Mexico's Economic Boom Fades Amid Worried Financial Markets

Delays in free-trade pact with US add to market jitters as president struggles to regain momentum

By , Staff writer of The Christian Science Monitor

A JITTERY Mexican stock market and the seemingly unending free-trade negotiations are some of the indications that President Carlos Salinas de Gortari may be entering the most challenging phase of his six-year term. How he and Finance Minister Pedro Aspe handle Mexico's economic bumps, analysts say, is likely to influence who will be the country's next president.

The immediate concern is that the stock market - one of the world's top performers last year - has taken two sharp hits, dropping to where it began the year. Last week it recovered some ground, but any extended capital flight from financial markets could set back Mr. Salinas's program. "We're looking at a very unstable stock market with no signs yet of good news," says Abel Hibert of Centro de Investigacion Econometrica de Mexico-Wharton Econometrics Forecasting Associates (Ciemex-Wefa).

Investor uncertainty is due to several factors:

Recommended: Could you pass a US citizenship test?

* Continuing negotiations on the North American Free Trade Agreement (NAFTA). Many observers - and participants - expected a deal by now. Mexican and foreign businessmen are pegging their high hopes on a well-defined, open trading environment. Even if NAFTA is completed this fall, a Democratic presidential victory may mean NAFTA will be revised - causing further delay - before United States congressional ratification is sought.

"This agreement is riding on the back of a deer now," says Rogelio Ramirez de la O, director of Ecanal, an economic consulting firm. He warns that delays in NAFTA may force the Mexican government to create additional incentives for foreign investors or risk them turning elsewhere.

* Slower than expected growth. Last year, the economy grew by 3.6 percent, leading to expectations of a 4 percent growth rate this year. But Mexico's No. 1 trading partner, the US, is having trouble climbing out of its economic slump, and economists say Mexico's growth rate this year is likely to be between 2.8 and 3.5 percent. Corporate earnings also have not met expectations.

* The "Ajustabonos" scare. A year and a half ago, the Mexican government began selling bonds which were a bet on inflation. Many banks and brokerage firms bought heavily earlier this year, but in the last two months the combination of a slower-than-expected economy, higher interest rates, and lower inflation has sent "Ajustabono" values south. Also, an investigation has been spurred by rumors that financial institutions were dipping into client funds to cover their losses.

What makes the fortunes of the Mexican financial markets so important is that Salinas and Mr. Aspe have been covering a growing deficit in the balance of payments, caused by fewer exports than imports, with foreign money. Last year's deficit of $13.2 billion is expected to swell to about $17 billion; it's predicted there will be just enough capital surplus to cover this year's deficit. "Salinas is running a trade deficit which is growing at a frightening rate. The whole thing is premised on cash flow," w arns Christopher Whalen, vice president of the Whalen Company, a Washington-based consulting firm.

If large numbers of foreign investors decide to take their money elsewhere, the government may be forced to dip into its dollar reserves to cover the deficit, which may in turn force a devaluation of the peso.

Most economists already agree the Mexican peso is overvalued now, but with fewer dollar reserves backing it, the case for a devaluation builds. "The peso can be maintained with appropriate inflows of capital but can't be maintained if capital inflows are halted for any reason," Mr. Ramirez de la O says.

While a devaluation may be the economically correct step, analysts say it may also be politically damaging. Salinas has worked hard to gain the confidence of Mexican and foreign investors, but a devaluation would shatter that trust and likely send investors to the exits. And Mexican citizens would certainly condemn a unilateral reduction in the value of their savings.

An economic debacle would likely boost the chances of opposition presidential candidates for 1994, while Aspe's presidential hopes would be dashed. Within the ruling party, the finance minister is one of the top three contenders for Salinas's mantle.

"Salinas and Aspe will move heaven and earth to prevent a peso devaluation," Whalen says. He argues a devaluation should occur perhaps at a moment of good news, such as the signing of NAFTA, rather than risk it being forced upon Mexico later.

Most analysts agree that these concerns are worst-case scenarios. Indeed, some economists say Mexico is on the right track. "They are doing everything they can and they're doing it very well. But there are some things you can't control," says Abel Beltran-del-Rio, director of Ciemex-Wefa.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...