The signing Tuesday of a $20-billion U.S. credit line to Mexico means that the international rescue package for this nation is now firmly anchored. But even as agencies around the world pledge record amounts to shore up the Mexican economy, the lingering question remains: Will it be enough?
"It is not going to put Humpty Dumpty back together again," predicted Brian Barish, an analyst at Lazard Freres & Co. "But if there were no package, it would be chaos."
The benefits of the loan are tangible but limited, analysts said.
The loan funds guarantee that the Mexican government will not default on its debt, and the conditions, which include regular reporting requirements on matters such as foreign reserves, will provide a clearer idea of how the Mexican government is managing the economy.
Analysts were also pleased that the Bank of Mexico will permit the creation of a pesos futures market--which had been forbidden, as a way to discourage speculation against the currency. That will allow companies with dollar loans to protect themselves against future devaluations.
But the deal will not bring the Bolsa index back up to the December levels of more than 2,000, nor will it restore the peso to 4.5 to the dollar as the government's economic emergency plan projected. In fact, the agreement provides no assurances of where or when the plunge of the peso and the stock market will end, analysts warned.
Indeed, both the Bolsa and the peso continued to tumble Tuesday as the financial package--with its stiff conditions of austerity--was signed in Washington.
Led by Sidek, the construction company whose near-default sent markets into a panic last week, the Bolsa fell 4.92% to 1,679.19--its lowest level in 19 months. Rather than rally to the deal's signing, which had been expected all month, the market reacted to its terms, analysts said.
The loan agreement virtually assures that interest rates--now above 50%--will remain high, strangling both blue-chip corporations and the smaller companies that supply and buy from them.
Grupo Financiero Bancomer, Mexico's second-largest financial group, has predicted significant layoffs in the economy--reducing employment by 2% in a country that must create a million new jobs a year just to keep up with the number of young people entering the work force.
Credit will be tight for companies as well as consumers because of a key provision of the agreement that requires the Mexican government to reduce the amount of money in circulation.
The Mexican emergency austerity plan had called for limiting credit expansion in 1995 to 10 billion pesos, about $1.8 billion at current exchange rates. However, in reality, the Bank of Mexico pumped 4 billion pesos into domestic credit in January alone, resulting in 3.8% inflation, according to Bancomer.
"Based on the January inflation rate, it is feasible to expect an accumulated inflation rate of 12% in the first quarter alone," according to a Bancomer economic report. The government has predicted annual inflation of 19%, though most analysts are projecting 27% or more.
The continuing fragility of the economy was demonstrated by the Bank of Mexico's decision to put off implementation of a new exchange rate policy. That move was widely interpreted as a sign that with its limited foreign reserves, the Mexican government could not put in place a tough enough policy to impress investors.
The government's decision to index the principal of bank loans to inflation--a policy common in high-inflation countries and which Mexico had strongly resisted in the past--was widely interpreted as a sign that continuing stiff price increases are inevitable. A Bank of Mexico statement said indexation was the only alternative to even higher interest rates.
Given that scenario, few investors would be attracted to Mexican stocks even without lingering suspicion of the Mexican government, analysts said.
High interest rates also will make Mexico increasingly dependent on high-risk speculators who are willing to place a bet, said a major institutional investor.