Is This Tough Love Or A Savage Crackdown?

Fearing violence, Mexico's government-backed labor unions canceled their traditional May Day parade. But that didn't stop 70,000 independent union workers from thronging the Zcalo, the main plaza in Mexico City, to protest massive job losses caused by Mexico's financial collapse. There, they spray-painted the colonial-era National Palace with slogans such as "The fatherland is for sale."

Such ferment isn't scaring off foreign investors. In fact, Mexico City is a preferred destination these days for executives of such phone giants as AT&T, MCI, and GTE, which are racing to enter Mexico's newly opened market. Energy companies are also eyeing Mexico, intrigued by proposed rule changes in the long-closed petroleum industry. "Mexico still has explosive growth ahead of it," says Dan Crawford, chief operating officer of Avantel, a joint venture of MCI and Banamex, Mexico's largest bank.

Sharply divergent attitudes toward Mexico are typical these days, as President Ernesto Zedillo Ponce de Len's economic-recovery program nears the end of its second month. Ordinary workers and the proprietors of small and midsize enterprises proclaim it an unmitigated disaster. But Mexican exporters, senior Mexican and American officials, and financiers contend that the country is making solid progress.

Both are right. Zedillo's harsh measures are doing their job. He has restored confidence in the financial markets. The peso has stabilized (chart). The bolsa has recovered some of its losses. And Mexico has been smoothly meeting its estimated $29 billion in foreign debt payments for 1995. More importantly, the devaluation of the peso has stimulated exports, helping to shift Mexico's trade account to a slight surplus for the first quarter, compared with a $4.3 billion deficit a year ago. "We have always said it would be a long road, but a number of indicators have turned favorably in the last two months," says Treasury Under Secretary Lawrence H. Summers, the Clinton Administration's point man for Mexico.

But for Main Street Mexico, Zedillo's austerity measures, which include tight credit, steep tax hikes, and boosts in energy prices, are killers. The government is predicting a 2% decline in economic output this year, and the more pessimistic private forecasters expect a 5% contraction. "Markets tend to anticipate, and obviously they are ahead of the rest of the economy," says Finance Secretary Guillermo Ortiz. "In the real economy, in terms of business activity and employment, we have not touched bottom yet," he told BUSINESS WEEK.

Indeed, businesses and workers are being hit hard. Store aisles are deserted. Construction sites are lifeless. An estimated half-million workers have already lost their jobs this year, and Ortiz warns that the biggest wave of layoffs is yet to come, probably in July and August. The bright side is exports, which were up 32%, to about $18 billion, in the first quarter. Exports from the Mexican factories of America's Big Three carmakers jumped 66%.

RICH GET RICHER. The crisis is apt to lead to major restructuring of the Mexican economy. Struggling small banks will be snapped up by larger domestic or foreign institutions. Likewise, many of the big export-oriented manufacturers will wind up in a position to acquire smaller competitors. That risks strengthening the near-monopoly positions of some companies and skewing wealth distribution even further.

The picture is particularly grim outside the export sector. Jaime D. Berebichez, general director of Promotek, a construction outfit, says he is on the verge of closing his company, which has eone from 30 employees to just 6. He scrapped plans to build a 552-unit middle-class housing development and is having trouble selling finished houses. "We have no idea whether our sacrifice will last six months or six years," moans Berebichez. "We don't harbor any hope of emerging from this crisis. It's as if we're dead."

Things are much worse for ordinary Mexicans. Marching on May Day were Rodolfo Suro Garabita, 64, and his wife, Teresa Ponce, 63. Suro and his four sons all lost their jobs as drivers for a city bus company that the government shut down for financial mismanagement. "We want the resignation of Zedillo," says Suro. "He has destroyed Mexico."

"PAYMENTS BUBBLE." Zedillo and his aides contend that Mexicans must go through such pain to return to stable growth. The question is how long it will be before a recovery takes hold. Many analysts expect modest growth to resume in 1996 or even earlier, but first there will be some tough challenges. From mid-July to mid-August, Mexico faces a "payments bubble" of $6.2 billion in short-term debt. Although the second half of the $20 billion U.S. bailout package will become available on July 1, the huge payout could put new pressure on the peso.

There are also nagging doubts about Mexico's weaker banks. Bad loans are soaring, reaching 10% of the nearly $70 billion outstanding. Seven banks have already borrowed a total of 6.5 billion pesos--more than $1 billion--from the government to boost their capital to minimum levels. Others are shopping around for buyers. William F. Truscott, a portfolio manager at New York-based Scudder, Stevens & Clark Inc., worries that problem loans may keep banks from extending credit, hurting the chances for a 1996 recovery.

Wall Street analysts think that Mexican stocks may now be overpriced, given the severity of the country's remaining problems. Lawrence D. Krohn, a Latin America analyst at Union Bank of Switzerland in New York, thinks the current financial rally was spurred mainly by Mexico's showing that it could meet its debt payments. "There could be a correction in all the markets," he warns, as investors start to focus on the real economy.

But even if there are some zigs and zags ahead, the crisis is forcing Mexico to move in ways that should pay off in the long term. With no cash to spare, Mexico's government has pushed through legislation allowing more privatizations and greater foreign and domestic private investment. The most tantalizing initiative was the surprise announcement that private companies, including foreign ones, would be allowed to build and operate natural-gas pipelines. That had been the exclusive right of Petrleos Mexicanos (Pemex), the state-run oil monopoly. Officials hope the move will attract financing for several major electricity plants and petrochemical privatizations. "We are prepared to move as soon as they are," says Rodney L. Gray Houston's Enron Corp.

At the same time that foreign investors are finding Mexico more welcoming, more Mexican companies are cracking new markets north of the border. Ilusin, a lingerie maker, has just sent its first shipment, worth $40,000, to a Los Angeles distributor that formerly favored garments from Taiwan. The company is negotiating much bigger contracts with several potential American clients, including Kmart Corp. "The devaluation is what made us think about exporting," says Benjamn Romano, one of five brothers who run the company.

But such upbeat tales are still the exception in an economic landscape dominated by layoffs and shutdowns. The question is whether exports and investments will prove to be strong enough medicine to keep the Mexican economy from plunging into the sort of malaise that could do serious damage to the country's social fabric. Zedillo's entire program hinges on just how fast the cure takes hold.


-- The trade account has turned positive, easing the foreign payments crunch.

-- $16 billion of $29 billion in tesobonos has been retired.

-- The peso has stabilized at about six to the dollar. Interest rates have fallen.

-- The bolsa has risen about 30% from its March lows.


-- The economy, especially retailing and construction, is moribund.

-- Monthly inflation-about 8% in April-is still high.

-- The banking system remains shaky, with problem loans rising.

-- Unemployment is soaring, threatening social unrest .


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