Zedillo Unveils Optimistic ’96 Blueprint for Ailing Mexico : Latin America: Investors react with skepticism. Central bank is forced to prop up tumbling peso for second time in a week.

Juggling recession, inflation, devaluation and despair, President Ernesto Zedillo’s government on Tuesday presented a balanced, $70-billion 1996 budget to the Mexican Congress that he promised will break one of the nation’s worst economic crises in modern history.

But even as the optimistic blueprint was unveiled, Mexico’s central bank was intervening for the second time in less than a week to reverse another steep slide in the peso, underscoring the uphill climb facing the nation as it battles inflation and tries to come out of the tailspin.

Zedillo’s finance secretary, Guillermo Ortiz, predicted in his budget address to Congress that the nation’s economy will grow 3% next year. Inflation, he said, will run at 20%, and the now-volatile peso will continue to float freely on international markets, averaging 7.7 to the dollar. He also predicted that at least $5 billion in foreign investment will return to Mexico next year.

Ortiz conceded that 1995 has been an economic disaster for Mexico and its 90 million citizens--a year when the government has been on the brink of “total insolvency” and many families and small businesses have been ruined. By the end of this year, he said, the nation’s economy will have shrunk 6% and inflation will top 50%; wages will have risen an average of just 16% and more than a million people will have lost their jobs.

He and Zedillo both stressed, however, that Mexico is on the mend, citing their projections and the harsh austerity measures of the past nine months that they said have built a solid foundation under the economy.

But financial markets and most independent analysts reacted to the budget package with clear skepticism.

The Mexican peso, which opened considerably weaker against the dollar before Ortiz’s speech Tuesday morning, continued to plummet to 8.2 after he unveiled the new budget, forcing the government again to intervene to stabilize the market--despite Ortiz’s promise to allow the peso to float--by spending dollar reserves to buy pesos.

Still, it closed at the same historic low of 7.8 to the dollar set last week. And the nation’s stock market, the Bolsa, dropped slightly after the finance secretary’s speech.

The peso’s continued slide has analysts nervously watching this week’s central bank auction of government debt, where some have predicted benchmark 28-day interest rates will surge to about 70% from the current 54.24%. Higher interest rates will make credit more expensive and allow fewer customers to repay their overdue loans, which will trim earnings at banks.

Ortiz’s budget projections, many analysts said, were overly optimistic.

“The figures are not realistic,” said Emilio Zebadua, an economics and political science professor at Mexico City’s Colegio de Mexico. “We’re already anticipating inflation higher than 20%. Companies are programming a minimum of 30% inflation for next year. . . .

“More importantly, this budget does not consider the critical question about the medium term. They haven’t come up with a realistic exchange rate. And until they address that issue, the markets won’t believe it.”

Other independent economists said Zedillo, a Yale-educated economist, and his Stanford-educated finance secretary had failed to take into account Mexico’s cultural quirks--its aversion to personal savings, for example.

“Something more needs to be done, and I don’t think the answer comes from an economic textbook,” said Gray Newman, senior economist at the James Caple Research Mexico brokerage firm.

Although Newman said he believed that the government’s projected growth and exchange rates are possible, he added that both depend on its ability to quell the continuing volatility in the markets and shore up confidence in Zedillo’s government.

“The issue is stability,” he said. “If you get stability, you get growth.”

Both Ortiz and Zedillo said they were convinced the recent exchange-rate fluctuation is a temporary phenomenon driven entirely by speculation. The nation’s economy, they said, is far more sound than when Zedillo inherited the government on Dec. 1.

With the help of an international emergency credit package that included $20 billion in U.S. loans, the government paid off $41 billion in foreign debt this year. In 1996, Ortiz stressed, Mexico faces just $8.9 billion in debt payments.

Much of next year’s expected growth, Ortiz said, is based on projections that Mexican exports will boom, increasing 19.4%. Imports, he predicted, will rise 19.1%, after a year when Mexican consumers had so little to spend that Mexico’s imports fell more than 27% and consumer spending as a whole dropped 13.5%.

* PEMEX GOES ON THE BLOCK

Mexico announces first phase of its controversial oil privatization plan. D3