Mexico's Biggest Stumbling Block: A Leader Who Doesn't Lead

Is Mexico headed for another meltdown? Certainly, confidence in President Ernesto Zedillo Ponce de Leon's economic management is in free fall. The latest blow to presidential credibility was the 1996 budget, announced on Nov. 13. It assumes a peso averaging 7.7 to the dollar, 20% inflation, and 3% economic growth. All are now considered unrealistic goals, following the peso's recent 15% plunge to nearly 8 to the dollar.

The markets were not impressed. After the announcement, the government intervened to shore up the peso, which is heading for 9.5, Goldman, Sachs & Co. predicts. Because of the jitters, the government is forced to pay nearly 60% for 28-day bills--nearly double the rate of six weeks ago. "They overpromise and then underdeliver," complains Mitchell E. Sahn, managing partner at Latin Tactical Trading Group in New York.

LOW PROFILE. Until recently, Mexicans were remarkably patient with the career technocrat who was unexpectedly thrust into the presidency after the assassination of the ruling Institutional Revolutionary Party's first candidate, Luis Donaldo Colosio. But now, Mexicans are wondering if Zedillo is ever going to get the hang of his job. That's why the markets gave some credence to rumors of a military coup in early November--even though the Mexican armed forces' tradition of staying out of politics makes such an event extremely unlikely.

Zedillo suffers from two basic weaknesses: a woeful inability to sell his programs and an apparent unwillingness to exercise Mexico's strong presidential powers. Since the crisis erupted last December, he has largely shut himself in the presidential residence. When he meets with delegations of businesspeople and foreign diplomats at the palace, he presents convincing arguments for his policy decisions. But most Mexicans don't see that side of him.

Zedillo's advisers argue that he is purposely keeping a low profile as his contribution to a redistribution of political power. But his reticence has cost him credit for real achievements. His administration has met the major requirements of the $50 billion international bailout led by the U.S.--a balanced budget, strict limits on monetary growth, and draconian fiscal constraints. He managed to negotiate a pact with business and labor, agreeing on moderate wage increases and goals for inflation and growth in 1996. And he submitted to Mexico's Congress a proposal for sweeping pension-fund reform that could give a big boost to the nation's savings rate.

None of this has calmed the markets, which "are not being guided by the economic fundamentals but by a lack of leadership and long-term economic strategy," says Denise Dresser, a political scientist at Mexico's Autonomous Technological Institute.

That absence of leadership is feeding the rumor mill. One rumor predicts the appointment of an "economic czar" to boost the government's credibility. Candidates mentioned include former Finance Secretary Pedro Aspe Armella and Jesus Silva Herzog, Mexico's politically savvy ambassador in Washington. A former PRI secretary-general proposed that if the peso hits 10 to the dollar, Zedillo should make way for a "government of national salvation."

But the most likely scenario is that Zedillo will continue to preside over an economic mess. Bad loans are rising, inflation is higher than expected, and the recession is turning out to be far deeper than most economists forecast. The government now admits that with the rise in interest rates, efforts to bail out the banks and consumers will cost $11 billion, or 5.1% of the GDP, much more than originally predicted. Zedillo's performance threatens to drag the whole country down.

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