MEXICAN FINANCIAL UPHEAVAL : The Peso--Profit and Pain : Business Impact: Foreign Investments, Confidence in Country’s Economy Shaken

The Mexican fiscal crisis has eroded the value of dozens of U.S. mutual funds and prompted American firms to re-evaluate their investment plans, undermining international confidence in Mexico’s economy less than a year after the signing of a free-trade pact that brought high hopes for a new era of prosperity.

A wide range of foreign investors--ranging from corporate giants such as Ford Motor Co. and Wal-Mart Stores Inc. to individual mutual fund investors--have been shaken by the surprising devaluation of the Mexican peso, which has dropped more than 30% in value against the U.S. dollar in only two days.

“There is no longer the trust” in the Mexican market, said Carlos J. Valderrama, who advises U.S. and Mexican firms on partnerships and business deals. “Some clients who were planning to invest in Mexico indicated to me that they will hold off for a while.”

On Thursday, the peso continued to plummet after the Mexican government said it will no longer control the value of the currency, instead allowing it to float freely against the dollar.

Because of fears that the devaluation might damage the Mexican economy, the turmoil in currency trading quickly spread to the Mexican stock market, where foreigners own an estimated $50.4 billion worth of shares--or 26% of the total market. Though the Mexican stock market rose Thursday, the falling peso translated into continued losses for American investors.

In U.S. financial markets, the shares of Mexican firms suffered, as did the stocks of American companies heavily involved in Mexico and Latin America. Telefonos de Mexico’s American depositary receipts fell $4.25 to $40.75, Citicorp was down $2 to $41.25, Coca-Cola dropped $1.25 to $51.125 and Colgate-Palmolive fell $1.375 to $61.75.

Several U.S. mutual funds with substantial Mexican and Latin American holdings have lost nearly 10% of their value since the crisis began.

“The surprise (devaluation) has resulted in a very large loss of confidence in the government,” said William Truscott, portfolio manager of the Scudder Latin America Fund, which has lost about 8% of its value in two days. As a result, investors will probably focus more on Brazil or Argentina next year.

“Our outlook has certainly changed on Mexico, and it’s changed to the negative,” he said.

The peso’s fall from grace is being closely tracked by U.S. and Mexican firms that have expanded into each other’s markets to take advantage of the North American Free Trade Agreement, which lifted many trade barriers. The weaker peso will make exporting to Mexico more expensive and reduce the value of investments in that nation.

Wal-Mart, the nation’s largest retailer, might delay the opening of some Sam’s Clubs and Super Centers in Mexico should the devaluation lead to inflation or possibly a recession, said J.J. Fitzsimmons, vice president of finance for the company.

“If the consumer economy is weak, it will clearly affect our business down there,” said Fitzsimmons, whose firm already operates 33 stores in Mexico in partnership with Cifra, a giant Mexican retailer, and plans to open another 25 in 1995. “But we will not cancel any project that we have started.”

Meanwhile, the much-heralded benefits of NAFTA to many U.S. firms have been undercut. Increased exports of U.S. products to Mexico under the trade pact have been credited with creating thousands of American jobs, but now those products--cars, for example--will be far less competitive in Mexico.

The devaluation will erase some of the gains Ford had expected in exporting an estimated 25,000 U.S.- and Canadian-made vehicles a year to Mexico. Previously, those cars had been made in an inefficient Ford factory near Mexico City, where all Ford cars sold in Mexico were manufactured under laws abolished when the free-trade pact was enacted.

Now the peso has fallen and “those cars will be more expensive,” Ford spokesman Al Chambers said. “This is disruptive.”

John Labatt Ltd., a Canadian brewery, said its 22% stake in Mexican brewer Femsa Cerveza had dropped nearly $148 million in value since the financial crisis began. The Toronto-based company had just bought the stake for $510 million in September.

But the effect on U.S. firms will not necessarily be bad.

In Palm Desert, Richard J. Heckmann, president of U.S. Filter Corp., which manufactures water treatment plants, spent Thursday morning reassuring some employees worried about the fate of a small but fast-growing number of Mexican projects.

“I’m just telling them it’s business as usual,” Heckmann said. His firm does not take out any profits from Mexico and its contracts can be adjusted to take currency fluctuations into account. In fact, Heckmann said, his firm stands to benefit because it buys supplies in Mexico with U.S. dollars, which have gained purchasing power.

“This would be the time to buy equipment, and this is the time to sign contracts if they are dollar-denominated,” Heckmann said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Parallel Plunge

Mexican stocks and funds that trade on U.S. markets have been hit hard by the economic turmoil in Mexico. Losses in shares of key companies and funds in the last day and last week:

Thurs. Percentage change from Issue close Wed. Week ago Empresas La Moderna $17.00 -14.4% -35.2% Grupo Mexicano de Desarrollo 11.63 -18.3 -31.5 Grupo Financiero Serfin 8.88 -18.4 -30.3 Grupo Sidek 11.63 -12.2 -28.9 Grupo Televisa 32.38 -10.1 -20.5 Telefonos de Mexico (Telmex) 40.63 - 9.7 -20.1 Coca-Cola Femsa 23.25 -10.1 -19.1 Closed-end funds Emerging Mexico Fund $14.50 -4.9% -15.9% Mexico Equity & Income Fund 19.13 -8.9 -15.9 Mexico Fund 23.75 -6.4 -17.7

Note: Stocks are American Depository Receipts, or ADRs, the term for foreign stocks that have been approved for trading on U.S. exchanges.

Source: Bloomberg Business News