Battered Bolsa Takes Yet Another Pounding : Mexico: Central bank’s rate hike delivers new blow to Latin America’s largest stock market.

It’s been a tough year for the Mexican stock market, and it’s getting worse.

Battered by the Chiapas rebellion, the kidnaping of a prominent banker and the assassination of the country’s leading presidential candidate, the market’s Bolsa index has plunged more than 30% in dollar terms since Jan. 1, more than any major international exchange.

On Wednesday, the impact of another factor in the market’s slide was evident. The Bolsa fell 5.2%, or 107.44 points, to 1,957.33 after the Mexican central bank announced that the interest rate on Mexico’s bellwether 28-day Cetes, or treasury bill, soared 3.42 percentage points to 18% at the weekly auction, the highest level since November, 1992, and up from 8.8% just two months ago.

The central bank has been lifting its treasury bill rates since late February to stem a massive flight of jittery investors from Mexico, an exodus spurred in part by the March 23 assassination of Luis Donaldo Colosio.

Even analysts who see the higher rates as a short-term phenomenon said Wednesday that they fear Mexico is running a big risk in raising rates so high. If prolonged, the high rates could reignite inflation, peso instability and the financial turmoil that laid waste to Mexico’s economy in the 1980s.

Others such as Nora Lustig, senior fellow at the Brookings Institution, say the chances of renewed hyper-inflation are low because of Mexican President Carlos Salinas de Gortari’s fiscal reforms. She insisted, as did others, that the spike upward is due as much to the recent rise in U.S. interest rates as internal events in Mexico. The U.S. interest rate hikes have also fueled a slide in the U.S. markets.

In any case, uncertainty and turmoil are bound to prevail in the Mexican market--Latin America’s largest--until the presidential election in August and the new leader lays out the nation’s course for the next six years, said Jonathan Heath, chief economist at Macro Asesoria Economica, a Mexico City-based think tank.

Until then, foreign investors will remain fearful of further trauma, such as a recurrence of peso devaluations that historically have coincided with Mexican elections, Heath said. Investors are also trying to make sense of a murky political situation marked by Colosio’s assassination and the peasant uprising in Chiapas.

“Fundamentally, there is no reason for what is happening, this deterioration in the stock market. So what we may have is an unfortunate case of a pessimistic self-fulfilling prophecy,” said Abel Beltran del Rio, president of Cie mex-Wefa, a think tank in Philadelphia that follows the Mexican economy.

By making the treasury investments more attractive, the Mexican government hopes to compensate foreign investors for their fears about Mexico’s future. “The Banco de Mexico (central bank) is just giving foreign investors a better option,” a Mexico City securities analyst said.

Beltran del Rio estimated the outflow of foreign capital at $6 billion since the Colosio assassination. One foreign investor who has already headed for the border is Gilman C. Gunn, senior manager of Keystone Fund for the Americas. Gunn reduced his fund’s Mexico holdings to 5% from as much as 35% at the end of 1993.

A continued drain of foreign capital would hurt Mexico because outside funds are critical to its internal growth. An exodus of foreign capital would also mean a huge sell-off of pesos. Part of Salinas’ economic strategy has been to keep the peso within a certain range of the dollar to ensure foreign investors of stability.

* DOWNWARD SPIRAL: Charting the Bolsa’s precipitous decline. D6