Peso Fall Marks End Of Mexican Economic Fiesta

MEXICO'S economy is like a once-rousing fiesta that, after dragging on a bit too long, crashes to a halt in a sudden and confusing brawl.

What President Ernesto Zedillo Ponce de Leon now must demonstrate to his ``guests,'' foreign investors and the Mexican people alike, is that he is up to putting the financial house back in order - and merits their confidence to accept another invitation in the future.

National address Monday

It's not going to be an easy task.

After what is being called the ``Christmas crisis'' in Mexico's financial stability, Mr. Zedillo plans a New Year's ``address to the nation'' Monday night to outline an economic plan for restoring confidence in the battered Mexican peso and placing economic growth on firmer footing.

But analysts who doubt the abilities of the Mexican president and his economic team, which is headed by Finance Minister Jaime Serra Puche, aren't sounding like reassured party guests.

``There is no plan to announce. The whole [Mexican] government is in a muddle,'' says Christopher Whalen, editor of the Mexico Report in Washington. ``The party that was paid for with supposedly low-cost debt is clearly over, but there's little indication Zedillo is ready to make the difficult decisions to get things moving again.''

Following an abrupt Dec. 21 decision to ``free float'' the peso, the Mexican currency lost 40 percent of its value against the United States dollar within a week before rebounding. But the peso plunge scalded the foreign ( primarily US) investors who had made the country's debt-financed development model work, and jolting already-shaken Mexican companies that had built up dollar-denominated indebtedness.

And as the peso tumbled, the economic cracks that were played down under President Carlos Salinas de Gortari - a ballooning current-accounts deficit, an unfavorable trade imbalance, decreased foreign investment, and absent domestic savings - have surfaced as serious fault lines.

Mexico's external debt rose to 40 percent of gross national product this year - or to 60 percent of GNP after the peso's fall -

while foreign reserves plummeted from $26 billion to less than $6 billion. Foreign investment is down sharply from last year's towering $15 billion.

Officials including Mr. Serra blamed the peso's instability on renewed rebel rumblings in Chiapas state and the jitters they were causing among foreign investors. Yet, the next day's decision to let the peso float free until settling at a realistic (and much lower) level against the dollar removed all guises of Zapatistas being Mexico's biggest problem.

Mexican analysts who had remained quiet while Mr. Salinas was still in office were joined by such foreign Mexico specialists as Massachusetts Institute of Technology economist Rudiger Dornbusch in ridiculing the thesis that Zapatista leader Subcommander Marcos was responsible for the peso fall. Blame really lies with the former president, they say, who resisted altering his policy of a fixed exchange rate with the dollar - even though factors ranging from rising US interest rates to lower foreign-investment levels dictated a change.

``Everyone wants to blame this on Chiapas,'' says Mr. Whalen, ``and I'll grant that [the situation there] is what set things off. But the true cause of Mexico's worst financial crisis in over a decade is the Salinas economic program that was fueled by foreign borrowing rather than growth.''

Yet while Zedillo keeps quiet about Monday's address, suggestions are filtering out that he may be ready to shift Mexico from the Salinas financial model. ``[Zedillo] was never convinced by a system that allows such high current-account deficits,'' says Sergio Sarmiento, a political analyst here, ``so I think we'll see him steering away from that.''

The Clinton adminstration is reportedly putting together a financial package to bolster confidence in the peso, in addition to the untapped $6 billion credit line Mexico has with the US. There's also speculation foreign banks may be allowed to expand more quickly in Mexico to shore up the financial system.

Mr. Sarmiento says that, after a post-devaluation discussion with Zedillo, he believes the president's economic program will offer ``no drastic change'' but measures to cut spending, fiscal regulations to encourage domestic growth and investment, and a plan to ``lower Mexico's dependence on foreign investment.''

Some analysts see this as a golden opportunity for Zedillo to set Mexico on a new course of domestically driven growth by telling Mexicans what was wrong with the past, and how he plans to fix it. The 40 percent devaluation, although it shrinks the value of dollar-denominated investments here and raises the specter of inflation, will also make Mexican exports cheaper and, thus, more competitive. And it makes Mexico's relatively low labor costs all the more attractive.

David Malpass, a Mexico analyst with Bear, Stearns & Co. in New York, says the first sign to watch for will be whether Mexico chooses to simply ``print money'' to cover the higher demand for pesos the devaluation will cause, or whether it opts to borrow to cover the cost.

The Mexican people and foreign investors are waiting to see how Zedillo chooses to clean up the mess. Observers worry the government's leaders haven't shown they're up to the task. ``There's clearly less [confidence] for the team than for the fundamentals of the economy,'' Sarmiento says.