A Progress Report : Mexico Ends ’95 With a Surplus, but Prosperity Depends on Foreign Investors

In 1995, the worst financial year in this nation’s modern history, President Ernesto Zedillo spent the equivalent of more than $60 billion to run his government--more than a tenth of it from the pockets of Mexican consumers through soaring sales taxes and more than a third from government sales of fuel, electricity and other basic goods at skyrocketing prices.

Zedillo also had to borrow $25 billion from U.S. taxpayers and international banks to pay back wealthy speculators, institutional investors and American pension funds that had invested in government securities and wanted out.

Yet with individual Mexicans both poorer and deeply mired in personal debt, this is the bottom line: Zedillo’s government finished the year not just with a balanced budget, but with a $2-billion surplus--and, some say, the promise of better times ahead.

The national economy--saved from collapse by a multinational bailout and an austerity plan that already has cost jobs of million Mexicans and sent the gross national product down by 7%--is poised to take off, Zedillo and advisors say.

That might be overstating it. But the pain of 1995, they insist, was the price for prosperity in 1996.

Part of the pain, for example, was the government’s payoff of all but $2 billion of the $29.2 billion in dollar-denominated high-yield bonds known as tesobonos that were outstanding when Mexico’s crisis hit a year ago this Tuesday, the day Zedillo moved to devalue the peso.

The balance will be repaid by the end of February. As a result, Zedillo and his advisors predict, billions of dollars in capital again will flow into a country that has proved it honors its debts. That, they argue, will create hundreds of thousands of jobs and break this profound recession.

By the second quarter of next year, Treasury Secretary Guillermo Ortiz predicted last week, the nation’s economy will begin to show growth for the first time since 1994--a forecast generally echoed by the Clinton administration.

But the ultimate success of Zedillo’s strategy to save the economy--by reducing its deficit, making its investors whole and shrinking the economy--depends heavily on attracting foreign investment once again. And analysts in and out of Mexico say that remains a hard sell.

The nation must attract anew at least some of the $30 billion in investment--the equivalent of 8% of Mexico’s GNP--that his advisors concede was abruptly, and to Zedillo’s shock, withdrawn from the Mexican economy after the peso tumbled.

*

This means the Yale-educated Zedillo, who has been widely criticized for his handling of the economy, must win back the support of Wall Street brokers, fund managers and wealthy Mexican investors who were critical to the emergence of a free-market economy here.

To that end he summoned 100 foreign business leaders to his residence two weeks ago to noisily announce their plans for $6.3 billion in capital investment in Mexico in 1996, an increase of 53% from this year. But that is a small start on what is needed.

And many U.S. economic analysts and fund managers said major investment is unlikely to return to Mexico until the middle of next year--and then only if there is no major labor unrest, political instability or social revolt.

But some agree there is room for optimism.

“I think the prospects in some parts of the economy are fairly good,” said Gary Hufbauer of the Institute for International Economics, a Washington think tank.

With a projected 1996 inflation rate of 20% to 25%, a continuing boom in Mexican exports and a peso exchange rate of about 9.5 to the dollar by the end of next year--worse than the current 7.5, and one-third the rate before devaluation--Hufbauer said: “The upshot of all that will in fact be very inspirational to portfolio investors.”

But Darryl McLeod, a senior economist and Latin America expert at the Lehman Bros. investment firm in New York, cautioned that it will take time for any such inspiration to take hold. He and other fund managers said it would also depend heavily on the government’s ability to break the cycle of inflation and high interest rates that have left the Mexican banking system in crisis.

Although there is positive news such as a trade surplus and a steep rise in exports, Mexico’s banks have seen their portfolios of bad loans--those on which hard-hit consumers and business owners can’t pay--climb steadily all year to a dangerous 17.9% of all outstanding debt.

“The banking system will be the bellwether of when the real turning point comes,” McLeod said. “Meanwhile, the major capital investment will wait and see. Mexico is not even going to get the promised [$6.3-billion] investment until people see the government has managed to break out of this repressive cycle.”

Rogelio Ramirez de la O, a leading Mexican economist who advises foreign corporations on his country’s economy, said:

*

“Foreigners will not touch the Mexican markets for a while. The problem is 80% lack of [Zedillo’s] credibility and 20% lack of economic fine-tuning. And it will require very dramatic changes to bring investors back. Until then, it’s going to be more of the same, or worse.”

Key economic advisors to Zedillo--whose campaign slogan in the August 1994 presidential elections that brought him to power was “Welfare for your family”--conceded that the economic crisis of 1995 has left the nation in a state of emotional depression.

“Expectations were so high in 1994 that, unlike previous crises, the entire Mexican household sector had gotten itself heavily in debt. All of us Mexicans felt that our income was going to rise,” a top Zedillo aide said.

“So when the crisis came,” he added, “and interest rates skyrocketed and income fell, people felt betrayed. And they felt betrayed not only by this government but by the previous government. They were hit in their pockets.”

Zedillo aides candidly concede that they and their boss were genuinely shocked when Mexico’s economy spun out of control after the decision to devalue the peso. They defend that step still, however, saying it was necessary to avoid outright bankruptcy of the Mexican government.

From February to Nov. 30, 1994, the day Zedillo’s predecessor, Carlos Salinas de Gortari, left office, the government spent more than half of the nation’s $29 billion in foreign-exchange reserves to support the peso at 3.4 to the dollar. Six weeks later, Zedillo’s government had exhausted all but $3 billion of those reserves. Today, the peso stands at almost 8 to $1.

“We knew the financial standing of the country was weak, but we were astonished that the markets reacted the way they did,” the senior Zedillo aide said, recalling the billions of dollars that fled Mexico almost overnight. “At the beginning, it was not clear what was happening.”

The president, he said, pored over the government’s books and focused on the current-accounts deficit that Salinas had left behind. “Immediately we realized there was $60 billion in short-term obligations coming due in 1995,” the aide said.

Most of that debt consisted of high-yield government bonds in the hands of the wealthy and institutional investors--the same sources Zedillo now is attempting to woo back.

Zedillo zeroed in on that debt to the exclusion of almost everything else, aides confirmed. But to meet the debt payments, the president realized he would need outside help. He turned to the Clinton administration and the Washington-based International Monetary Fund, which put together a $50-billion line of medium-term credit. That let his government pay off this year’s debts and spread payments on the new debt over the next five years.

*

But the credit package came with economic strings--principally U.S. Treasury Department demands for the austerity program that hit Mexican consumers and taxpayers with a 50% increase in the sales tax, a 42% rise in the price of gasoline and electricity, and official interest rates that still top 50% a year.

Mexican Treasury Department statistics show that the sales-tax bill alone for consumers jumped by an average of $150 million a month after Zedillo increased the levy from 10% to 15% across the board on April 1.

The loan arrangement also extracted a political price. Zedillo was forced to give in to American demands that Mexico repay the new loans out of future oil export revenues, now funneled through the U.S. Federal Reserve Bank of New York. Everyone from opposition politicians to the average Mexican in the street has criticized Zedillo for mortgaging the future

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

A Long Year

The brutal effect of Mexico’s economic crisis on the nation’s people and businesses can be surmised from the statistics: Interest rates on the treasury bills called cetes soared to 82%, inflation climbed steadily to 50%, and the peso lost about half its value. The Bolsa stock index collapsed too, but it began recovering in March when interest rates began to ease. Today, on expectation of an economic recovery, the Bolsa stands higher than before the devaluation.

* Consumer Price Index

Monthly figures at annual rate

Nov. 1995 (estimate): 50%

* 28-Day Cete Rate

Tuesday auctions:

Dec. 12: 50.31%

* Pesos Per Dollar

Weekly closes:

Friday: 7.75

* Bolsa Index

Weekly closes:

Friday: 2,675.69

Sources: Bloomberg Business News, Datastream, Times reports. Researched by JENNIFER OLDHAM / Los Angeles Times.