Hard Choices for Mexico : Political Pressures on New President Trouble Creditors

Mexico’s next president, weakened by his relatively poor showing in the recent election, will find it extremely difficult to implement his best laid plans for economic growth and modernization, according to bankers and political analysts.

Carlos Salinas de Gortari’s bare majority victory--coming on the heels of a drop in oil prices and rising interest rates--has international bankers “sweating bullets” in fear that Mexico will unilaterally reduce payments on its $102.8-billion foreign debt.

What the Mexicans consider to be a democratic opening in their once-monolithic political system, American bankers seem to view as potential for political unrest. Although Salinas, 40, a Harvard-trained technocrat, was secretary of budget and planning in the current administration and the architect of incumbent President Miguel de la Madrid’s austerity program, the bankers worry that he will bow to pressure on economic issues from a strong leftist opposition or that he will suddenly adopt populist measures to improve his image.

Leftist challenger Cuauhtemoc Cardenas shocked the ruling party by winning at least 31% of the vote in the July 6 election after campaigning on a platform calling for a moratorium on debt payments and a halt to international oil sales. He opposed Salinas’ accelerated program to reduce the size of the federal government, sell state-owned companies and open the borders to foreign investment.

U.S. Bankers Worried

Cardenas and rightist candidate Manuel J. Clouthier are challenging the official results that gave 50.36% of the vote to Salinas, the lowest percentage ever for a candidate of the Institutional Revolutionary Party, which has ruled Mexico for the past 60 years. Many Mexicans believe that Cardenas actually won the election, only to have it stolen by officials of the PRI, as the ruling party is known from its initials in Spanish; that adds a legitimacy problem to Salinas’ troubles.

The vote is widely interpreted as a rejection of the government’s economic policies and of the party’s lock on power.

Salinas has said that the economy, stagnant for the past seven years, must now grow by 4% annually. During his campaign, he threatened to halt debt payments if they inhibit growth. Some bankers read his words as campaign rhetoric, but others take them more seriously, noting that officials routinely float the idea that they seek a 50% reduction in the annual interest payments of approximately $10 billion.

“This is creating fear in the hearts of bankers. We are all sweating bullets over this 50% reduction,” said a foreign banker who declined to be identified.

“Mexico has been the good guy all along. But now they are going to come to the table and say, ‘We reduced personal income, we fired people, we cut government spending and we don’t need any new money. Either you figure a way to reduce our debt burden, or we’ll do it for you,’ ” the banker said.

U.S. bankers say a moratorium or significant cut in Mexico’s payments would reduce the credit available in the United States and upset their financial statements, possibly throwing some banks into deep trouble. Mexican newspapers, meanwhile, point out that their government has made $60 billion in interest payments since 1982 without reducing principal on the debt.

While ruling out a moratorium for now, Mexican analysts say Salinas may make concessions to the left on the debt to gain the political strength he needs to follow through with the unpopular internal measures that threaten traditional sectors of his own party--unions and the federal bureaucracy.

The unions have long been controlled by the ruling party and have been a bastion of its strength. But in this election, many rank-and-file members abandoned the PRI to vote for Cardenas, himself a former PRI member and the son of one of Mexico’s most revered presidents.

Real Wages Erode

Salinas lost Mexico City, where the government is the largest employer, and apparently was rejected by unionized workers in state-run enterprises such as the telephone company, which Salinas plans to sell. In Congress, the PRI Mexican Workers Confederation lost 10 of the 49 seats for which it ran candidates.

Workers have seen their real wages erode by about half during De la Madrid’s administration, and about half the work force is under-employed or unemployed. A government wage and price control package has brought inflation down from 15% a month at the beginning of the year to 1.7% in July, but while that looks good to economists, to consumers it means prices are still going up.

Businessmen say they support the program to speed the opening of Mexico’s protectionist economy, but few seem to want competition in their own sectors.

Not only will Salinas have to negotiate with union bosses from his own party to make the changes he wants, but he will be the first PRI president ever to face a strong opposition in Congress.

“The economic policy will have to recognize the presence of an important opposition that will not be eliminated in a couple of months, but which is growing,” said Jesus Silva Herzog, the former Treasury secretary who resigned in 1986 after publicly raising the possibility of a moratorium on debt payments. Salinas last week named him to head a policy commission on foreign debt.

“The contractionist policies of the last six years cannot be maintained for another six years. Politically and socially, it is not possible. . . . (Salinas) has got to spend money on more socially oriented programs,” Silva Herzog said.

Concessions Needed

With Mexico likely to receive about $1.6 billion less in oil revenue than was expected this year and a fiscal deficit estimated by economists at $16 billion to $20 billion by year-end, Silva Herzog, like U.S. and Mexican bankers, sees debt payments as the only potential source of funds for health, education and other social programs.

“I don’t think a moratorium is the solution, but we are moving into a stage where we need . . . concessions (from creditors). That might be discounts, capitalization of interest payments, interest payments in local currency or an outright reduction in interest payments and debt,” he said.

While foreign banks are worried about the situation, they have shown no willingness to bite the bullet. They are presenting Mexico with proposals that include caps on interest payments and payments tied to oil revenues, but none of the offers so far contemplates a reduction of the amount of money that Mexico has to lay out, according to U.S. and Mexican bankers.

The bankers expect Mexico to make a new zero-coupon bond offer or another debt-reducing deal before year-end, although such a bond offer earlier this year was far less successful in reducing the debt than the government had hoped. One foreign banker said a new deal would set the stage to reduce the debt if it is successful or, if it failed, would allow Mexico to blame recalcitrant bankers and act on its own.

Mexican officials have tried to calm such speculation. At a meeting this month of the Mexican Bankers Assn. in Monterrey, De la Madrid ruled out a moratorium and said there would be no major surprises on the economic front for the remainder of his administration. For the bankers, no news was good news: De la Madrid’s predecessor, Jose Lopez Portillo, nationalized the banks during the final months of his government in 1982 in a last-ditch effort to improve his place in Mexican history books.

When De la Madrid took office, Mexico’s reserves had been virtually depleted. Last week, the government announced that reserves were about $11.7 billion--a healthy figure, but nonetheless, down from more than $16 billion in April. The $4.5-billion loss resulted from capital flight during the election period and lowered interest rates in Mexico. One economic observer said some dollars were used by the private sector to pay off a portion of its debt.