Trouble and Trading : Mexico Reform Has Balancing Act With Rebels, Wall Street

It’s a long way from the jungles of Chiapas in southern Mexico to the carpeted offices of Wall Street, where international traders make judgments on financing for Mexican industry.

But it is on Wall Street that the Indian uprising against the Mexican government, which has claimed more than 100 lives in the past week, is having its most important economic impact, because it is arousing the concerns of credit rating agencies.

Mexico needs the approval of those agencies--Moody’s, Standard & Poor’s, Duff & Phelps--for its government and individual companies to be able to borrow at reasonable rates, a most important consideration for a country that borrows almost $20 billion a year--roughly 6% of its total economy--to finance development. If Mexico could gain a higher investment rating, it could qualify for international pension fund investments, which would put its industries on the road to world-class status.

Until last week, Mexico was on its way. Enthusiasm for the economic reform policies of President Carlos Salinas de Gortari and the North American Free Trade Agreement had made the country a bright hope of the investment community.

But the violence was a wake-up call, a reminder that Mexico is still a poor, developing country with an economy characterized by vast income disparities, a fledgling industrial base and a system of agriculture that historically has proved a source of social and economic difficulties.

Wall Street has not turned off, but it has turned cautious. “These events would make anyone take notice, but we are encouraged by Mexico,” says David Roberts, senior analyst of Duff & Phelps. “We would like to see more exports to reduce the trade deficit and more internally generated capital rather than a continuing buildup of debt,” says Kristin Lindow, senior analyst with Moody’s Investment Service. Mexico’s investment rating will not be upgraded anytime soon.

“Their caution is justified,” says Sebastian Edwards, chief economist for Latin America at the World Bank. “But caution should be accompanied by more knowledge and understanding. It would be disastrous if financial markets turned off Mexico now, because Salinas’ reform program is designed to remedy the economic troubles that are behind the violence.”

What’s really going on in Mexico, and what’s the outlook?

The uprising, first of all, is occurring in the country’s poorest region, inhabited by more than 3 million people, most of whom retain the Mayan culture, and by tens of thousands of refugees from Guatemala and elsewhere in Central America. Where per-capita income for most of Mexico’s 85 million people is about $3,000 a year, people in Chiapas live at a subsistence level of about $230 a year.

Chiapas has been hurt by the worldwide decline in coffee prices in recent years and by the traditional Achilles’ heel of the Mexican economy: agriculture. Mexico, a country once characterized by vast landed estates, is a place where land reform never quite worked. The distribution of land to the peasantry from the revolution of 1910 to the early 1930s resulted in small farmers living on uneconomic, one- and two-acre plots called ejidos.

Moreover, custom and regulation said ejidos could not be sold. So agriculture, which helped form capital and family wealth in the United States and other countries, has not contributed capital to the Mexican economy. One of Salinas’ reforms is to allow ejido owners to sell their property, but in Chiapas, this has been misunderstood and in fact has contributed to the unrest, says Luis Maizel, a La Jolla-based investment manager currently traveling in Mexico.

As a result of agriculture’s failure to serve as a source of capital, Mexico’s attempts at economic development have been characterized by boom and bust--development interrupted when credit became overextended and was cut off, as happened in the 1980s after the oil boom turned into the Mexican debt crisis.

The economy’s current growth began when Salinas came into office in 1988 and opened Mexico to world markets and global competition. He privatized state industry and, reckoning that the only way Mexico would develop would be in partnership with the United States, concluded the NAFTA agreement, which went into effect Jan. 1.

Salinas’ policies have improved the Mexican economy: Inflation has dropped to 8% and is headed for 5% this year; Mexico’s high birthrate has been declining for several years. The outlook, in other words, was good heading into 1994, an election year when Salinas will leave office, probably to be replaced by Luis Donaldo Colosio, the current secretary of social development.

“And nothing has happened to seriously disturb that outlook,” says Abraham Lowenthal, director of the Center for International Studies at USC. “The unrest in Chiapas doesn’t mean the country is falling apart.”

International investors seem to agree. D.A. Campbell & Co., a Los Angeles investment firm specializing in Mexican issues, saw little U.S. selling of Mexican stocks in recent days. And Salomon Bros. in New York found similar patience among investors. “The bottom line is the country and the good Mexican companies have not changed,” says Juan Carlos Garcia, a Salomon research analyst.

But the country has changed. “Just look at the official reaction to this uprising,” says World Bank economist Edwards. Mexico is a country that has known terrible violence in its history--its revolution was so bloody that leading groups finally compromised in the 1930s on a single party, which has ruled the country to this day. In 1968, the government of President Gustavo Diaz Ordaz summarily shot student demonstrators in Mexico City.

This time it’s different. The Mexican Army initially went at the Chiapas rebels with guns blazing and bombs falling. But with Wall Street looking on nervously, Salinas’ government quickly adopted a more accommodating stance. This week, it replaced the controversial governor of Chiapas with a human-rights administrator, is offering to negotiate with the uprising’s leaders and has pledged to increase social welfare funds for the region.

It’s still a long way from Mexico to Wall Street, but the distance is getting shorter.

Mexico’s Financial Uprising

International credit experts, aroused by the violence in Chiapas, also are concerned with the build-up of public and private borrowings by the Mexican government and industries. Those borrowings are shown by a burgeoning current account deficit, which has tripled since 1990 as Mexico has sought funds to finance its economic development.

Year & Current Account Balance (in billions of current U.S. dollars): 1970: -$1.19 1971: -0.93 1972: -1.01 1973: -1.53 1974: -3.23 1975: -4.44 1976: -3.68 1977: -1.60 1978: -2.69 1979: -4.87 1980: -10.74 1981: -16.05 1982: -6.22 1983: 5.42 1984: 4.42 1985: 0.40 1986: -1.77 1987: 3.82 1988: -2.92 1989: -6.09 1990: -7.11 1991: -13.79 1992: -22.81 1993*: -21.14 1994*: -25.41

* Projected

Source: Banco De Mexico

Researched by ADAM S. BAUMAN / Los Angeles Times