Mexico after the debt crisis : is growth sustainable?

The story of Mexico's involvement in international capital markets is one of riches to rags and back to riches again. Four periods can be distinguished: stable, steady international borrowing through the 1950s and 1960s; heavy reliance on international loans through commercial bank syndicates from the mid-1970s until 1982; massive capital flight, zero access to private lenders, and complete reliance on official sources from 1982 to 1990; and massive return of flight capital, a continued drought in syndicated loans, but heavy expansion of foreign direct investment, portfolio investment, and bond placement. Easing the transition from the third to the fourth period was the restructuring of Mexico's external debt under the Brady deal, which ultimately reduced - and smoothened - the net transfer to foreign creditors. The authors argue that smoothening the external transfer had far more impact on the domestic economy than the reduction of debt and debt servicing per se. The financing of the expansion that ensued in the fourth period differs dramatically from what was observed earlier in Mexico's history. Foreign capital inflows were dominated by foreign direct investment and especially portfolio investment and, unlike in the second period, most inflows financed the domestic private sector. Are the current rate and pattern of borrowing - at levels unforeseen at the time of the Brady deal - a cause for concern? Is growth sustainable? To answer these questions, the authors analyze the domestic macroeconomic counterpart of the large capital inflows and high current account deficits of the early 1990s. Whether growth is sustainable depends on the level of domestic saving. But even if domestic saving increases, the transition to sustainable growth is unlikely to be smooth because the slowdown in consumption growth (associated with improved saving) is likely to be contractionary. The outcome depends on how investment and net exports respond. The authors analyze cyclical and structural factors of investment and the external sector, and their interactions with Mexico's exchange rate and monetary policy, to interpret the recession in the second half of 1993. They emerge from their analysis with cautious optimism about Mexico's medium-term prospects.