Zedillo Firms Up Details of Mexico Economic Plan

Moving to defuse a deepening financial crisis and restore investor confidence in Mexico, President Ernesto Zedillo on Monday was finalizing an ambitious emergency economic plan that analysts said would expand privatization, reinforce free-market reforms and protect foreign capital--while also seeking to control inflation and interest rates.

Mexican and U.S. officials confirmed late Monday that the United States will make available half of an international line of credit, which also will include a consortium of commercial banks and European central banks.

Zedillo had been scheduled to announce the plan in a nationwide address late Monday after he and his economic advisers worked feverishly through the New Year’s holiday and into Monday night to negotiate the $18-billion line of international credit to help reduce the nation’s $28-billion current-account deficit and to secure wage and price ceilings to avert double-digit inflation.

But those ceilings appeared to be proving more difficult, as Zedillo’s aides announced hourly delays throughout the night in a presidential address that originally was scheduled for 6 p.m.

In a final announcement that last-minute marathon meetings--which had begun early Monday with key labor unions, corporations and farmers groups that had negotiated a series of anti-inflation pacts with the previous administration--would continue through the night, aides said the president postponed his speech until later today.

Zedillo’s economic team was seeking what a working text of the plan called “an extraordinary effort” to moderate price and wage increases during 1995--despite a debilitating 30% devaluation of the nation’s currency and the doubling of key short-term interest rates in the past two weeks.

Perhaps anticipating a bold new approach to the nation’s economy by the 42-year-old, Yale-educated president one month into his six-year term, the peso gained slightly Monday, closing at 4.925 to the dollar in light trading. Major markets in the United States were closed for the extended New Year’s holiday, and Mexico City analysts said they expected the peso to gain back even more of its value today on the strength of Zedillo’s plan.

In the past two weeks, Mexico has been plagued by uncertainty triggered by a day of unrest in the southernmost Mexican state of Chiapas and the ensuing plunge of the peso, after the government allowed it to float freely against the dollar.

Mexican Treasury Department documents leaked Monday indicate that the core of the rescue plan is likely to be bold cuts in public spending and new incentives for foreign investors and Mexican export manufacturers. The documents also provide for sweeping privatization of large government-run enterprises nationwide.

The plan also includes the expanded international credit package worth an estimated $18 billion. That credit would help the government meet its short-term debts and reduce the trade deficit.

The credit reportedly will include $9 billion in available emergency loans from the United States and $1.5 billion from the Canadian Central Bank--money that Mexico’s government needs desperately after months of heavy spending to support an overvalued peso. The government’s currency purchases severely drained the nation’s foreign-exchange reserves, which fell from more than $20 billion at the start of 1994 to $6.5 billion when the government suddenly announced in the wake of the Chiapas uprising on Dec. 21 that it would stop defending the peso.

The credit package would expand by $3 billion the $6-billion line of credit that Washington made available when the peso started falling sharply against the dollar. It also includes $5 billion from various central banks and an additional $3 billion from international commercial banks.

Making clear the Clinton Administration’s support for the overall plan, which was prepared in Mexico City in consultation with Washington, Frank N. Newman, acting U.S. Treasury secretary, said in a written statement quoted by wire services in Washington on Monday evening--and clearly timed to coincide with Zedillo’s scheduled speech in Mexico City--that the decision to boost the U.S. line of credit “is based on the importance of the U.S.-Mexican economic relationship, the substantial economic reforms that Mexico has undertaken in recent years, and the strong (new) program.”

But another key to the plan, which clearly was designed to restore investors’ confidence in an economy that has attracted billions of dollars in foreign capital in recent years, remained uncertain--the precise level of wage and price restraints that Zedillo’s team was still negotiating late Monday.

“We must control the threat of inflation as soon as possible,” Zedillo said in a brief statement to the nation Thursday, when he announced that he had accepted the resignation of former Treasury Secretary Jaime Serra Puche and begun work on the specifics of his emergency plan.

Zedillo’s team secured a 60-day wage and price freeze from the unions and key companies when the government decided to expand the trade ceiling on the peso on Dec. 20--a decision that was followed 12 hours later by the government’s announcement that it would permit the peso to float freely.

But inflationary pressure has been severe. A spokesman for Mexico’s prosecutor for consumer affairs said Monday that the office has received 600 complaints of overpricing in the past two weeks, for which it fined 500 mostly small businesses and temporarily shut down 50 others.

In the longer term, economic analysts said the president also was attempting to walk the trickiest economic tight rope of all by deciding to slash public expenditures while leaving most social services intact.

The nation’s economic crisis comes amid threats of poverty-fed social unrest in several states--particularly Chiapas--and the Treasury Department documents indicate that the emergency plan includes incentives to stimulate private investment in social infrastructure to make up for cuts in government spending, particularly in the Mexican countryside.

To raise additional public capital and avert another potential crisis, the plan reportedly would also offer a new series of bond options to investors. The options are meant to discourage them from cashing in billions of dollars’ worth of government bonds that come due within the next month.

Times staff writer James Gerstenzang in Washington contributed to this report.

* RESCUE’S PRICE: The plan would be costly for both the U.S. and Mexico. D1