3

# 1. Motivation and Summatr

Between 1987 and 1990 Mexico's current account/trade balance deteriorated more than US$ 10 billion. The extent to which this denerioration is worrisome hinges, of course, on the underlying factors. If it was prompted by a surge in investment there need be no big cause for concern as the trade deterioration could then be regarded as temporary. The evidence indeed shows that, despite the severe cutbacks in public investment, there was a sizable surge in fixed investment in the last three yaars, particularly in l990 when fixed investment was up 13.5% _.n real terms compared to the 1989 level, or 28% above the 1987 level. However, higher investment only accounts partially for the recent current account deterioration. The current account deterioration cannot be ascribed to the public sector. Nominal public saving rose more than enough to finance increased investment implying that the entire current account deterioration could be ascribed to declining private saving. The conventional or unadjusted measure of private saving, i.e., the portion of aggregate investment not financed by public or foreign saving, has it fact declined sharply between 1987 and 1990. 1 Horqever, when properly measuring private, public and foreign saving, the above diagnosis no longer holds. Private saving in 1990 was actually higher than in 1987 and public saving lower. And although recently both the conventional and proposed measures of private saving move in the same direction, i.e., a sharp decline in 1990, the conventional measure alarmingly shows a private saving-GDP ratio at its lowest level since 1981 while the proposed measure of private saving reveals that in 1990 the ratio was just below the decade's average.

In this paper we compute series of private saving which incorporate a variety of corrections usually not considered in conventional measures. The main objective is to provide an accurate measure of private saving and its components. One key measurement problem is the measurement of income from foreign assets, which is usually misrepresented in the official current account of Mexico. We employ estimates of income from foreign assets which increase the measure of disposable income by almost 2 percentage points of GDP. The proposed private saving measure fully captures the impact of the recent shift in portfolio composition from foreign to domestic assets on private agent's income structure.

Another key measurement issue is the adjustment of foreign and domestic interest payments for inflation. In a high inflation country as Mexico this adjustment is more than relevant. For example, the inflation component of the domestic public interest service alone represented more than 20 percentage points of GDP in 1987. And the inflation tax on base money, although partly compensated by interest payments on commercial banks deposits at the central bank, shrunk from arond 7% of GDP in 1982 to about 1% in 1989-90. In turn, the inflationary adjustment of foreign debt service and on income from foreign private assets permits measuring accurately the impact of the recent real peso appreciation over the foreign debt service burden and real income from foreign assets.

Several other important measurement issues are discussed. For example, to ensure consistency with national accounts data those items of the balance of payments and iiscal accounts which were available as national accounts data t The conventional measure is derived directly from national accounts as the difference between disposable income and consumption. However, as we show in section 2 it is equivalent, once data consistency is ensured, to the portion of aggregate investment not financed by public or foreign saving.