This paper argues that, in the case of Mexico's debt and debt service
reduction agreed with London Club creditors, the 'smoothening' of the
external transfer had a much stronger domestic impact than the reducti
on of debt/debt service per se. The financing of the expansion that en
sued following the debt deal was facilitated by strong foreign capital
inflows. However, along with the capital inflow, there was a sharp de
cline in private saving which raised concerns about the sustainability
of the recovery. The paper argues that, even if domestic saving incre
ases from the low level reached in 1992, the transition to a sustainab
le growth path is unlikely to be smooth, as the slowdown in consumptio
n growth is likely to be contractionary. The net outcome will depend o
n how investment and net exports respond. The analysis of cyclical and
structural factors of investment and net exports leads to a cautious
optimism over the medium term.