Mexico Facing Worse Inflation : Economic Aftershocks Aggravate Debt Crisis

When First Lady Nancy Reagan delivered a $1-million check to Mexico after last week’s giant earthquakes, officials welcomed the gift as a symbol of international support for this shattered capital.

More skeptical observers, however, saw the donation instead as a symbol of Mexico’s shattered economy: The $1 million, they muttered in private, equals about an hour’s-worth of interest on Mexico’s growing foreign debt.

“She may as well have taken the check with her on the plane back to the United States,” said a local newspaper and radio commentator.

Long before the Sept. 19 earthquake, Mexico’s economy was in crisis, suffering from a 60% annual inflation rate, high unemployment, falling prices for its main export, oil, and a $96-billion foreign debt. Interest payments alone are $14 billion a year.

The government, short of dollars, already had been forced to reschedule payments on half of the debt, and, on the day of the first earthquake, the International Monetary Fund announced that it would suspend payments on $450 million of new loans to Mexico because the country had not lived up to earlier agreements.

Now, say economists and government officials, the crisis is more serious than ever. Economists warn that the cost of reconstruction will add to the country’s unwieldy debt, distort prices and kick off an inflationary spiral.

‘On Razor’s Edge’

“It would not be an exaggeration to say that the economic panorama has changed completely since the earthquake,” said Jaime Serra Puche, director of the Economic Studies Center at the prestigious College of Mexico. “We are on the razor’s edge.”

The Sept. 19 quake, registering 8.1 on the Richter scale, killed nearly 5,000 Mexicans by official count, injured at least 11,000 more and left thousands homeless. It leveled or damaged more than 1,000 buildings, damaged 25% of the city’s drinking water system, knocked out international communications and ruptured scores of city streets and overpasses.

Among the collapsed buildings were seven tourist hotels, 10% of the city’s schools and five hospitals, including the advanced 2,000-bed Medical Center.

“Once the shock has passed and once the rescue of possible survivors and of the dead is complete, the real problem is to rebuild the city,” said presidential spokesman Manuel Alonso.

In order to do so, Alonso said, the government is calling for “understanding and flexibility” from the international banking community--a euphemism for more time to pay the debt, perhaps even a short moratorium.

New Budget Priority

The government also will redirect a large portion of its current budget to reconstruction, postponing other badly needed public works and social programs.

Alonso did not rule out the possibility that the government might resort to such unpopular moves as salary and price freezes, or increasing the country’s oil production from the longstanding level of 2.5 million barrels a day.

Appraisers are busy tallying up the physical damage, but no one yet knows the true cost of reconstruction and direct and indirect damage to the economy. Economists and engineers throw out estimates ranging from hundreds of millions of dollars to $5 billion.

Some of the indirect costs of the earthquake will not be measured for months, when the long-term effect on the important tourism industry becomes clear. After the second quake struck on Sept. 20, thousands of tourists hastily packed their bags and fled the capital.

Hotel Outlook Bleak

At the 850-room Maria Isabel Sheraton, director Aureliano Torres Izabal said the occupancy rate dropped from 70% to 55% and that most of those who checked in were journalists and rescue workers who will soon be leaving.

Smaller pieces of the reconstruction costs are perhaps easier to figure. For example, just to rebuild the Medical Center, the most advanced medical complex in Mexico, will cost about 10 million pesos a bed--or $500 million for the whole project, according to Alonso.

Insurance adjusters say a new office building costs about 80,000 pesos ($2,000) per square meter. Hundreds of high-rises were among the damaged and destroyed buildings.

Alonso said the government has imposed a moratorium on public works projects for at least two months until officials can assess the damages. In the meantime, “Not even a bridge across the street” will be built, he said.

Victor Manuel Bernal Sahagun, director of the Department of Trans-National Studies at the National Economy University of Mexico, said a conservative estimate of reconstruction costs would be $4 billion to $5 billion, just to replace the buildings, the services infrastructure and lost equipment.

Spending that money, he said could set off an inflationary spiral.

“If you inject this type of money into the economy, and there is a demand for credit and withdrawal of deposit, it will have an inflationary effect in the short and long term,” Bernal said.

Serra, of the College of Mexico, said the government will have to offer tax breaks and subsidies to people to rebuild housing and businesses or to move away from the capital, thereby further reducing the public bank account.

Serra added, however, that the tragic earthquakes may prove to have some positive effects on the economy.

“There’s a process of solidarity that puts us in a situation where people are willing to cooperate,” he said.

Internally, he said, that may make people more willing to accept austerity measures they would not have accepted before the quake; internationally, it may make bankers more lenient with Mexico.

“If there ever was a moment to impose price freezes, now is the time,” he said.

Although thousands of people were put out of work by the earthquakes, Serra said that once reconstruction begins, creating more jobs, there should be a temporary reduction in unemployment.

No Sign of Leniency

International creditors, meanwhile, could give Mexico a break on its payment schedule without setting a precedent for other debtor nations.

“This is a perfect situation for creditors to save face. They can see Mexico can’t pay because of its priorities and they can stop collecting,” he said.

So far, there is no sign of such leniency, but major multilateral lenders have agreed to disburse quickly loans that already were in the pipeline to Mexico.

World Bank President A.W. Clausen has promised the Mexican government $300 million in previously approved credits for potable water works and urban transport services. Antonio Ortiz Mena, president of the Inter-American Development Bank and a former Mexican finance minister, flew here last Saturday and announced that $800 million in approved loans would be made immediately available for the construction of new schools, hospitals and other public services.

The day after the earthquake, International Monetary Fund Director Jacques de Larosiere sent a telex to President Miguel de la Madrid saying the IMF “stands ready to assist your country to the fullest extent possible.” Discussions of an emergency disaster loan are thought to be continuing.

Alonso said the government has received about $2 billion--including the check from Nancy Reagan--in gifts of emergency aid. He said he expects more aid from Mexican and U.S. fund drives, such as the Spanish International Network telethon to be held in Los Angeles this weekend.

An 8-day-old infant is rescued after six days in rubble. Page 26.