Why Mexico Keeps Hearing The Refrain 'Economic Crisis'

Capital needed to fuel growth is lacking, so another bust may loom

IN his annual state of the nation address this month, Mexican President Ernesto Zedillo Ponce de Len promised "a new era" in which Mexico would "avert the recurrent crises" that have plagued the country's economy for two decades - one of which greeted Mr. Zedillo when he took office in December 1994.

Probably nothing would make Mexicans happier, but many economic experts scoff at Zedillo's pledge: Little has been done that will change the country's pattern of periodic currency devaluations accompanied by spurts of hyperinflation and devastated buying power, they say. Another economic crisis is likely before the end of Zedillo's term in 2000, they add, perhaps as early as next year.

"There will be another crisis. The question really is how long it can be postponed," says Jess Estban Macias, an economist at Monterrey Technological Institute in Mexico City.

A variety of factors lead Mr. Estban and other economists to their conclusion, but all of them single out one basic flaw in Mexico's financial system that will sooner or later make another crisis inevitable: the lack of enough pesos at home to allow the economy to grow at the rate Mexico requires - at least 5 percent - to get ahead.

"The problem is a lack of capital. It's a structural financial problem," says Rodolfo de la Torre, an economist at Mexico's Autonomous Technological Institute in Mexico City and director of Trimistre Economica, an economic review focusing on Latin America. "Until our internal savings rate makes financing a 5 to 6 percent growth rate possible, anything else will be insufficient to address the problem of recurring crises."

Not all economists agree that a new financial mess is unavoidable. "I don't think it's inevitable at all," says Morris Goldstein, a senior fellow at the Institute for International Economics in Washington. Noting that Mexico has an improved current-account balance and no longer has an onerous "huge overhang" of maturing short-term foreign-investment bonds, he says the "prospects for a crisis are much less than in 1994."

Mr. Goldstein, author of new book on private-capital investments in emerging markets after Mexico's 1994 emergency, agrees that savings rates are very important and need to be addressed by Mexico and most of Latin America. But he calls this a "medium-term problem" that doesn't mean a new collapse is "around the corner."

Mr. de la Torre stops short of predicting a crisis and peso devaluation as early as next summer, after mid-term elections in Mexico. But he says Mexico will have to turn to foreign capital sources, as it has in the past. And despite Zedillo's pledge last year to seek a "different, more stable kind of foreign investment," foreign investment remains largely volatile - a roller coaster since the late '70s.

"At some point there will be pressure for foreign investment to leave the country," de la Torre says, "and then we would again face a possible crisis scenario."

Mexico's 1994 trade deficit of $18.5 billion turned into a $7 billion surplus in 1995, as the economic slump put imports into a tailspin and the peso devaluation made Mexican exports cheaper. But already in 1996 that surplus is falling as Mexico imports more. The decline is likely to continue as internal demand revives.

Some economists say Mexico is in fact already running a deficit, if the maquiladoras, or foreign-owned assembly plants concentrated on the northern border, are left out of the trade equation.

"The government was very happy to announce a 7 percent second-quarter growth rate, but without the assembly plants it would have been about 1 percent," says Christopher Whalen, editor of The Mexico Report in Washington. "Those plants do little for Mexico's financial situation.... They don't put cash in the Bank of Mexico."

Right now Mexico is once again enjoying a "healthy influx of [foreign] investment," Mr. Whalen adds. But he sees that as largely driven by a Wall Street focused on Mexico's macroeconomic gains, and by investors bringing in assembly plants that operate in dollars and do little to expand Mexico's financial base. "The structural changes Zedillo should be looking at have not been done," he says.

Zedillo has won some praise for recent pension reforms that may boost Mexico's savings rate. But analysts agree that the capital picture will not brighten much as long as conditions for saving and borrowing money are more attractive outside the country (primarily in the United States), and until skittishness about the country's political stability is laid to rest.

That's a long-term process, analysts say, that will include completing Mexico's democratization and building back a middle class devastated since the early '80s.

Among other steps analysts say Mexico should take to end the cycle of crises is a cut in the value-added tax, which was raised to 15 percent last year, and currency links with the US dollar.

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