NOW that the dust may finally have cleared, Mexico is getting a candid, if discouraging, look at what it faces: severe austerity punctuated by interest rates as high as 50 percent.
In exchange for securing $20 billion in United States assistance to pay off short-term loans, Mexico's central bank was pressured to jack interest rates to recession-provoking levels. President Ernesto Zedillo Ponce de Leon was made to confront a potential political backlash by putting up revenues from its national oil company Petroleos Mexicanos (Pemex) to ensure that the loans will be returned.
``There is a price we must pay as a country - that's just the way it is,'' says Manuel Sanchez, a vice president at Grupo ICA, Mexico's largest construction firm. ``The bright side is that the United States is sending Mexico a sign of confidence, which will help to return credibility to our government and get us through this crisis.''
Even as details of the massive $52 billion international bailout package became public, lingering uncertainty over whether the crisis is over continued to drag down the peso and prices on the country's stock exchange. The Mexican government has pledged more financial reforms and revenue-raising privatizations. But restoring investor confidence remains elusive.
In recent weeks, Mexico boosters had been arguing that the peso's nearly 40 percent devaluation since Dec. 20 would help exporters and give domestic companies a leg up over foreign competition. But with short-term interest rates rising to more than 50 percent, many Mexican firms are likely to spend the coming months trying to avoid bankruptcy and make some profit.
``No one is going to be able to survive with these high interest rates,'' said Pedro Sanchez Mejorada of Transportacion Maritima Mexicana, the country's largest shipping firm.
At the weekly treasury bill auction held Feb. 22, the day after the package was signed, yields hit a precipitous 59 percent, a 19 percent jump over the previous sale. High interest rates, of course, can attract foreign money and thereby help stabilize the peso. But for business executives, current borrowing conditions are a horror story. Few are embracing Commerce Secretary Guillermo Ortiz's upbeat forecast of 0.5 percent real growth in national output. ``No project is viable under this financial scheme,'' says ICA's Mr. Sanchez.
The government is banking on the weaker peso to quickly boost exports and provide sufficient funds to cover loan payments.
In testimony Tuesday to the US Congress, Federal Reserve Chairman Alan Greenspan endorsed the Mexican strategy but called it ``a tricky one.''
A GOVERNMENT promise to cut spending is sure to make matters worse, holds Pedro Tello, an economist with the National Manufacturing Industry Council. Companies that incurred heavy debt prior to devaluation, or must buy such essential imports as machinery and primary materials, face the most difficult times since the crisis of the early 1980s.
``The interest rates are just one more ingredient to this bitter recessionary cocktail that we Mexicans are forced to take in this difficult year,'' Mr. Tello says.
Many banks will be hard pressed. An already grave situation of nonperforming loans, a national average of 9 percent of total loans, is likely to get worse, says Francisco Blanco, director of analysis at Arka, a Mexico City brokerage firm. Some bank analysts say that current accounting practices downplay nonperforming loan levels.
Salomon Brothers, a US brokerage firm, recently singled out Banco Serfin, Comermex, Banpais, and Banoro as having nonperforming loans near or exceeding combined equity and reserves. With foreign banks increasingly being allowed entry into the Mexican market, many analysts see mergers and even bank failures ahead.
With Pemex revenues going to a special Mexican account at the Federal Reserve Bank of New York as collateral against US loans, Mr. Zedillo and Ortiz will be under an intense light. Opposition parties are already accusing the government of having sacrificed national sovereignty to bail out incompetent bankers. Facing a conservative backlash within his own ruling party, and having failed to force the Zapatista rebels to negotiate, Zedillo could face further political instability.
According to the US loan pact, the government will be forced to limit money growth to less than inflation, raise $12 billion to $14 billion through privatizations, make the central bank's dealing more transparent, and restrain from the election-driven spending sprees that were partially to blame for the peso's devaluation.
Mexico's business community can only hope that foreign investment returns to the country, and with it the possibilities for growth. ICA's Sanchez, trying to put a positive spin on the economy, adds, ``Hopefully, the government is capable of implementing a real austerity program.''