| BUSINESSWEEK ONLINE : DECEMBER 20, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- LATIN AMERICAN COVER STORY
Finance Minister Gurria: Toward Democratic Normality Jose Angel Gurria, 49, Mexico's Secretary of Finance & Public Credit, is a veteran government official who has helped steer the country through several of its financial crises. He has spent most of his career in the Finance Secretariat, where in the late 1970s he helped Mexico sign up foreign debt to pay for development projects. After the 1982 debt crisis, when Mexico defaulted on its foreign credits, he helped the country renegotiate and reduce its payments to international creditors. Under former President Carlos Salinas de Gortari, Gurria helped negotiate the financial chapter of the North American Free Trade Agreement. He then headed Bancomext, the government export bank, and Nafinsa, the national development bank. A lifelong member of the long-ruling Institutional Revolutionary Party (PRI), Gurria served as the party's Foreign Affairs Secretary before joining the Zedillo Administration as Foreign Minister in 1994. He took over the Finance post in January, 1998. Earlier this year, he was named "Finance Minister of the Year" by Euromoney magazine and appointed to an imaginary "Dream Cabinet" consisting of top officials from around the world, by World Link, in recognition of his efforts to prepare Mexico for a smooth economic transition in the forthcoming presidential elections. Gurria spoke recently with Mexico City Bureau Chief Geri Smith on Mexico's efforts to avoid a financial crisis in 2000. Here are edited excerpts of their conversation: Q: How do you compare Mexico's situation today with that of 1994, just prior to the crisis? A: We have a history of high expectations that were created and then of those expectations not actually coming to fruition for different reasons -- basically economic policy reasons. There are five reasons why we have had these problems: One, because we did not have enough fiscal discipline. Two, because we were overindebted. Three, because we depended only on oil for exports. Four, because the savings rate vis-a-vis GDP dropped precipitously because we were consuming and spending too much and had to import foreign capital to make ends meet. And the fifth reason we've had these problems is the exchange rate regime. Many times in my professional lifetime, we borrowed money to shore up the reserves, to support a fixed or crawling-peg or band exchange regime, which didn't work. And we ended up in the worst possible world, having borrowed and therefore owing the money and having to pay it [back]. You still had the devaluation, the ensuing inflation, a big recession, and no reserves. So right now, we have an exchange rate regime so that we have the largest-ever volume of reserves, and at the same time we are financing more than three-fourths of the current account deficit with direct foreign investment. If there's bad news, the exchange rate goes down. If there's good news, it goes up, like any currency in any modern economy. Those are the five reasons, and they played out differently [in each crisis]. I think now there is a situation where we have objectively created the conditions to make sure we do not have a transitional economic crisis. Why? Because we went back, took a hard look at what we did, or did not do, or did wrong, that created the problems. There is a new culture [in Mexico today]. The congress won't let you go ballistic -- if the government were to propose a big deficit, it wouldn't be accepted by the congress, by the analysts, by public opinion, by the markets. The markets would clobber you immediately if they did not see you moving in the right direction. It's an immediate reaction -- there's no lag here. The markets are a very, very important source of discipline. On the savings rate, we have legislated the new social security law, creating the new private pension funds, which are going to be the source of long-term savings to finance long-term projects in Mexico. Our financial market is very short term, meaning that longest term is one year. You don't have 10, 20, or 30-year bonds. We are now facing the possibility of creating longer-term issues, because people think that inflation is going to be lower than it is today. Anyway, the savings rate has recovered to above 20%, and we think that will continue in the year 2000. That is a big turnaround. We no longer depend on oil exclusively. In fact, we depend on oil for only 6% or 7% of our exports. Ninety percent is manufactured goods. We are the [13th-largest] exporter in the world, the 8th largest if you put Europe in a single basket. We just finalized negotiations for a free trade agreement with the European Union, and we already have NAFTA and free trade agreements with Chile, Venezuela, Colombia, and some Central American countries. We have been championing the cause of free trade, and it has worked because it has allowed Mexico to become a very important exporter of manufactured goods. If I had told you 10 years ago that we would be exporting $12 billion dollars a month today, they would have accused us of abusing a forbidden substance! Yet it's a reality, a dramatic change. The other issue, that of debt: We are no longer overindebted, and our calendar of payments is quite comfortable. This is the new economic structure of Mexico, which is much less vulnerable than before. Now, I tell people, "You tell me why we're going to have a problem, given these numbers." Q: Why are some concerned about a crisis in 2000, then? A: [Here are] some reasons: External volatility, the banking sector, and the political sphere -- the race for the presidency. The external volatility is still there. We believe it's more under control than it was before, that what could go wrong already did. The new challenge would be what will happen with the U.S. [But] with its impressive performance, of 5.5% growth for the third quarter, there's a lot of room there for a reduction in that rate of growth and still [making] ends meet. We are forecasting, I think, 2.8% growth [in the U.S.] for our purposes. We're saying that our whole economic forecast for the year 2000 will hold and is feasible, even at a very low rate of growth for the U.S., of 2.5 or 2.8%. Q: What about the banks? Even a $100 billion government bailout hasn't started them back on the path to lending. A: The banking system is safe, sound, and stable, but not ready to lead growth. The solution? A better legal context. The bankruptcy laws [now in congress] have a good chance of passing. The credit-guarantee laws are being discussed in the lower house and are very advanced. Q: Would you really call the banks sound at this point? A: I'm calling them sound because they're now capitalized. They know exactly what the risks are. They've strengthened their balance sheets and their reserves. And we've just put out a new set of regulations making it mandatory that they have a better quality of capital. If those banks are just happy to comply [with the new regulations], the other banks are going to do better, and they're going to eat their market share. It's no longer a question of the banks collapsing or anything like that -- we are not in that situation anymore. Now, if you have the improved legal context, which gives you greater legal certainty to lend and do business, but also you have strengthened regulations for capital and provisions and better banking supervision, then it's a very great incentive for banks to go out and sell assets to capitalize themselves better. When the IPAB [Bank Savings Protection Institute, Mexico's equivalent of the Federal Deposit Insurance Corp.] finishes with Serfin, Bancrecer, Inverlat, Promex, and Atlantico, which are in different stages [of healing], from here to the middle of next year, we will see one [example] after another of the finalization of these processes. Q: How likely do you think it will be, in a possibly volatile election year, to sell off the banks that required government intervention? That includes Serfin, Bancrecer, Inverlat, Promex, and Atlantico. A: Oh, we think that people are going to buy them because they are looking at the medium and long term and I think the fact that it's an election year hasn't precluded many banks from coming and saying they're interested. There has been an appetite for the portfolios [of seized assets from troubled banks] held by IPAB. That has gone well, and we are in the process also of selling large chunks of assets, like hotel chains, factories, and things like that. Q: When do you think normal lending will return? A: Banks are already lending again in positive terms, except it doesn't show on their balance sheets because they are still incorporating the impact of punto final, which is the big debtor-relief program that the government put together with the banks. This reflects on the balance sheet that actually they owe you less, so on the balance sheet you have numbers that still show negative growth for credit. But what is happening is that in the margin, as the economic outlook has improved, more people are borrowing, and the banks are lending more. [In time,] you will see the positive growth. Q: Do you think election-year jitters will cause economic instability in Mexico? A: In politics, I think people are more reassured about what's going on. We never had a primary in the PRI, never had ... challengers [as strong] as you have now, and never had as even a playing field as you have now. And that raises uncertainties. In Mexico, things are happening for the first time. Ten million people voting in [the Nov. 7 primary held by the PRI to select its presidential candidate] to elect one candidate in Mexico -- that's very important, regardless of who they voted for. This gives people looking at us confidence. I remember this very fortunate phrase that President Zedillo coined about our aspirations in terms of political life. He said that we aspire to democratic normality, which I think is a great phrase. It's not speechifying, it's not overly rambunctious, he's just saying, "We want to be like everybody else, and have just a normal democracy." I think we're making great strides, and that gives people confidence. The fact that we have more checks and balances, the fact that the congress is playing a larger role, that the judiciary is more and more independent -- that makes people more confident. Q: Hopefully, Mexico will be able to avoid election-year violence. A: We are now very deep into the election year. We've had disputes [in recent elections] over just 22 or 450 votes. These things never would have happened in Mexico only a few years ago. More and more, people trust our election system, the election machinery, in terms of how it works. And even our primary vote was very transparent because all of the exit polls agreed with the final outcome. So you have institutional and external checks and balances now. So I think that's going to be a bonus rather than a problem. As you know, Mexico is difficult to explain in political terms. But I think [the election year] is actually a plus rather than a minus. Q: You've been taking a series of measures to protect the economy against a shock in 2000. How do you think Mexico's credibility has evolved since 1994? A: It's like the fight against inflation. When you have 54% inflation, it's not so difficult to go down to 26% as we did. And it is a little more difficult to go back to 18%, even more difficult to go back to 13% like we're doing this year, [and still] more difficult to go back to 10% next year. Every time it becomes more difficult because you've done all the obvious things. Then you really have to get into a very intense work, and you run into the smaller pieces of the machinery -- they have to be right, too. Q: You have two separate audiences: One is the outside world, which is waiting to see if you can pull it off, and the other is the domestic Mexican audience. Part of Mexico, especially the exporters, are doing well. But a great mass of Mexicans still feels very badly off, five years after the devaluation. A: Of course, we cannot forget that, ever. We have not yet recovered the real wages of 1994 -- we're getting there. The answer is, the only way you can deal in a country like Mexico with the very obvious need of the people for a better livelihood, is you have to keep the growth going. Crises are so costly in terms of people's standards of living, that the obvious conclusion is not to have a crisis and therefore do everything in your power to avoid it, which is what we've been doing. Keep the job growth going. But, there are some people who cannot wait for the invisible hand of the market to come and protect them -- they need help now, and nobody will do it except the government. You can privatize the steel companies, the airlines, the hotels, but you cannot privatize the care of the poorest. For that, you need strong public finances, but you also need specific programs in place. Q: Mexicans are pretty tired of the austerity. When is that going to ease, now that the economy seems more on track? A: We have never had as high a budget for education as we will in the year 2000, measured by per capita spending or as a percentage of GDP. The same goes for social expenditure in general, it's going to be almost 61% of the budget. We're increasing by 50% the support that we give to farmers for their basic grains because we are facing this huge onslaught of imports of basic grains from the U.S., where farmers are very subsidized. There are a lot of needs, but at the same time we are trying to make the budget address these needs, and we are letting the big investments be done by other economic agents [via concessions or privatizations] rather than the government, with a few constitutional exceptions [such as the oil industry, which is restricted to the government]. Q: What is it like having a boss, the President, who is a Yale-trained economist known as the "Economist-in-chief" of the nation? He's said to be very hands-on as far as economic policy goes. A: It makes my life as finance minister a lot easier, in that I do not have to convince him of what has to be done. Many times he's ahead and tells me. On the other hand, it makes your life very hard because you can't skirt the issues, you can't present tables that are inconsistent. He is a very, very severe judge, even of a proposed text, even of the way things are presented. And of course in terms of the substance, as you say he is the chief economist of the country. But I think that's one of the reasons why we've been able to make so much progress on the economic front. Q: Finally, with regard to the issue of confidence, do you feel Mexican authorities are coming under great scrutiny this election year? You've been quoted as saying there's no way the government could embark on a big election spending spree. A: There's so much information now. You know that now, if it's Wednesday of the third week after the close of the month, then at 2 o'clock in the afternoon you will get the preliminary trade figures, two weeks later you'll get the adjusted trade figures. And if it's Tuesday, you get the employment figures. Everyone is very well informed, and that is why the [economists'] projections converge so much, because everyone is working on the same information, and there is plenty of it. It's not that we're going to be under the magnifying glass next year, we're under the magnifying glass all the time! We produce reports all the time, we're talking to congress every day, whether it's budget time or not. Again -- democratic normality. The question of accountability has grown exponentially. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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