Commentary: Mexico Is Doing Fine Despite What Business Thinks

In boardrooms throughout Mexico, executives are nervous. With 16 months to the presidential vote, they're worrying about an election-year devaluation. That's understandable: Mexico has suffered economic crises in all four presidential transitions in the past 23 years. Confidence in the country's ability to avoid another peso crisis is so low that the Mexican Businessmen's Board recently urged President Ernesto Zedillo to transform Mexico to a dollar-based economy.

The business Establishment should calm down. Mexico is in much better shape than in 1994, when it was beset by political assassinations, a huge current-account deficit, and loads of dollar-denominated debt. Today, all signs point to a spirited but peaceful democratic contest. Even if the opposition wins, Mexico is unlikely to abandon its free-market course. And while the country still bears scars of the December, 1994, devaluation, Mexico is faring better than the rest of Latin America.

OIL HEADACHES. Consider how little Mexico has been affected by the global financial turmoil of the past 15 months. While Brazil and Ecuador were forced to devalue their currencies, Mexico's peso has strengthened. First-quarter corporate earnings are healthy, and the stock market is up 23% in dollar terms this year, the best performance of any emerging market. The country boasts $30.7 billion in foreign reserves. Inflation is at 15%, down from 52% in 1995. And interest rates on Treasury bills have dropped to 22%, from 48% in September 1998, when Asian flu hit Latin America.

Not all is rosy, of course. Oil prices are still low, and Mexico depends on oil for a third of its tax revenues. But after plunging to just $7.20 a barrel in 1998, forcing Mexico to reduce its budget, oil is back up above $10. Meanwhile, with rates close to 30%, midsize companies still can't afford to borrow from banks. And the country's strong currency is hurting some exporters. But in comparison to other emerging markets, Mexico is doing surprisingly well. Thanks to the North American Free Trade Agreement and years of economic reforms, Mexico is a dynamic exporter, with more than 85% of sales going to the robust U.S. economy. Mexico's stock market and economic growth closely track U.S. economic indicators.

Despite the strength, Mexico's corporate heavyweights have the jitters--and that's bad. "If enough people believe it could happen again, that's enough to cause a crisis," says independent economist Jonathan Heath. Few express their fears publicly, but in private Mexicans say they'll purchase dollars or shift savings overseas at the first sign of instability. They worry that the government will go on a dangerous spending spree to win votes--or that political upheaval preceding the elections will trigger a stampede from the peso. There is ample evidence that wealthy Mexicans and companies beat foreign investors to the exit door in 1994.

Commentary: Mexico Is Doing Fine--Despite What Business Thinks (int'l edition)

Mexican executives must realize that democratic elections are healthy, not dangerous. It won't be the end of the world if the opposition wins for the first time in 70 years, nor will it mean that the democratic transition has failed if the Institutional Revolutionary Party (PRI) holds on to power. Businesspeople should openly back the candidate of their choice, instead of maneuvering in the shadows. And they should publicly state they will work with whatever party wins. After decades of backing a one-party system, business must be an agent for change.

For Mexico's nervous business community, adopting the U.S. dollar isn't going to prevent a crisis. Mexico's previous devaluations were caused by election-year financial shenanigans. President Zedillo, whose own term in office began with an economic crash, is determined to avoid another crisis. He's controlling the budget and stretching out foreign-debt payments so that just $3 billion in public-sector debt falls due next year. Wise precautions--but Mexico's business class must do its part, too.

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