Online Extra: Q&A with Mexico's Francisco Gil Díaz

The Finance & Public Credit Secretary talks about Mexico's economy and the possible impact of the terrorist attacks in America

For 20 years, Francisco "Paco" Gil Díaz, Mexico's Finance & Public Credit Secretary, was an economist at Mexico's Central Bank, finally rising to serve as a vice-governor. Then he became general manager of Avantel, a long-distance telecommunications company that's a joint venture between Banacci, Mexico's largest financial group, and WorldCom, before joining President Vicente Fox's Cabinet last December. Gil, 58, holds a doctorate in economics from the University of Chicago. He spoke with BusinessWeek Mexico City Bureau Chief Geri Smith on Sept. 14, three days after the terrorist attacks of the World Trade Center and the Pentagon, to discuss the events' economic impact on Mexico. Here are excerpts from their conversation:

Q: Even before the terrorist attacks, Mexico's economy was suffering the effects of the U.S. slowdown. At the beginning of this year, officials expected the economy to grow 4.5%. Now it's looking like 1% or less. Are things going to get worse now?

A: We've been hit particularly hard because what we export, which are durable goods, have the greatest cyclical swing, both on the upside and on the downside. We export a lot of computers, televisions, and household appliances.... We'll be hit pretty hard there.

The decline is going to be a sharp one, but the rebound is going to be good, too. Sooner or later, you might have expected that we'd suffer from lower growth in tourism. Now, with what's happening in aviation in the U.S., I suspect you are going to see thousands of cancellations.

Q: What will be the main impact on Mexico?

A: Tourism, for one. And it's going to increase the cost of foreign trade, because if you have less air travel, you have less air capacity for cargo. Our airport here, in Mexico City, is the second-largest merchandise customs entry and exit point for air cargo in Mexico. You see very few cargo planes here because 80% of air cargo [has gone] in and out on passenger planes. [Despite new restrictions on sending cargo on passenger flights] that kind of cargo will continue to go in and out. Timing [of deliveries] is very important, and it's going to be more unpredictable, so it's going to cost more in terms of production costs.

Q: For some time now, Mexico has stood out among emerging markets because its economy was in good shape and it was closely linked to the booming U.S. economy. But now some brokerages are saying that closeness to the U.S. is a liability.

A: This isn't a Mexican downturn linked to the States -- it's a global downturn. You could also argue that being linked to the States, you have an immediate linkage between demand and production. Because of low inventories, you go down quickly when demand goes down, and you go up quickly when demand goes up. That didn't happen when you had large inventories. Just as we started lowering our exports right away when demand decreased in the States, the rebound is also going to be a very good one.

Q: If the U.S. goes to war, how would this affect Mexico's economy? Would that lead to greater exports of strategic minerals or oil?

A: Wars now are so technical...that it's not the kind of war economy it used to be. Except perhaps for energy consumption -- it might increase the consumption of oil [which Mexico exports]. I'm not even sure that a war situation would mean a substantial increase in military expenditures, because what we are talking about are localized targets in some Middle Eastern countries. It wouldn't be anything on the scale of Korea or Vietnam.

Q: What about additional expenditures in Mexico for security reasons? There is greater vigilance along the 2,100-mile-long U.S.-Mexico border as both countries keep their eyes open for possible escaping terrorists.

A: The Department of Defense here [and] the preventive police...are taking all kinds of additional precautions now. But it means a reshuffling of the budget. It doesn't increase our budgetary expenditures.

Q: How closely in contact are you with your counterparts in Washington, to work together during the economic slowdown?

A: We have a lot of contact and different kinds of collaboration, trying to understand what's going on in the U.S. economy. If the U.S. doesn't recover quickly, it is going to be hard. The same goes for the world economy. Everybody is slowing down.

Q: Exporters believed the peso is overvalued by as much as 20%. They say they're losing competitiveness. Recently, the peso has slipped slightly, but they still claim the government is determined to keep a strong peso.

A: [The weaker peso] will help some and hurt others. People assume we're going to go one way or another in the [peso] market or try to influence interest rates. You know that we didn't do anything to try and appreciate the peso when it went above 10 pesos [to the U.S. dollar], and we didn't try to do anything recently when it went below 9 pesos per dollar, so I think that's very good proof that we are letting it float freely.

Q: How concerned are you over the recent big increases in salary contracts, such as the 14% hike [nearly triple the expected inflation rate this year] granted to 12,300 workers at Volkswagen this month after a 17-day strike?

A: I think it's a very serious problem. The salary increases that we've been witnessing, if you look at them in dollar terms, are exceedingly large. If you look at them in terms of peso purchasing power, maybe they're not so high, but the peso has been appreciating in real terms. Volkswagen last year granted an 18% raise. This year, including fringe benefits, it was 14%. The compounded increase [over two years], then, was about 35% in dollar terms. If firms and the government continue to reach settlements quickly in order to avoid strikes, we'll quickly price ourselves out of the markets.

We've already lost 450,000 jobs [this year], and it is due mostly to the decline in exports. But some of the losses are because of the [high] wage settlements. Looking to the future, the number of jobs that may be lost because of wage settlements will be greater.

Q: You're under a lot of pressure to stimulate the economy.

A: Everybody, except for the PAN [President Fox's National Action Party], mentions that we should have an emergency countercyclical economic plan. That could have been done when Mexico had ample recourse to foreign credit, but it doesn't have that anymore. It could be done when information on our national accounts had a long time lag. But now, you have economic analysts poring over Mexican data by the minute -- and they are well-informed, very good analysts. The minute they see us following the path of demand stimulation, we would see a negative reaction in the markets.

[Some say] the government is being cruel and orthodox because it doesn't have the "social sensitivity" to stimulate production and employment. [But] if we started financing deficits with debt, whatever [economic] stimulus we got would [come at the cost of] crowding out private investors. It wouldn't be an economic stimulus -- it would mean a rise in interest rates. Why should we get into that?

Q: You have been trying to push through an ambitious tax-reform program to raise more revenue for social programs and to reduce dependence on oil revenues, which provide one-third of the tax base. But Congress is balking at your proposal to levy a 15% value-added tax on food and medicine, saying it will hurt the poor the most.

A: It's not easy to convince Congress of the need for reform. But the comments and suggestions we have been getting from the [congressional] working groups have been encouraging. We should be able to pass the reform within one and a half months. [It may mean] a watering down of the value-added tax, but I think we'll get all the revenue we need.

Q: Thanks to the North American Free Trade Agreement, the economies of Mexico and the U.S. are "married" -- Mexico now sends 88% of its exports to the U.S. But it has taken most of this year for policymakers here to realize the U.S. slowdown would seriously affect Mexico's economy.

A: Well, [it's because] consumption, just like in the States, kept on going in Mexico, and I don't know why. In the States, the explanation is that people were refinancing mortgages because of the high real estate values, refinancing them to finance consumption. Here [in Mexico], what people did was decrease their savings. Private consumption [in Mexico] was very high at the beginning of the year, and it has been coming down lower every month.

[In other areas, Mexico closely followed U.S. trends.] Mexican investment started decreasing right away: You could see capital expenditures starting to decrease as of the first quarter of this year, so it seems that at least the private investment was very well synchronized with what happened in the States, and perhaps the reason is that [most] private investment has to do with exports, and our exports started weakening immediately. Industrial production in Mexico started falling in November of last year.

By Geri Smith

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