Financial Crisis Sours Holidays for Mexican Elite : Latin America: Traditionally, business leaders lie in the sun now to ponder better times ahead. But this year they face grim prospects.
The palms swayed, the surf pounded and the waiters scurried from umbrella to umbrella last week at this idyllic Pacific Coast beach resort halfway between Mexico City and Tijuana.
Jammed with Mexican business leaders and industrialists, the scene here--as in Cancun, Acapulco and other getaways for Mexico’s wealthy and middle class--seemed typical of other holiday weeks between Christmas and New Year’s, when commerce and politics grind to a halt and give way to relaxation, contemplation and planning for even bigger boom times in the year ahead.
But this year, it was different.
Mobile telephones shrilled in clashing counterpoint to the cries of gulls as the latest peso rates filled the beach with fidgets and frowns. Aides in street clothes slogged over the sands, bearers of even grimmer news: Short-term interest rates had doubled.
As news of Mexico’s worst financial crisis in more than a decade came in hourly installments of doom, the reaction was bitter and the planning was grim. The engineers of Mexico’s economic boom braced themselves, for the first time in years, for worse times ahead.
“More than anything, it’s a feeling of betrayal,” said one Mexican industrialist on the beach last week, who asked not to be identified by name. “It took so many years for the government to rebuild our confidence, to get us to stick our necks out and trust them.
“Now, it’s like we’ve all been stabbed in the back--again. It wipes out the trust. It wipes out NAFTA. And for many, it just wipes us out entirely.”
Causing the anger in the key sector that drove Mexico’s free-market revolution over the past six years--particularly in the 12 months to the day since the North American Free Trade Agreement took effect--was not merely the government’s decision to devalue Mexico’s currency, which plummeted 30% in just two weeks.
Nor was it how the government did it: suddenly, and after repeated indications that it would continue to spend billions of dollars to support an overvalued peso.
It was also the timing and history: The devaluation announced by President Ernesto Zedillo’s now-former Treasury secretary, Jaime Serra Puche, and the ensuing financial crisis came just as such things had happened under far less progressive governments in Mexico’s past. And they had the same effect: They left thousands of business people suddenly deeper in debt than they ever planned and rekindled fears of the runaway inflation of the 1970s and early 1980s that stifled Mexico’s middle class.
And on top of everything, the critics said, these events came as Mexicans of all income groups were celebrating a year-end holiday that recently has been one of joy, hope and newfound upward mobility.
“Before this happened, I was thinking how we would expand in ’95, create more jobs, export more goods and build new markets,” the industrialist said. “Now, I’m agonizing over who I’m going to have to lay off, how I’m going to pay off six-figure dollar debts with cheap pesos and how I’m going to go backward in time, manufacturing inferior goods with obsolete technology that can’t compete internationally.”
This mood is the backdrop for Zedillo’s scheduled speech to the nation about the economy Monday evening. Aides said the president will unveil an emergency plan designed to control inflation and interest rates, boost exports and maintain high levels of foreign investment.
Mexican analysts, business people and industrialists all said Zedillo’s speech must be a bold and creative one--even more decisive than his brief announcement accepting the resignation of Treasury Secretary Serra last Thursday. The results of an opinion poll conducted in both cities and published Saturday in the Mexico City daily Reforma and the Monterrey newspaper El Norte showed that as many as 59% of those polled had no additional confidence in Zedillo after his short speech to the nation last week. What is more, an average of 85% of those polled felt that the economy will be little changed in 1995.
As they picked up the pieces after a year of armed peasant uprisings, political assassinations and now economic disaster--all problems that Zedillo inherited from his predecessor, Carlos Salinas de Gortari--the industrialist on the beach in Mazatlan and the thousands of others like him said much damage already has been done.
“When everyone comes back to work on Tuesday, I’m going to have to tell them 20% will lose their jobs at a time when prices are going to go up,” the industrialist said sadly. “And that’s just the beginning of the damage control. We have to completely rethink and restructure our business strategy now.”
In thinking through the impact of doubled short-term interest rates, a peso worth a third less and a possible return to the double-digit inflation that plagued Mexico for many years before Salinas and his radical free-market reforms, the industrialist gave it a personal context.
“For us, NAFTA was designed to help us modernize and improve our products to compete in the American and Canadian markets,” he said. “In theory, as our exports increased, production would increase and so would jobs. Ultimately, that would help cut poverty.”
Buoyed by NAFTA’s prospects--and convinced by six years of government stability and support under Salinas--Mexico’s industrialists borrowed millions of dollars to invest in importing product components for final assembly. They also hired more workers to expand production. In theory, the loans were affordable. Finished products would be exported for dollars or sold in domestic markets for stable pesos, which together with the export earnings would repay the dollar debts.
Many economists now say that the theory was sound but that its application was skewed. They ultimately blame the industrialists and support the government’s decision to devalue sharply.
The economists said, and some of the industrialists themselves conceded, that NAFTA’s first year saw most Mexican manufacturers borrowing dollars for finished products that they largely sold for profit here in Mexico.
Such sales brought in no new dollars, and, as a result, the government was forced to spend an estimated $10 billion supporting the peso. In effect, these analysts said, the government was subsidizing imports and private industrialists’ profits. Without devaluation, the government would have gone broke within months.
Whoever bears ultimate blame, the industrialists and business people appeared to agree last week that the impact remains the same. Most were left with huge dollar debts that increased by a third almost overnight. Most now face drastic cuts. Others face bankruptcy.
“I think most of the bitterness and this sense of betrayal is based on the fact that this has happened so many times before here,” said the industrialist on the beach.
“The government spent six years trying to convince us they would never again do what they did with the devaluations of 1976 or 1982. And here, just when we start believing them, they do it again. How do you measure the impact of that? Psychologically, all I can say is it’s not a good way to start the New Year.”