NEWS ANALYSIS : Steadier Peso Belies Uneasiness in Mexico

Ending their worst week since the Mexican economy bottomed out last March, Mexican stocks and the peso ended slightly higher Friday after the government took radical action to stabilize the nation’s brittle financial markets.

But analysts here warned that the forces behind this week’s market plunge are more fundamental and long-term than the government’s latest actions could address.

The Mexican peso closed Friday at 7.1 to the dollar, slightly stronger than Thursday’s close of 7.23, which had broken the psychological barrier of 7.0 for the first time since March 9. Mexico’s Bolsa, or stock market, also recovered some ground, closing up 58.74 points, or 2.69% higher than on the previous day, after a week in which it lost a total of 3.58%. The recovery sparked gains in other Latin American markets.

The rally came after President Ernesto Zedillo’s government, in a dramatic about-face, suddenly dropped all criminal charges against an alleged leader of the armed rebellion in the southern state of Chiapas. The attorney general’s office released alleged Zapatista National Liberation Army leader Fernando Yanez from prison in the morning. His arrest, in Mexico City last weekend, triggered fears of renewed fighting in the simmering 22-month revolt that helped drive the Mexican peso to seven-month lows; it sent the stock market reeling.

Zedillo’s financial advisers also made frantic appeals to domestic and foreign investors to stand by Mexico’s economy, asserting the setback in the volatile markets is “temporary” and that the nation’s economic fundamentals are, in fact, in recovery.

But persistent economic and political problems will continue to contribute to further market instability, analysts and traders said.

“Things are calming down a little today,” Jose Dayan, a trader from Banorte, said Friday. “But the main problem is the economic situation. The main problem is, people are unsure about growth next year.”

Amid Mexico’s worst recession in more than a decade, the government conceded this week that inflation and unemployment have soared beyond their expectations and that its foreign-exchange reserves are slipping.

Most of Mexico’s blue-chip companies reported bleaker third-quarter results than expected.

Labor unrest is growing, with union leaders reluctant to sign new wage-and-price agreements after nearly a year of frozen wage increases.

And investor confidence is slipping, driving interest rates up each week for the past month to current bellwether government bond rates of more than 42%.

In all, the Mexican economy has shrunk almost 6% since the government was forced to devalue the peso last Dec. 19 and to impose a series of harsh austerity measures to remain solvent, Mexico’s central bank president conceded.

And in the aftermath of this week’s financial turmoil, independent analysts concluded that the Mexican economy is unlikely to improve by early next year, as Zedillo and his advisers have predicted.

This week’s tumult suggests that the economy here remains far more fragile than the last few months of relative stability would suggest. A $52-billion international bail-out package that includes $20 billion in American loans helped stabilize the markets but not the government as a whole, the analysts argued.

At the heart of it, they say, is a continuing lack of confidence in Mexico’s 43-year-old president and Yale-educated economist’s policies--specifically stability in his government and in the troubled southern state of Chiapas, where threats of renewed fighting last December helped touch off the nation’s worst economic crisis since at least 1982.

“Things have been difficult for more than a month now, after the central bank tried to force interest rates down,” said Leonel Dominguez, a trader with Abaco Casa, as he entered the Bolsa Friday morning. “The government was trying to give a false image and it built up false expectations. Then interest rates and inflation rose, companies like Telmex [communications conglomerate Telefonos de Mexico] and the mining industry published good--but lower than expected--earnings reports, causing a complete lack of confidence in the markets.

“The peso jumped, and the Bolsa dropped,” he added. “Then, the government arrests a supposed Zapatista rebel. . . . This had an important impact on an already vulnerable market; it said problems are deeper than the government is saying. . . . Now, there’s a lack of confidence in the markets and a lack of credibility in the government.”

Emilio Zebadua, an economic and political analyst at Mexico City’s Colegio de Mexico, blamed the continuing uncertainty on drift in government policy.

“The Mexican government still has not defined its economic policy,” he said. “There are three different actors: the president, the treasury department and the central bank. Each one has a different approach. Whenever there is unsettling news . . . investors look for some sort of uniform reaction. When they don’t see it, they get nervous, and the market starts to act erratically.”

Gray Newman, an economist at the Mexico City office of the James Caple brokerage firm, agreed, saying: “Politics appears to be behind this. If you look at the fundamentals of the peso, they are solid. But when it goes from 6.8 to 7.3 in a day, I’m concerned. There have been no changes in economic, fiscal or monetary policy which explain it. . . . We seem to be returning to December, 1994.”

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Tough Week for the Bolsa

Mexico’s stock market was sent reeling this week as many of the country’s blue-chip companies reported bleak third-quarter results. Monthly closes on the Bolsa, except latest: (see newspaper for full chart)

Friday: 2,245.92

Source: Bloomberg Business News