring 200.00 103.63Ln. 3407-ME 1992 NAFIN Primary Education 250.00 90.44Ln. 3419-ME 1992 NAFIN Irrigation & Drainage Sector 400.00 195.71Ln. 3461-ME 1992 BANOBRAS Environment/Natural Resources 50.00 35.13Ln. 3465-ME 1992 NAFIN Agricultural Technology 150.00 126.76Ln. 3475-ME 1992 NAFIN Science & Technology Infrastructure 189.00 144.58Ln. 3497-ME 1992 BANOBRAS Housing Market Development 450.00 137.04Ln. 3518-ME 1993 NAFIN Initial Education 80.00 66.56Ln. 3542-ME 1993 NAFIN Labor Market & Prod. Enhancement 174.00 98.39Ln. 3543-ME 1993 NAFIN Transport Air Pollution Control 220.00 187.24Ln. 3559-ME 1993 BANOBRAS Medium Cities Transport 200.00 186.16Ln. 3628-ME 1993 BANOBRAS Highway Rehab. & Traffic Safety 480.00 335.73Ln. 3704-ME 1994 NAFIN On-Farm & Minor Irrigation Network 200.00 180.66Ln. 3722-ME 1994 NAFIN Primary Education II 412.00 380.20Ln. 3750-ME a> 1994 BANOBRAS N. Border I Environment 368.00 368.00Ln. 3751-ME a> 1994 BANOBRAS Water/Sanitation II 350.00 350.00Ln. 3752-ME a> 1994 BANOBRAS Solid Waste II 200.00 200.00Ln. 3778-ME 1995 NAFIN Rainfed Areas Development 85.00 75.23Ln. 3790-ME 1995 NAFIN Second Decentralization 500.00 460.00Ln. 3805-ME a> 1995 NAFIN Technical Education/Training 265.00 265.00Ln. 3838-ME a> 1995 NAFIN Financial Sector T.A. 23.60 23.60

Sub-total 8,425.89 4,358.13

Total 22,977.73Of Which has been repaid 7,468.29Total now held by the Bank 15,509.44

Amount sold : 92.34Of which has been repaid: 92.34

Total Undiabursed 4,358.13 4,358.13

a> Not yet effective

MdeS: LA2COFile: N:\MdeSilva\disburse\Meico\MX-03-9S.xl.April 10, 1996

Annex A7Page 2 of 3 MEXICO

SUMMARY OF IFC INVESTMENTSas of March 31, 1995

[L)SS Millions)unqirmi ur;o r ommam"rits lump 16 Dy UnPitimiW_s

Fiscal Year IFC pbci- by Prtici- (IndCudingCommitted Company Type of Business Loan Equity pants Toati IFC panas Participants)

1958 Bristol de Mexico S.A. /a Aircraft Engine Overhaul 0.52 - - 0.52 - - -

1958/59 Industras Pertect Circle SA. /a Industrial Equipment 0.80 - - 0.80 - -

1961 Aceros Solar S.A. /a Tvist Drills - - 0.28 0.28 - -

1982/516/8 FundidoraMonterreyS.A./a Steel 1.81 21.45 0.48 23.74 - -

1963 Quimica del Rey S.A. /a Sodium Sulphate 0.07 - 0.88 0.75 - -

1963 Tubos de Acero de Mexico(Tamsa) /a Stainless Steel Pipes 0.81 - 0.19 1.00 - -

1964/66 Industria del Hierro S.A. Construction Equipment - 1.96 - 1.96 - -

1970 Minera del Norte /a Iron Ore Mining 0.75 - 0.75 1.50 - -

1971 Celanese Mexicana S.A. /a Textiles 8.00 - 4.00 12.00 - -

1972 Promotora Papel Periodico SACV /a Pulp& Paper /b - 0.03 - 0.03 - -

1973/79 CementosVeracruzS.A./a Cement 11.35 - 4.50 15.85 - -

1974/81 Cancun Aristos Hotel /a Tourism 0.98 0.32 - 1.30 - -

1975/78 Mexinox S.A. /a Stainless Steel 12.00 3.18 - 15.18 - -

1978/95 Tereftalatos Mexicanos, S.A. /a Petrochemicals 39.00 - 20.00 59.00 20.00 20.00 40.00

1978/81/84 Papeles Ponderosa S.A. (a Pulp & Paper 6.20 4.96 4.50 15.86 - - -

1979/81/87 Hotel Camino Real Ixtapa. S.A. Tourism - 4.20 - 4.20 4.20

1979/84 EmpresasTolteca,S.A. la Cement 30.00 7.95 138.00 175.95 -

1979 ConductoresMonterrey,S.A. Electrical Wire & Cable 8.41 - 13.00 21.41 1.49

1980 lndustrias Resistol, S.A. ia Particle Board 8.00 - 17.00 25.00 - - -

1980 Minera Real deAngeles,S A./a Mining 30.00 - 80.00 110.00 - - -

1980 Vidrio Plano de Mexico, S.A. a/ Flat Glass 15.00 - 99.90 114.90 - - -

1981/86 Grupo Industral Alfa (Giasa) a/ Pulp & Paper 15.50 - 44.00 59.50 - - -

1981 Corp Agroindustrial, S.A.(Univasa) /a Agribusiness 6.30 3.00 5.00 14.30 - - -

1984 Capital Goods Facility ,a Capital Goods Financing 34.00 - 66.00 100.00 - - -

1984/88/94 Metalsa, S.A. Auto Chassis 32.00 1.40 35.00 68.40 24.63 35.00 25.00

1985 Proteison, S.A. de C.V. /a Agribusiness 1.95 0.82 - 2.77 - - -

1985 Prom. Industrales Mexicanas, S.A. Petrochemicals 32.00 - 4.40 36.40 13.50

1986/88 Celulosa Y Papel de Durango,S.A.CV Pulp & Paper 10.00 3.07 - 13.07 - - -

1987 Agromex (AESA) /a Veg. & Fruit Processing 1.50 0.50 - 2.00 - - -

1987 Industras Sulfamex, S.A. DE C.V. a/ Chemicals & Petrochemicals 2.00 0.50 - 2.50 - - -

1989 Cicasa Constr. Guar. Fac /a Cons t. Guarantee Facility 20.00 - - 20.00 - - -

1988 Sealed Power de Mexico Auto Assembly 9.00 - - 9.00 0.75 - -

1988/95 Sigma Alimentos, S.A. de C.V.(Salumi) Food & Food Processing 40.96 7.00 32.00 79.98 27.00 32.00 7.50

1988 Vulica Shipping Company Industral services - - - 0.00 16.50

1988 CrescentMarketAggregates ConstructionMaterials 73.00 - - 73.00 24.14 -

1988 Apasco, S.A. de C.V. Cement & Const. Materials 46.00 - - 46.00 14.33

1991/92/93 Apasco, S.A. de C.V lc Cement & Const. Materials 49.91 - - 49.91 - -

1994 Apasco, S.A. de C V. /c Cement & Const. Materials 10.00 - 40.00 50.00 10.00 40.00

1989 Banca Serfin Development Finance 60.00 - - 60.00 52.00 -

1989 Cementos Mexicanos Cement & Const. Mat 60.00 - 8.00 68.00 11.43 -

1989 Grupo FemsalVisa Consumer Goods Conglomeral 80.00 27.60 - 107.80 57.78 -

1989/92 Polimar (ASS). S.A. de C.V. Petrochemicals 19.10 - - 19.10 9.56 -

1990 Bancomer Credit Line/a Development Finance 20.00 - - 20.00 - -

1990 Banco Nacional de Mexico Development Finance 60.00 - - 60.00 39.84 5.00 2.40

1990/91 Condumex, S.A. de C.V. /c Electromanufacturing - 35.00 9.54 18.00 62.54 24.08 9.00 -

1990 Indelpro, S.A. de C.V. Petrochemicals 31.00 - 3.00 34.00 24.75 1.13

1991 Mexico Fund /a Money & Capital Markets - - 6.57 6.57 - -

1991 Petrocel, S.A. Chemicals & Petrochemicals 32.00 - - 32.00 28.00 -

1991 Vitro Flotado SA. de C.V. Glass & Related Manufacturing 25.00 - 101.00 126.00 24.38 63.13

1991 Vitro, S.A. Glass & Related Manufacturing - 10.17 8.04 18.21 10.17 -

1992 Aislantes Leon S.A. de C.V. Battery Manufacturing 10.00 7.03 - 17.03 9. 50

1992 Banco Mercantil del Norte, S.N.C. Development Finance 20.00 - - 20.00 - - -

1992 CelulardeTelefonia. S.A. de C.V. Telecommunirations 15.00 1.00 37.00 53.00 16.00 36.73 2.88

1992 Grupo Financiera Probursa S.A. de CV Development Finance - 7.50 - 7.50 7.50 -

1992 Grupo Industrial Bimbo,S A. de C.V. Bakery 25.00 - 75.00 100.00 21.4.3 58.33

1992/93 Grupo Posadas S.A. de C.V. Tourism 20.00 3.72 33.50 57.22 20.00 33.50

1992 Mexico City Toluca Toll Road Transport & Storage 13.75 - - 13.75 9.55 -

1993 Celulosa y Derivados S A de C .V. Textiles,Packaging 11 00 - 26.00 37.00 11.00 24.07

MEXICO Annex A7SUMMARY OF IFC INVESTMENTS Page 3 of 3

as of March 31, 1995(US$ M,illions)

(C rjrl M r-Fs Lommrtments old held by UndmbursedFiscal Year CFc Partci- by Pwtci- (IncludingCommitted Company Type of Business Loan Equity pants Totel IFC pants Participau)

1993 Masterpak S.A. de C-V. Timber, puip & paper 12.00 - 28.00 40.00 12.00 25 931994 Alimentos Naturales(Banorte-Sabrosa) Food & agribusiness - - - 0.00 3.00 -

1994 Aurum Heller, Factoraje Financial Services - 0.98 - 0.98 0.98 - -1994 Grupo ldesa, S.A. de C.V. Chemicals & Petrochemicals 15.00 8.00 42.50 65.50 23.00 42.50 35.50

1993/94 Grupo Operador de Termiriales

Maritmas S.A. (GOTM) Industnal Services 4 00 2.00 6.00 12.00 3.71 - -

1994 lnternacioral de Ceramica Cement & constr materiais 21.00 - 17.50 38.50 21.00 17 501994 Mexicana de Cobre, S.A. Nonferoous metals 25.00 - 35.00 60.00 25.00 35 001994 Banorte-Pyosa, S.A. de CV. General manufacturing - - - 0.00 9.70 -

1994 Banorte-Arancia General manufacturing - - - 0.00 7 30 - -

1995 CompaniaTratadora de Aguas

Negras de Puerto Vallarta (CTAPV) Industral Services 7.00 - - 7.00 7.00 - 5.00

1995 Baring Venture Partners de Mexico Financial Services - 0.15 - 0.15 0.15 -1995 Mexiplus Puertos Infrastructure - 1.04 - 1.04 1.04 -

Total Gros Commitments /d 1,178.67 139.06 1,054.78 2,37Z.51

Less: Cancellations, Terminations. Repayment. & Sales 588.35 82.24 575.97 1,246.56

NetComritments Now Held el 590.33 56.82 478.81 1,125JR 647.15 478.81 118.28

Pending Commitments:

Baring Venture Financial Services - 10.00 - 10.00

Total Commitmnent Held and Pending Commrtnents 590.33 68.82 478.81 1,135.90

Total Undisbursed Commitrnents 50.28 0.00 68.00 118.28

a/ Investments w'iccn nave been fully cancelled. terminated, written-off, sold, redeemed, or repaid.

cl Excludes placements of S30.0 milrion (Apasco), S20.0 million (Vitro), and Si 9.8 million (Condumex)

d/ Consists of approved and signed projects (inc!uding underwritng, but excluding swap transacdons i.e., Banca Serfin US6.5 million.

Indelpro S6.0 million, Banamex S40.0 million and GruPo Posadas 11 $5.5 million).

e/ Held Commitmnents consist of disbursed and undisbursed investments.

Annex B IPage 1 of 2

Methodological Note on Macroeconomic Projections

1. Projections were performed using a macroeconomic model especiallydeveloped for the Mexican economy. Using national accounts identities, the model links thereal, monetary and external sectors of the economy. In addition, to analyze the effects ofrelative prices on production and income, the model uses econometric analysis to determinethe response of the key macroeconomic variables to relative price changes and to policyvariables.

2. The model determines endogenously GDP, private consumption, privateinvestment, the current account, public sector finances, the inflation rate, and domesticinterest rates. To estimate the key parameters of these variables, we used economic theorypredictions and econometric analysis. In general, endogenous variables are determined byrelative prices, income or wealth, and exogenous variables. The exogenous variables arepolicy variables on which the authorities have direct control such as Central Bank monetarycreation, public investment, the nominal exchange rate and minimum wages. In addition, themodel assumes as exogenous the external variables such as international prices, U.S.economic growth and international economic policies which were provided by the Bank'sInternational Economic Department.

3. The model is closed by: (a) assuming that the Central Bank meets its monetarytargets, that is, the expansion in net domestic assets for 1995 and the inflation target forsubsequent years; and (b) assuming that Mexico has limited access to international finance,that is, a current account restriction. These restrictions combined with an assumedinternational environment, enables the model to forecast the key economic variables: GDP,private consumption and investment, and the composition of exports and imports.

4. Two different scenarios are offered to illustrate the likely outcomes in terms ofmacroeconomic forecasts. Differences exist on the effects of the banking crisis on theeconomy, which we regard as the major risk. In the first scenario, the Base Case, theGovernment succeeds in implementing the March 9 Economic Program. In this scenariobanks experience liquidity problems and, as a result, the Central Bank exceeds its net domesticassets expansion target in the first two quarters. In the following two quarters, however, itmanages to reduce net domestic assets and to meet the end-1995 target. In the secondscenario, the Downside Scenario, banks experience solvency problems and eleven banks lose25 percent of their assets which are financed using shareholders' capital and fiscal resources.To this end, the Government issues bonds amounting to about '11 percent of GDP thusincreasing interest payments on domestic debt and the total fiscal deficit. Assuming theGovernment overcomes the banking crisis and manages to adjust the economy, this scenariopredicts a sharper fall in GDP and a slower recovery in the period 1996-1999.

5. The capital account and the stock of debt are projected using the currentaccount projected by the macroeconomic model and relying on the disbursement schedules for

Annex B IPage 2 of 2

different official creditors such as the IMF, IDB and the contributions to the Exchange andStabilization Fund. The difference between the total supply of funds less the current accountdeficit determines the change of reserves. Starting in 1995 we assume that the authoritiesreplenish their international reserves to meet the IMF program and to dissuade speculativeattackers. After the authorities reached their desired level of reserves, the ex-ante surplus inthe capital account is applied to repay the most expensive creditor, which we assume is theU.S. Treasury.

6. The World Bank exposure and stock of debt is projected using information onthe specific contracts and their associated disbursement schedules.

Annex B2 SNAPuge I of 2 Mesico

CAS AnnexesNtional Accouts (Use Can) 5/19/95 3:25 PM

ActbI Edtmate Procction1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

A. In Current Prices (billion LCUa)

GDP at narket prlces 695 877 1,035 1,140 1,267 1,627 2,040 2,446 2,952 3,556NetndimrectTaxeu 66 86 103 108 119 187 222 264 319 380GDP dFactorCoa 629 791 932 1,032 1,148 1,440 1,818 2,181 2.633 3,176

Agriculfre 55 67 86 93Indusbly 211 260 289 318 ..

of which Manufactuing 156 193 208 225 ..

Services 429 550 659 729 .. ..

Resource Balance (8) (28) (57) (48) (67) 62 75 52 40 28Imporu (rNFS) 116 147 185 188 236 327 425 561 708 901Export (GNFS) 108 120 128 140 169 390 500 613 748 929

Total Expenditure 703 905 1,091 1,188 1,334 1,565 1,965 2,394 2,912 3,528

Conssmption 544 699 839 928 1,024 1,259 1,566 1,881 2,264 2,706Governmest 58 78 103 122 109 122 155 187 223 279Private 486 621 736 806 915 1,137 1,411 1,695 2,041 2,427

Gross Dxneesic Invedmert 159 206 253 260 310 306 399 513 648 822Governmect 34 39 43 47 51 64 81 102 128 158Private 94 129 169 182 212 242 308 388 506 637Totl fixed ivestment 128 168 212 230 262 306 390 490 634 795Totl investmet in stoclm 31 37 41 31 48 0 10 23 14 27

Domestic Saving 151 178 196 212 243 368 474 564 688 850+ Net Factor ncome (NFY) (24) (25) (29) (33) (41) (76) (89) (90) (101) (117): NetCummt Tnmufern(NCT) 11 8 9 8 14 20 23 26 30 34

= Nationsl Savings 138 161 176 187 215 312 409 501 618 768

Gross Nationel Produt 671 852 1.005 1,107 1,226 1,551 1,951 2,356 2.851 3,439Gross Nationsl Disposable Income 682 860 1,015 1,115 1,240 1,571 1,974 2,382 2,881 3,474

B. Shares of GDP (current prices)

GDP at nmrket prices 100.0 100.0 100.0 100.0 100.0 100.0 O1.0 100.0 100.0 100.0Net lndirectTaxes 9.5 9.8 9.9 9.5 9.4 11.5 10.9 10.8 10.8 10.7

Agriculture value added 7.9 7.6 8.3 8.2 .. .. ..

Industry value added 30.3 29.6 27.9 27.9 .. .. ..

of which Manufacturing 22.5 22.0 20.1 19.7 .. .. ..

Services value added 61.8 62.8 63.7 63.9 .. .. ..

Resource Balance -1.2 -3.2 -5.5 -4.2 -5.3 3.8 3.7 2.1 1.4 0.8Impors (GNFS) 16.7 16.8 17.9 16.5 18.6 20.1 20.8 23.0 24.0 25.3Exports (GNFS) 15.6 13.6 12.4 12.3 13.3 24.0 24.5 25.1 25.4 26.1

Total Expenditure 101.2 103.2 105.5 104.2 105.3 96.2 96.3 97.9 98.6 99.2

Total Consumption 78.3 79.7 81.0 81.4 80.8 77.4 76.8 76.9 76.7 76.1Government consumption 8.3 8.9 9.9 10.7 8.6 7.5 7.6 7.6 7.5 7.8Private consumption 70.0 70.8 71.1 70.7 72.2 69.9 69.2 69.3 69.1 68.3

Toral Investment 22.8 23.4 24.4 22.8 24.5 18.8 19.6 21.0 22.0 23.1Governmert investment 4.8 4.5 4.1 4.1 4.0 3.9 4.0 4.2 4.3 4.4Private investment 13.6 14.7 16.3 16.0 16.7 14.9 15.1 15.8 17.1 17.9Investmert in Stocks 4.5 4.2 3.9 2.7 3.8 0.0 0.5 0.9 0.5 0.8

Gross Domestic Savings 21.7 20.3 19.0 18.6 19.2 22.6 23.2 23.1 23.3 23.9Gross National Savings 19.8 18.3 17.0 16.4 17.0 19.2 20.0 20.5 20.9 21.6

Gross Nations] Product 96.5 97.1 97.2 97.1 96.8 95.3 95.7 96.3 96.6 96.7Gross Nationa] Disposable Income 98.1 98.0 98.1 97.8 97.8 96.6 96.8 97.4 97.6 97.7

Mernorandum itenns:

Price indices (% cbluge)GDPdeflator 29.7 21.8 14.8 9.7 7.1 34.8 22.9 14.5 14.4 14.8Consumer price index 26.7 22.7 15.5 9.8 7.1 34.4 22.9 17.8 16.3 14.7

Toal GDP (billion current USS) 247.1 290.5 334.4 365.9 375.5 250.3 287.3 313.6 343.2 382.4Conversion factor used (LCU/USS) 2.81 3.02 3.09 3.12 3.38 6.50 7.10 7.80 8.60 9.30

SNA Anmex B2Mexico Page 2 of 2

CAS AnnexesNational Accounts (Base Case) 5/19/95 3:26 PM

Actual Estimuate Projection1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Per capita gross atiorl product 2,580 2,976 3,425 3,722 4.006 3,259 3,017 2,913 3.234 3,547(Atlas method: in CP USS)

C. In Constant 1980 Prices (mil. LCUs)

GDP at nurket prices 5,277 5.469 5,620 5,645 5,857 5,579 5,691 5,959 6.288 6,601GDP at Factor Cost 4,774 4,932 5,061 5,110 5,305 4,936 5,072 5.315 5,609 5,895

Agricslture 409 413 409 420 ..

Indwtlry 1.738 1,797 1,853 1,848 .

of which Manufacturing 1.204 1,252 1,281 1,262Services 3.129 3,259 3,359 3,377 ..

Resource Balance 258 184 27 75 30 460 465 391 368 358Imports (GNFS) 709 827 1,000 988 1,115 851 995 1,182 1,348 1,555Exports (GNFS) 967 1,011 1.027 1.063 1,145 1.311 1,460 1,573 1,716 1,913

Total Expenditure 5.018 5,285 5.593 5,570 5,828 5,118 5,226 5,568 5,921 6,243

Consumption 4,018 4.209 4,366 4,384 4,539 4,016 4,112 4,316 4,503 4.644Government 569 591 604 623 632 416 465 489 474 468Private 3,450 3,619 3,761 3,761 3.907 3,600 3,647 3,827 4,029 4,176

GrossaDomestk lnvevenea 1,000 1,075 1,227 1,186 1,289 1.102 1,113 1,252 1,418 1.599Government 268 256 243 231 243 223 235 258 284 304Private 720 814 943 939 1,024 879 907 994 1.134 1,243Toal fixed investment 988 1.070 1,186 1,170 1,267 1,102 1,142 1,252 1,418 1,546Toialinvestmestinstocko 12 5 41 16 22 0 (28) 0 0 52

Terms of trade (T) effect (307) (340) (333) (327) (347) (298) (289) (282) (291) (309)Gross domestic income 4,970 5,129 5,287 5,318 5,511 5.280 5,401 5,677 5,997 6,292Domestic saving (TT adjusted) 951 919 921 934 972 1,264 1,289 1,361 1,494 1,648

D. Annual growth rates (19N0 prices)

GDP at market prices 4.5 3.6 2.8 0.4 3.8 -4.8 2.0 4.7 5.5 5.0Agriculture 5.9 1.0 -1.0 2.8 .. ..

Indvutsy 5.7 3.4 3.1 -0.2 .. ..

of which Manufacturing 6.1 4.0 2.3 -1.5 .. ..

Services 3.7 4.1 3.1 0.5 .. ..

Imports (GNFS) 19.7 16.8 20.9 -1.2 12.9 -23.7 16.9 18.8 14.0 15.4Exports (GNFS) 3.6 4.6 1.6 3.5 7.7 14.6 11.3 7.8 9.0 11.5

Total Expenditure 6.6 5.3 5.8 -0.4 4.6 -12.2 2.1 6.6 6.3 5.4Consumption 5.5 4.8 3.7 0.4 3.5 -11.5 2.4 5.0 4.3 3.1Invesnment 11.1 7.5 14.1 -3.4 8.7 -14.5 1.0 12.5 13.2 12.8

Grors domestic income 5.7 3.2 3.1 0.6 3.6 -4.2 2.3 5.1 5.6 4.9Gross domestic savig 6.4 -3.4 0.2 1.4 4.0 30.1 2.0 5.6 9.8 10.3

Per Capita eroeth rstes:

Per capita GDP (mp) 2.2 1.5 0.7 -1.7 1.7 -6.5 0.1 2.8 3.6 3.0Per capita tota consumptiosn 3.2 2.6 1.6 -1.8 1.5 -13.2 0.5 3.0 2.4 1.2Per capita private consuanption 3.7 2.8 1.8 -2.2 1.8 -9.6 -0.6 3.0 3.3 , 1.7

E. Period Average Indicatora 1984-89 1989-94 1994-99

Marginal natiosal saving rate 25.8 6.7 56.4

lcremental capital-otput ratio 16.1 7.7 8.3

Import elasticity 15.8 4.7 3.3

Annex B3 TRDPage I of I MeWAco

CAS AnnexesExports and Imports (Base Case) 5/19/95 3:29 PM

Actual Estimate Projection1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

A. Value in Current Prices (UWS millions)

Total Merchandise Exports (FOB) 30,390 30,905 32,259 35,453 41,146 49,264 57,645 63,924 71,713 83,542Fuels 10,104 8,166 8,307 7,418 7,393 8,532 8,451 9,093 10,235 11,873Manufactured goods 17,507 19,819 21,484 25,252 30,717 37,414 45,362 50,600 56,979 66,S31Other goods 2,779 2,919 2,469 2,782 3,035 3,318 3,833 4,231 4,499 4,838

Total Merchandise Imports (FOB) 31,272 38,496 48,193 48,924 59,687 43,183 52,024 63,885 75,408 89,509Consumption Goods 5,099 5,834 7,744 7,842 9,511 8,089 9,528 11,748 13,154 15,802Intermediate Goods 19,3S4 24,074 28,893 30,025 36,854 26,638 32,123 38,634 44,957 51,993Capital Goods 6,790 8,588 11,556 11,056 13,322 8,456 10,373 13,504 17,296 21,714

B. Value in Constant 1987 Prices (USS millions)

Total Merchandise Exports (FOB) 27,425 29,966 30,988 34,852 37,723 44,356 50,633 54,317 59,025 66,623Fuels 8,582 8,899 8,607 7,907 7,375 8,288 7,848 7,840 8,194 8,826Manufactured Goods 16,295 18,257 19,983 24,161 27,507 33,009 39,314 42,742 46,956 53,732Other Goods 2,548 2,810 2,398 2,783 2,840 3,059 3,471 3,735 3,875 4,065

Total Merchandise Imports (FOB) 27,734 33,807 41,934 42,080 50,366 35,851 42,438 50,749 58,436 67,600Consumption Goods 4,581 4,771 6,211 6,212 7,388 6,191 7,163 8,608 9,404 11,021Intermediate Goods 17,106 21,625 25,974 26,657 32,091 22,852 27,071 31,732 36,026 40,648Capital Goods 6,047 7,411 9,749 9,211 10,886 6,808 8,204 10,409 13,007 15,931

Memorandum Items:

Export volune growth rate 10.3 9.3 3.4 12.5 8.2 17.6 14.2 7.3 8.7 12.9Importvolumegrowth rate 20.9 21.9 24.0 0.3 19.7 -28.8 18.4 19.6 15.1 15.7

C. Price Indkes (1987 = 100)MerchandiseExport 111 103 104 102 109 111 114 118 121 125Merchandise Import 113 114 115 116 119 120 123 126 129 132Merchandise Terms of Trade 98 91 91 87 92 92 93 93 94 95

D. Non-Factor Services(indices base 1987 = 100)

Exports of NFS - volumc index 133 159 166 173 169 187 220 251 283 312ExportsofNFS-priceindex 111 102 103 100 107 108 110 113 116 119

Impots of NFS - volumc index 173 184 198 188 199 151 158 171 177 188Imports of NFS - price index 113 113 114 115 118 119 121 125 128 131

BOP Annex B4Mehico Page 1 of I

CAS AnnexesBalance of Payments (millions of USS) (Bane Case) 5/19/95 3:46 PM

Actual Estimate Projection1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Total Exports of GNFS 38,411 39,695 41,451 44,806 50,883 60,190 70,755 79,297 89,444 103,602Merchandise (FOB) 30,390 30,905 32,259 35,453 41,146 49,264 57,645 63,924 71,713 83,542Non-Factor Services 8,021 8,790 9,192 9,353 9,737 10,926 13,109 15,373 17,731 20,060

Total hnports of GNFS 41,214 49,037 59,681 59,952 71,597 52,325 61,801 74,723 86,889 102,014Merchandise (FOB) 31,272 38,496 48,193 48,924 59,687 43,183 52,024 63,885 75,408 89,509Non-Factor Services 9,942 10,541 11,488 11,028 11,910 9,142 9,777 10,838 11,482 12,505

Resource Balance (2,803) (9,342) (18,230) (15,146) (20,714) 7,864 8,953 4,574 2,554 1,588

Net Factor Income (8,735) (8,367) (9,320) (10,933) (12,163) (11,715) (12,478) (11,526) (11,757) (12,535)Factor receipts 3,237 3,529 3,151 2,703 3,452 1,647 1,984 2,948 3,139 2,941Factor Payments 11,972 11,896 12,471 13,636 15,615 13,362 14,462 14,474 14,897 15,476

Total Interest 7,444 8,369 7,634 6,997 7,716 9,562 12,512 11,744 11,127 10,206Other Factor Payments 4,528 3,527 4,837 6,639 7,899 3,800 1,950 2,730 3,770 5,270

Net private Current Transfers 3,978 2,745 3,021 2,688 4,014 3,096 3,238 3,387 3,544 3,708Currcnt Receipts 3,992 2,764 3,040 2,704 4,031 3,113 3,256 3,405 3,562 3,727

of which workers' remittances 1,980 2,414 2,704 2,380 2,653 2,786 2,925 3,071 3,225 3,386Current Payments (14) (19) (19) (16) (17) (17) (18) (18) (18) (19)

Net official current transfers 0 0 0 0 0 0 0 0 0 0

Current Account Balance (7,450) (14.893) (24,804) (23,391) (28,863) (754) (287) (3,565) (5,660) (7,239)

Official capital grants 0 0 0 0 0 0 0 0 0 0

Private investment (net) 4,627 14,489 17,293 22,486 9,893 (20,500) 7,800 10,400 15,000 16,000Direct Investment 2,633 4,761 4,393 4,901 8,030 6,000 7,800 8,000 10,000 11,000Portfolio investment 1,994 9,728 12,900 17,585 1,863 (26,500) 0 2,400 5,000 5,000

Net LT Borrowing 8,542 3,888 (348) 3,057 1,470 19,851 (4,092) (5,075) (8,696) (5,126)Disbursements 11,363 8,141 11,896 15,785 17,101 27,612 7,491 6,075 5,767 5,966LT Repayments 2,821 4,253 12,244 12,728 15,631 7,761 11,583 11,150 14,464 11,092

Other Capital Flows (net) (2,485) 4,653 9,032 3,890 (1,386) (0) (0) 1,000 1,000 1,000Net Short-Term (ST) Capital 7,420 5,775 2,678 2,746 1,526 (0) (0) 1,000 1,000 1,000Capital Flows n.e.i. (12,425) 788 6,919 2,593 (1,340) 0 0 0 0 0Errors and omissions 2,520 (1,910) (565) (1,449) (1,572) 0 (0) 0 (0) 0

Change in net intem'l reserves (3,234) (8,137) (1,173) (6,043) 18,885 1,404 (3,422) (2,760) (1,644) (4,635)(- indicates increase in assets)

Memorandum Items:

Total Net Reserves 3,358 11,006 13,025 20,346 2,554 1,150 4,572 7,333 8,977 13,611Total Gross Reserves, of which 9,909 17,772 18,975 25,133 6,300 14,840 24,482 26,394 24,415 21,567

Total Reserves minus gold 9,863 17,726 18,942 25,110 6,278 14,816 24,458 26,371 24,391 21,543Gold (at year end London price) 46 46 33 23 23 23 23 23 23 23

Total Gross Reserves in months imports 3 4 4 5 1 3 5 4 3 3

Exchange ratesAnnual Average (LCU/US$) 2.81 3.02 3.09 3.12 3.38 6.50 7.10 7.80 8.60 9.30At end year (LCU/USS) 2.95 3.07 3.12 3.11 5.33 6.50 7.10 7.80 8.60 9.30Index real average X-Rate (1980 =100) 1.31 1.18 1.09 1.04 1.07 1.56 1.41 1.35 1.31 1.27

Current Account Balance as % GDP -3.0 -5.1 -7.4 -6.4 -7.7 -0.3 -0.1 -1.1 -1.6 -1.9

Annex B5 DEBTPage 1 of 2 Mejdco

CAS AnnextsExternal Debt Stocks and Flows (millions of USS) (Base Case) 5/19/95 3:49 PM

Actual Estimate Projection1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

A. Gross DisbursementsPublic & Publicly Guaranteed 9,303 5,747 6,783 7,875 7,514 26,612 6,491 5,075 4,767 4,966

a. Multilateral 3,647 2,114 1,749 1,465 1,210 2,076 2,472 1,418 1,638 2,060of which IDA 0 0 0 0 0 0 0 0 0 0of which IBRD 3,326 1,581 1,352 1,098 943 1,496 1,822 575 814 1,091

b. Bilateral 1,819 757 1,144 1,222 1,177 22,391 1,810 1,412 1,174 1,004Private creditors 3,837 2,877 3,891 5,188 5,127 2,145 2,209 2,245 1,955 1,902of which bonds 975 1,122 1,157 3,750 3,495 500 500 500 500 500

Private Non-Guaranteed 2,060 2,394 5,113 7,910 9,587 1,000 1,000 1,000 1,000 1,000Total Long-Term Disbursements 11,363 8,141 11,896 15,785 17,101 27,612 7,491 6,075 5,767 5,966

Net Short-Term Capital 7,420 5,775 2,678 2,746 1,526 0 0 1,000 1,000 1,000IMF Purchases 2,183 1,276 328 0 0 10,614 7,283 0 0 0Total Disburs. (LT+IMF+ST) 20,966 15,192 14,902 18,531 18,627 38,226 14,774 7,075 6,767 6,966

B. AmortitionsPublic & Publicly Guaranteed 2,625 3,644 10,186 5,653 7,150 6,840 10,553 9,827 10,804 9,407

a. Multilateral 1,037 1,211 1,259 1,276 1,281 1,625 1,789 1,838 1,860 2,036of which IDA 0 0 0 0 0 0 0 0 0 0of which IBRD 801 954 981 991 1,065 1,311 1,470 1,492 1,516 1,650

b. Bilateral 249 268 1,022 1,398 2,502 2,341 6,417 6,007 6,120 6,056Private creditors 1,339 2,166 7,906 2,979 3,367 2,874 2,348 1,982 2,823 1,314of which bonds 464 84 4,592 650 595 542 969 554 1,854 444

Private Non-Guaranteed 196 609 2,058 7,075 8,481 921 1,030 1,323 3,660 1,685Total Long-Term Amortizations 2,821 4,253 12,244 12,728 15,631 7,761 11,583 11,150 14,464 11,092

IMF Repurchases 1,191 1,105 896 1,175 1,192 785 1,063 848 3,623 7,483Total Amortizations (LT+IMF) 4,012 5,358 13,140 13,903 16,823 8,547 12,646 11,998 18,087 18,575

C. Net DisbursementsPublic & Publicly Guaranteed 6,678 2,103 -3,403 2,222 364 19,772 -4,062 4,752 -6,036 -4,441

a. Multilateral 2,610 903 490 189 -71 451 683 -420 -222 23of which IDA 0 0 0 0 0 0 0 0 0 0of which IBRD 2,524 627 370 107 -123 185 352 -917 -702 -559

b. Bilateral 1,570 489 122 -176 -1,325 20,050 -4,606 4,595 4,947 -5,052Private creditors 2,498 711 -4,015 2,209 1,760 -729 -138 263 -868 588of which bonds 511 1,038 -3,435 3,100 2,900 -42 -469 -54 -1,354 56

Private Non-Guaranteed 1,864 1,785 3,055 835 1,106 79 -30 -323 -2,660 -685Total Long-Term Net Disb. 8,542 3,888 -348 3,057 1,470 19,851 -4,092 -5,075 -8,696 -5,126

Net Short-Term Capital 7,420 5,775 2.678 2,746 1,526 0 0 1,000 1,000 1,000Net use of IMF Credit 992 171 -568 -1,175 -1,192 9,829 6,220 -848 -3,623 -7,483Total net Disburs. (LT+IMF+ST) 16,954 9,834 1,762 4,628 1,804 29,680 2,129 -4,923 -11,320 -11,609

D. InterestPublic & Publicly Guaranteed 5,358 5,795 5,139 4,708 5,308 5,427 7,903 7,434 6,998 6,501

a. Multilateral 1,005 1,126 1,176 1,196 1,247 1,337 1,411 1,422 1,390 1,373of which IDA 0 0 0 0 0 0 0 0 0 0of which IBRD 751 861 892 905 926 1,015 1,076 1,069 1,006 958

b. Bilateral 373 551 716 724 892 827 3,188 2,644 2,099 1,538Private creditors 3,980 4,117 3,247 2,788 3,169 3,263 3,304 3,369 3,509 3,590of which bonds 1,112 3,084 2,527 2,206 2,535 2,612 2,616 2,604 2,605 2,555

Private Non-Guaranteed 582 610 832 827 1,144 1,455 1,448 1,264 1,109 935Total Interest on Long-Term Loans 5,940 6,405 5,971 5,535 6,452 6,882 9,351 8,698 8,107 7,436

InterestonShorT-Tern Debt 982 1,423 1,160 1,036 1,037 2,163 2,128 1,891 1,954 2,017IMFCharges 522 541 503 426 227 516 1,032 1,156 1,067 754Total Interest (LT+IMF+ST) 7,443 8,369 7,634 6,997 7,716 9,562 12,512 11,744 11,127 10,206

DEBT Annex B5Mexico Page 2 of 2

CAS AnnexesExternal Debt Stocks and Flows (millions of US$) (Base Case) 5/19/95 3:50 PM

Actual Estimate Projection1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

E. External DebtPublic & Publicly Guaranteed 77,558 79,119 72,264 74,450 83,037 99,632 95,571 90,819 84,782 80,341

a. Multilateral 14,302 15,475 15,537 16,059 15.987 18.626 19,309 18,888 18,667 18,690of which IDA 0 0 0 0 0 0 0 0 0 0of which IBRD 11,030 11,928 11,966 12,322 13,038 14,540 14,893 13.976 13,273 12,714

b. Bilateral 8,470 9,664 9.738 10,098 9,593 30,441 25,835 21,240 16,293 11,241Private creditors 54,786 53,980 46,989 48,293 57,457 50,566 50,427 50,690 49,822 50,410a. Bonds 40,100 40,462 35,007 37,616 40,782 40,784 40,316 40,261 38,907 38,963

Private Non-Guaranteed 5,835 7,620 10,675 11,509 15,615 17,488 17,458 17,135 14,475 13,790Total Long-Term DOD 83,393 86,739 82,939 85,959 98,652 117,120 113,029 107,954 99,257 94.131

Short-Term Debt 16,082 21,857 24,535 27,281 28,807 30,008 30,008 31,008 32,008 33,008Use of IMF Credit 6,551 6,766 5,950 4,787 3,747 13,689 19,909 19,061 15,438 7,955

Total DOD (LT+IMF+ST), of which: 106,026 115.362 113,424 118,027 131,206 160,818 162,946 158,023 146,703 135,094Principal Arrears 0 0 0 0 0 0 0 0 0 0Interest Arrears 0 0 0 0 0 0 0 0 0 0

F. Debt and debt Burden Indicators:

Total debt service (mil US$) 11,455 13,727 20,774 20,900 24,539 18,108 25,158 23,742 29,214 28,781Interest (LT + ST + IMF) 7,443 8.369 7,634 6,997 7,716 9,562 12,512 11,744 11,127 10,206Principal (LT + IMF) 4,012 5,358 13,140 13,903 16,823 8,547 12,646 11,998 18,087 18,575

For total DOD and Total debt service (TDS):DOD/Exports (GNFS + FR + WR) 243.0 252.8 239.8 236.6 230.2 248.9 215.4 185.2 153.1 122.9DOD / GDP 42.9 39.7 33.9 32.3 34.9 64.2 56.7 50.4 42.7 35.3TDS/Exports (GNFS + FR + WR) 26.3 30.1 43.9 41.9 43.1 28.0 33.2 27.8 30.5 26.2

IBRD exposure indicators:IBRD Debt Service/Public DS 16.0 16.4 11.2 15.9 14.4 17.1 12.4 13.3 11.2 10.8Pref Creditor DS/Public DS 38.7 35.9 22.9 34.0 28.4 31.4 25.8 27.3 35.3 48.2

Pref Creditor exci IMF DS/Public DS 21.1 21.1 14.6 20.7 18.2 21.8 15.6 16.9 14.4 14.1IBRD DS/Exports (XGS+ WR) 3.6 4.0 4.0 3.8 3.5 3.6 3.4 3.0 2.6 2.4County Share in IBRD Portfolio (FY) 11.5 11.7 12.0 12.0 12.0 12.3 12.3 11.9 11.2 10.7

Annex B6 GOVPage I of I Mexico

CAS AnnexesPublic Finance (bilion LCUs) (Base Case) 5/19/95 3:40 PM

Actual Estimate Projection1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Total Current Revenues 141 166 205 210 239 354 430 526 650 794Direct taxes 33 43 58 69 72 79 110 149 203 271Indirect taxes 72 90 102 107 119 187 222 264 319 380

On domestic goods and services 66 80 89 95 107 174 204 240 285 335On intemational trade 6 10 13 13 13 13 18 25 34 45

Non-Tax Receipts 36 34 45 33 48 87 99 112 128 143

Total Current Expenditures 105 105 111 128 152 246 295 366 465 581Interest on external debt 49 30 24 19 16 50 48 56 65 68Interest on domestic debt 15 17 15 15 17 36 27 16 9 6Transfers toprivate sector 10 17 33 51 68 83 110 133 159 182Transfers to other NFPS (46) (52) (61) (70) (79) (84) (94) (105) (117) (128)Subsidies ..

Consumption 76 93 99 114 131 160 205 266 349 453Wages and salaries 35 47 46 54 62 67 75 86 99 113Other consumption 41 46 53 60 69 92 130 180 249 340

Budgetary Savings 36 61 93 81 87 108 135 160 185 213Capital Revenues (29) (32) (38) (42) (39) (49) (50) (50) (51) (51)Total Capital Expenditures 26 33 40 37 49 65 84 109 143 176

Capital transfers 6 6 10 6 7 11 12 14 15 17Budgetary fixed investrnent 21 28 30 32 42 54 72 96 128 159

Overall balance (- = deficit) (19) (5) 15 3 (1) (6) 1 1 (9) (14)

Shares of GDP at current prices

Current revenues 20.4 19.0 19.8 18.4 18.9 21.8 21.1 21.5 22.0 22.3Current expenditures 15.1 12.0 10.8 11.2 12.0 15.1 14.5 15.0 15.8 16.3Budgetary savings 5.2 6.9 9.0 7.1 6.9 6.7 6.6 6.5 6.3 6.0

Capital revenues -4.2 -3.7 -3.7 -3.6 -3.1 -3.0 -2.4 -2.0 -1.7 -1.4Capital expenditures 3.8 3.8 3.9 3.3 3.9 4.0 4.1 4.5 4.8 5.0Overall Balance (- = deficit) -2.8 -0.5 1.4 0.2 -0.1 -0.4 0.0 0.0 -0.3 -0.4

Tax burden indicators (%)

Direct taxes / GDP 4.7 4.9 5.6 6.1 5.7 4.9 5.4 6.1 6.9 7.6Indir taxes on domestic G&S / GDP 9.5 9.1 8.6 8.3 8.4 10.7 10.0 9.8 9.7 9.4Indir taxes on don G&S / priv Consuim 13.5 12.8 12.1 11.8 11.7 15.3 14.4 14.1 14.0 13.8

MEXICO: BANK PORTFOLIO SHARE PROJECTIONS, 1994-2003 1 9-May-95Summary 11:43 AM

Additional Commitments (CY) Disbursnents (CY)1995 1995 1996 1995 1995 1996 1996 1997

I DI I I n I n

Base Case $1.5 B p.a.

Proposed Lending Program $1.0 B in FY95 & FY96; $1.5 B in FY97-afher 1,500 500 0 600 200 850 350 0- $654M Loans Cancelled 4 2.0B Crisis Program

Portfolio Share (FY)FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03

Base Case $1.5 B pa. 12.03% 11.88% 11.38% 10.81% 10.26% 9.82% 9.46% 9.24% 8.96% 8.69%

ProposedLending Progran $1.0 B in FY95 & FY96; $1.5 B inFY97-after 12.03% 12.31% 12.34% 11.87% 11.19% 10.66% 10.16% 9.77% 9.34% 8.98%- $654M Loans Cancelled + 2.OB Crisis Program

Net Disbursements (FY)FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03

Base Case $1.5 B p.a. -10 -305 -558 -681 -628 -474 -334 -148 -200 -258

Proposed Lending Program $1.0 B in FY95 & FY96; $1.5 B in FY97-after -10 387 165 -545 -817 -605 -501 -385 -405 -368- $654M Loans Cancelled + 2.0B Crisis Program

0 QH1-

The hoo-daries, colors, denonanhons and any other Wfomah-n~hano oath,5 snap do oa iospfy, an the part of Th. Word So-t

-. - -, U N I T E D STAT E S 0 F A M E R I C A -6 t mpt- - b-aiery. orany

'_ 0 1 100 200 300

CNSONORA

0

I ( CHIHUAHUA \ _.

ClS T COAHUILA IZ X, ' S ' - . \ ~~~NUEVO -

, . ' .., ,( .LEON ,S x, v ,',DURANOE .f d.i

SINALOA t '' '"S-'' < S '., o.z. . :. '. :TAMAULIPAS

fZACATECAS.'%*K

i1 t * *f * . *SAN LVIS ..NAYARIT iotos,...

S*. ~ .g j >, ,,Si,0 j;8 a5YUCATAN

MEXICO * jAtISCO (-.- 4 t * .QUINTANA

BANK PROJECTS WITH SPECIAL 'E ROOCOLIMAI, -f ICHACA EXECRCEMPHASIS ON POOR STATES MICHCAN 3L- PUEB0 - TABAS*J,.' CAMPECHEi

I BELIZE* REGIONAL DEVELOPMENT I NUMBER OF PROJECTS BY STATE iLI REGIONAL DEVELOPMENT 11 ONE PROJECT

A BASIC HEALTH I TWO PROJECTS G* BASIC HEALTH II GUATEMALA

* PRIMARY EDUCATION I -| FOUR PROJECTS ® NATIONAL CAPITAL I HONDURASPRIMARY EDUCATION 11 SIX PROJECTS STATE BOUNDARIES ' EL--RAINFED AREAS SEVEN PROJECTS - - INTERNATIONAL BOUNDARIES /SALVADOR r .AGRICULTURAL POVERTY EIGHT PROJECTS

3: CHIAPAS AGRICULTURE NICARAGUA >_ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~NJD

x~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~N

i itiAGI ,ti G

Rer.'.-rt No: 141_:I M, EIyp-e: C{A'>)