The Mexican Crisis Mexico Is Still In A World Of Hurt

After a month of 20-hour workdays spent sorting out Mexico's financial crisis, Finance Secretary Guillermo Ortiz looked understandably tired on Jan. 31. Tired but, for once, satisfied: Hours earlier, the Clinton Administration had unveiled a $49.8 billion rescue package for Mexico's embattled peso. "The times ahead of us won't be easy times," Ortiz warned.

What an understatement. The devaluation of the peso and the accompanying financial jitters will dramatically slow Mexico's economy this year, as interbank interest rates as high as 50% choke off consumer spending and send overleveraged companies into bankruptcy. With emergency cuts in government spending, the economy could actually shrink by 1.5%--a far cry from the 4% growth President Ernesto Zedillo Ponce de Len forecast just six weeks ago. Tens of thousands of Mexicans will lose their jobs, and inflation as high as 40% will savage the spending power of those who still have a paycheck.

WEAK SUPPORT. Just as troubling is Zedillo's ability to hold the country together politically: Although he has promised international creditors an austere, orthodox path to economic recovery, opposition parties and labor unions are expected to block proposed privatizations and press for more government spending. "The country is on the verge of economic collapse," says Congressman Adolfo Aguilar Zinser, of the left-leaning Party of the Democratic Revolution. "Zedillo does not have the political support to apply a painful, orthodox program."

Ultimately, Zedillo will have to strike a delicate balance between buying opposition support for his economic program and satisfying members of his own ruling Institutional Revolutionary Party, who are chafing at his attempts to make Mexico's long-closed political system more democratic. As for the Mexican people, Zedillo now has little to offer but a year of sacrifice.

Although the bailout appears to solve Mexico's short-term financing woes, key sectors show signs of vulnerability. The jump in interest rates sparked a spate of loan defaults that could push the banks' nonperforming loans to as high as 30% of total loans from 8% to 10% now, says David Hale, chief economist at Kemper Financial Services Inc. Meanwhile, Mexico's three biggest banks--Banamex, Bancomer, and Serfn--owe overseas creditors nearly $5.5 billion in dollar-denominated certificates of deposit, all of which fall due during the next 90 to 180 days. The banks say they're liquid enough to pay off the notes, but sharply higher domestic loan defaults eventually could make that difficult. Major corporate borrowers, holding some $3 billion in international commercial paper, also will be hard-pressed to make payments.

In the months ahead, consumer spending on everything from household appliances to automobiles is expected to drop 30% to 50%. Mercedes-Benz, Ford, Nissan, and Volkswagen all have carried out plant shutdowns, with more to come. Construction will be hit hard, too. The government's emergency economic program includes big cuts in infrastructure spending, and high interest rates have put most private projects on hold. Empresas ICA, Mexico's largest construction company, hopes to go ahead with a $500 million Mexico City development with Paul Reichmann and George Soros, but ICA official Eduardo Borja admits affordable financing will be tough to find: "The project is still viable, but the financial crisis has put the brakes on."

Exporters, certainly, will gain from the cheaper peso. Tilemaker Internacional de Cermica plans to sell 50% of its production to the U.S. and Canada, up from 40% last year. Exports of canned processed foods and beer also will do well. And makers of tires and textiles, which had been hurt by cheap imports, will benefit from diminished competition from overseas. A sharp drop in imports from the U.S., combined with greater Mexican exports, is expected to help quickly reduce Mexico's $28 billion current-account deficit--one of the factors that triggered the peso devaluation.

Indeed, export strength likely will be a boon to maquiladoras, plants along the U.S. border that produce largely for foreign markets. Samsung Electronics is going ahead with a $500 million investment in a Tijuana plant. But electronics producers who also had been targeting the Mexican market have put growth plans on hold. Sony Electronics de Mexico General Director Koichi Nakamura expects that domestic demand for audio and video equipment will drop 30% to 40% this year. "The market is shrinking drastically," he says. "People...don't need a TV set right now."

Similarly, many of Mexico's small, family-run companies will struggle. Jose Guaida's family makes plastic tricycles and beach toys. Most of their materials--plastic and steel--are imported, and Guaida is allowed to pass on just 30% of price increases to customers. To boost volume in the face of shrinking margins, Guaida is expanding his line of beach toys, figuring that more Mexicans will spend vacations at the beach close to home. "We've survived devaluations before," says Guaida with a shrug. "It's better to keep working."

Zedillo is counting on such commonsense support as he attempts to shepherd t he economy through the coming months. To succeed, though, he must cater to two very different constituencies: impatient Mexicans eager to grab their long-postponed share of prosperity and foreign investors who, like it or not, now have a great stake in seeing that Mexico reaches its goals.

Where Mexico Will Suffer Most

BANKING High interest rates will cripple many corporate customers, driving up nonperforming loans to as much as 30% of lenders' portfolios

CAPITAL GOODS Sales of everything from cars to washing machines are expected to drop 30% to 50% as consumer credit costs soar

CONSTRUCTION Drastic government infrastructure spending cuts, and a slowdown in office building, will force a major slump

CONSUMER PRODUCTS A 7% cap on salaries, combined with inflation of 25% to 40%, will dampen demand, especially for imports

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