Mexican Investors: So Little Faith

They're fretting about a hot economy as Zedillo's term ends

Each July, Mexican radio waves are saturated with jingles advertising the annual storewide promotion at Comercial Mexicana, a national supermarket chain. This year, store management had better make sure the aisles are well stocked. Consumer demand is booming, abetted by rising employment and falling inflation. June sales at the chain jumped 9.2%. Now, the euphoria generated by Vicente Fox's victory in the July 2 presidential election promises to lift shoppers' spirits even higher.

Many investors seem just as thrilled. In the days since Fox's decisive win, they have pushed the peso to its highest level, 9.45, since early May. That's a boon for Mexican shoppers, since a strong peso makes imported goods cheaper. Their spending is powering an economy that grew at a blistering annual rate of 7.9% in the first quarter. But some are fretting that all of this may be too much of a good thing. After all, since 1976 Mexico has never made it through a presidential transition without a devastating devaluation.

The last peso crash, a few weeks after President Ernesto Zedillo took office on Dec 1, 1994, caught Wall Street by surprise. That's why even optimistic observers are looking out for curves ahead. "Overheating is a legitimate worry," says F. Javier Murcio, director of Latin America economic research at CS First Boston in New York. "But this time I'm happy to see the fiscal and monetary authorities are conscious of it."

Indeed, the Zedillo administration is doing its best to reassure investors that the economy is under control. On July 10, Finance Minister Jose Angel Gurria held a press conference to announce that the government had renewed and expanded international credit lines of $26.5 billion through 2001 to protect the peso against any chaos in financial markets. "We'll do whatever is necessary so there is no overheating, no pressure on prices," he told reporters.

VOWS OF RESTRAINT. The government is sticking by its projection of 4.5% economic growth this year, despite Wall Street estimates as high as 6.5%. Analysts warn that Mexican consumers' growing appetite for imports must be balanced out by strong exports. Otherwise, the current account deficit could widen to dangerous levels. Also worrisome is the possibility of a slowdown in the U.S., which takes in more than 80% of Mexico's exports. So investors will be looking for other confidence-building moves. They'll want proof that the government is fulfilling its pledge to rein in spending after a startling 15% spike in the first quarter.

Aides to Fox are also promising restraint. Fox's chief economic adviser, Luis Ernesto Derbez, has pledged that the fiscal deficit in 2001 will be just 0.5% of GDP, smaller than the 1% expected this year. "That will send everybody a clear message that we are ready for a slowdown of the U.S. economy and even a drop in oil prices," he says.

Still, investors are bound to remain jittery until well after the transition of power in December. Only then will they be convinced that Mexico has finally broken its devaluation curse.