Political Turmoil Roils Mexican Economy

With interest rates falling, low inflation, and NAFTA's passage, this was to be a good year economically for Mexico - but then came the storms, including the assassination of a presidential candidate

LIKE survivors of a tornado warily eyeing every passing cloud, local and overseas investors are uneasily watching the Mexican economy.

``A couple of clients have called a halt to projects,'' says Juan Carlos Escamila, an architect who is remodeling some of the finest homes in Mexico. ``They're sitting on their money until things quiet down.''

After near-recessionary conditions in 1993, this was supposed to be a ``blue skies'' year for Mexico. Interest rates fell, inflation slipped to single digits, and the North American Free Trade Agreement (NAFTA) kicked in to provide foreign investors with a clear, long-term trading regime.

But then came the storms. Political events, including the Mayan Indian uprising in January, the kidnapping of a prominent banker, Alfredo Harp Helu, in mid-March, and the assassination of the ruling party presidential candidate Luis Donaldo Colosio on March 23, have combined to give investors the jitters.

An estimated $5.2 billion of capital has fled the country since Colosio's death, says Jorge Salim, president of the Mexican Association of Money Exchange Houses.

The Mexican stock market has tumbled to its lowest level in five months; the peso has lost 8.8 percent of its value against the dollar in the first three months of this year. To stem the outflow, the Mexican government is hiking interest rates on treasury certificates. The 28-day certificates have bounced from a February low of 8.8 percent to 14.58 percent in just seven weeks.

Government officials and international bankers insist that Mexico is being battered by a temporary confluence of factors that will soon disappear, leaving the positive long-term outlook intact.

``Mexico isn't in a situation of economic or financial instability. The nervousness of the markets is temporary,'' World Bank vice president Shahid Javed Burki told Mexican reporters last week. Recent events ``don't alter the World Bank's confidence in Mexico.''

Finance Minister Pedro Aspe Armella told bankers and businesspeople at the Inter-American Development Bank's annual meeting in Guadalajara lask week that ``there will be no turns nor detours in the economic policy,'' in spite of the ``painful, difficult, and uncertain situation of the first quarter of 1994.''

The Mexican government still has plans to reactivate the economy (real gross national product was up 0.4 percent last year), while maintaining fiscal spending in the black and bringing inflation in at 5 percent. Buttressing its image amid the uncertainty, Mexico's Trade Ministry announced April 12 that 33 companies (including Chrysler Corporation, General Motors Corpora- tion, Ford Motor Company, and J.C. Penney) plan to invest $6.1 billion in Mexico this year.

Geoffrey Dennis, director of research for emerging markets at Bear, Stearns & Co. in New York, is one of the few analysts who is still bullish about Mexico's economic growth this year. ``We're sticking to 4 percent growth,'' Mr. Dennis says. ``The only thing wrong now is the high interest-rate level. Taking the year as a whole, there's no reason we shouldn't see lower interest rates when the political situation stabilizes.''

Dennis's optimism is based on a forecast of strong government spending and rising exports. Economists agree that, because it is an election year, government spending is increasing. The Chiapas uprising has prompted the government to bolster development expenditures even further. Added to that is the expectation of continued 4 percent growth in the United States economy, the No. 1 destination of Mexican exports.

The key question, Dennis says, is when interest rates will come back down. He says he expects progress in the next two to three weeks. If rates stay up beyond July, economic growth will slip, he says. For 1994, economists here were expecting a strong second half that would produce an annual real growth rate of 3 to 3.5 percent. Now the consensus is 2 to 2.2 percent - less than the population growth rate.

``There's a lot of uncertainty on the political front and the government has to compensate investors with a premium - higher interest rates,'' says Jonathan Heath, chief economist at Macro Asesoria Economia, a Mexico City consulting firm. He predicts that interest rates will stay at current levels until after the August presidential elections.

Despite the troubles, Mr. Heath, like most economists, says he does not expect the peso to be abruptly devalued. The Mexican goverment has slightly more than $24 billion in reserves, plus a $6 billion US credit line to support a possible run on the currency.

Colosio has been replaced by his campaign manager and former education minister Ernesto Zedillo Ponce de Leon as the ruling party's presidential candidate. Although Mr. Zedillo's credentials as a free-market economist and technician in the mold of President Carlos Salinas de Gortari are welcomed by the business community, he has never run for public office. The ruling party, furthermore, has been divided and demoralized by the assassination of its candidate. There is speculation - but little evidence - that members of the ruling party or the Salinas government are somehow behind Colosio's murder.

In southern Mexico, the Chiapas rebels remain armed; they occupy about one-quarter of the state. Land takeovers by campesinos (peasants) supported by the rebels is another source of unrest. Ranchers and coffee plantation owners threaten their own uprising if peasants are not removed soon. Cattlemen estimate that they have lost more than $100 million in revenues and destroyed property since the start of the rebellion on Jan. 1.

``Mexico's long-term prospects for low inflation and exchange rate stability are good,'' says economist Roberto Salinas-Leon of the Institute for Free Enterprise Research in Mexico City. ``But the international investment community needs to see a demonstration of civil order being restored, such as dealing with the Zapatista [rebel] army. If we have a civil war in Chiapas, then interest rates will go so high as to crush all growth or we'll have to devalue'' the peso.

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