Zedillo Outlines Rescue Plan, Calls for Deep Sacrifices : Mexico: President declares ‘economic emergency,’ acknowledges real earnings will drop for most. Program includes wage and price controls, major privatizations.

President Ernesto Zedillo on Tuesday unveiled an emergency austerity plan packed with sacrifices for all Mexicans in an effort to overcome the nation’s worst economic crisis in more than a decade.

He was able to announce the new program only after wresting key concessions from business, labor and other groups that will hold down prices and wages despite a recent, crushing devaluation of the peso.

In a speech to the nation seen as a major test of Zedillo’s governing skills, the president confirmed that his economic rescue plan also offers sweeping privatization of state-owned railroads, airports, seaports and the telecommunications industry. Analysts called the move a clear attempt to lure back foreign investors, who reportedly lost billions of dollars in one week after Zedillo’s government suddenly allowed the peso to float freely against the dollar last month.

Declaring a national “economic emergency,” Zedillo punctuated his address with such words as “drastic,” “grave” and “urgent” as he appealed for unity and sacrifice throughout Mexican society.

“We must confront (the current crisis) in the knowledge that it will mean sacrifices for all of us, without exception,” the president said, surrounded by the labor and business kingpins who ultimately agreed to bite the bullet on profits and raises during 1995. “We must face it, above all, clearly aware that it is a problem that can be overcome, and that together we are going to overcome it.”

Most political analysts said Zedillo’s speech, delayed 20 hours while his economic team fought through the night to win the wage and price concessions, was an important measure of the president’s credibility and persuasiveness with key sectors of Mexican society, as well as his skill in governing through consensus.

Specifically, Zedillo’s plan concedes that annual inflation may run as high as 15% in the short term, far more than the 4% his government predicted a month ago. But the pact he signed Tuesday with labor and big business holds annual wage hikes at just 7%. And he projects annual economic growth of 1.5% to 2%, far less than the 4% originally predicted. But his new plan aims to cut government spending by 1.3% and sell off key state-owned companies that were spared the initial free-market reforms of his predecessor, Carlos Salinas de Gortari.

Zedillo conceded that the devaluation, combined with the austerity plan, “will mean a drop in real earnings” for nearly every Mexican during the coming year.

The 42-year-old, Yale-educated economist profusely thanked the union and corporate presidents who gathered to hear his speech at the presidential residence for their courage and faith in signing a pact that holds minimum-wage increases at the same level agreed to before the devaluation and prohibits sudden price increases, except on imported products.

The markets reacted less favorably than did the men and women who applauded him at the end of a speech some analysts said they hoped would do more.

The peso continued to fall after Zedillo’s Tuesday afternoon speech. Having opened at 4.95 to the U.S. dollar, it closed at 5.4. The Mexican Stock Market Index fell 3.22%. And several economic analysts said the president must act more boldly if he is to restore confidence in his administration and the economy.

“The pact has very little chance for success, because there’s no political leadership,” said Rogelio Ramirez de la O, a Mexico City economist. “A lot of the market players are asking whether Zedillo knows what he’s doing.”

Noting that it took Zedillo 20 hours to do what his predecessor did with a single phone call to the same group of union and business magnates, Mexican analysts said labor’s assertiveness could augur problems for Zedillo, particularly amid social unrest in several Mexican states.

“In a vacuum of political leadership, the labor leaders will grab every opportunity to take power, especially if they think the president is weak,” Ramirez said.

In his nationally televised speech, however, Zedillo spoke firmly and with confidence in his government’s ability to manage its way out of an economic emergency that many analysts blame largely on Salinas, who refused to devalue the peso before his term ended Nov. 30--despite the fact that his government was spending billions of dollars supporting it at overvalued levels.

With the nation’s foreign-exchange reserves now at $6.1 billion, compared with more than $20 billion at the beginning of 1994, Zedillo also confirmed a new, U.S.-led $18-billion Exchange Stabilization Fund that consists of $9 billion in available credit from the U.S. government, $5 billion from a consortium of government-backed Swiss banks, $3 billion from commercial banks and $1 billion from Canada.

The credit package, Zedillo said, will not be used to close Mexico’s $28-billion current-account deficit--the gap between imports and exports that the president said made the devaluation necessary. His rescue plan envisions that new foreign investment and moderate borrowing--combined with the higher price of imported goods--will close that gap to $14 billion in a year.

Vowing to continue to permit the peso to float freely, Zedillo indicated that the support fund will be used only if necessary to stabilize the currency. And he insisted that the devaluation--and its resulting inflation--are temporary.

The president was clearly aware in presenting his plan, though, that arresting a return to the double-digit inflation that plagued Mexico in the late 1970s and early 1980s is his most immediate challenge in a nation where real income already has fallen an average of 45% in 12 years.

Zedillo also indicated he will not separate his emergency program from rapid rural development and his promised democratic reforms, something that the Salinas administration said could come only after economic reform.

And Zedillo made clear that he knows his call for sacrifice comes amid discontent and post-electoral protest in several parts of the country. That is particularly true in the state of Chiapas, where the armed Zapatista National Liberation Army has demanded sweeping land reform, electoral reform and major development projects.

Conceding that the government cannot afford such ambitious development, especially with federal spending restraints, he vowed to enlist the aid of international agencies, the United States and Europe.

* FOREIGNERS WORRIED: Zedillo’s plan unlikely to restore investor confidence. D1