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Could Those Blips Be Vital Signs In Mexico? (Int'l Edition)


International -- Finance: MEXICO

COULD THOSE BLIPS BE VITAL SIGNS IN MEXICO? (int'l edition)

Just three weeks ago, Mexican officials released the alarming news that the country's economy, battered by capital flight and a draconian budget squeeze, had shrunk in the second quarter at an unprecedented 10.5% annual rate. Now, says President Ernesto Zedillo Ponce de Len, the worst is over. "During the last quarter of the year, the country will begin to show signs of recovery," he predicted in his first state-of-the-nation address on Sept. 1.

The makings of a revival are coming together. Most economists are now forecasting modest GDP growth of 2% or so next year after a 5% shrinkage this year. Mexico's stock market likes what it sees, rising 3% in two days after Zedillo's speech to 2,598. That is its highest since mid-November last year, before the peso's Dec. 20 collapse, though still down 35% in dollar terms.

"VERY EXCITED." More important, perhaps, long-term investors are showing confidence in Mexico. Miami-based Ryder System Inc. is spending $250 million over three years to set up a transportation and logistics network, which it announced last December. Although it is behind schedule, company officials say that demand is bigger than they had expected for the project. "We're still very excited about that market," says Randall West, senior vice-president for international operations, "and we're hiring people every day." U.S. Ambassador James R. Jones estimates that a solid $5 billion of direct foreign investment will flow into Mexico this year, although that is down from 1994's $8 billion.

There are other harbingers of recovery. Inflation is falling, from 8% per month in April to 2% currently, and so are interest rates, from 80% in March to 34% in early September. Booming exports are earning an estimated $6 billion trade surplus this year, a huge upswing from 1994's $18.5 billion deficit. And the peso is steadying (chart). Two months ago, many analysts were expecting the peso to end 1995 at 6.7 to the dollar. Now some say it could be at 6.4 in December, not far off its current 6.2 rate.

Analysts see other signs to reinforce those trends, such as modest improvements in sales of domestic appliances and cement in July. In addition, the export-driven maquiladora industry, with a 14.1% sales boost from the cheap peso, has expanded its payroll to 633,000 workers, up 9.6% over the past year.

The incipient upturn will be helped by stepped-up government spending. Up to now, Zedillo has held down outlays as part of his tough anti-inflationary squeeze. Now, he said in his address, two-thirds of this year's total budget will be spent in the final months on projects such as labor-intensive housing and road building. The central bank will also do its part: After a drastic 18% real cut in the money supply in the second quarter, the Bank of Mexico is expected to ease money a bit in the months ahead.

TRADE DEFICIT? The steadier peso has sparked a new debate over currency policy. The bank has been managing a "dirty" peso float, intervening in currency markets mainly to avoid short-term lurches in the peso's exchange rate. But Finance Secretary Guillermo Ortiz recently said he would like to see the peso at 6.2 to 6.3 by yearend. That has spurred talk of returning the peso to an exchange-rate band, which would require stronger intervention to keep it between preset limits. In his speech, Zedillo said he favors a "competitively priced" peso to spur exports.

Analyst Roberto Salinas Len warns, though, that as the economy recovers and imports of capital goods resume, officials will have to start worrying about how to finance an inevitable trade deficit. "We need to see more cold, hard cash coming in to be invested in factories," he says.

Chunks of cash may be drawn in by privatizations such as the sale of four petrochemical complexes by oil giant Pemex, starting next month. Amoco Corp. is one U.S. company eyeing the plants. On Sept. 6, the government awarded a long-distance phone license to MCI Communications Corp. and Mexican partner Banamex-Accival. They plan to invest $1.8 billion to serve 36 cities.

But to reduce its dependence on foreign investment, says Finance Ministry spokesman Alejandro Valenzuela, Mexico needs to raise domestic savings, now only 16% of GDP. Until it does, Mexico will risk repeating yet another cycle of recovery--and collapse.Geri Smith in Mexico City


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