Mexico Offers Optimistic Economic Plan for ’97

Declaring that Mexico is leaving behind nearly two years of economic turmoil, the government on Saturday presented an economic plan for 1997 that forecasts solid growth and will increase the paychecks of millions of hard-hit workers.

Financial markets had been jittery before the plan was presented, as investors wondered whether the government would ease up on its inflation-fighting policies and allow big wage increases to soften rising opposition to some economic reforms.

However, the forecast of a 15% rate of inflation next year and the decision to raise the minimum wage by 17% fell within analysts’ expectations.

“That should be very good news,” said Carlos Asilis, chief Latin American economist for Oppenheimer & Co., a Wall Street brokerage. He said the plan should lead to lower interest rates and strengthen the wobbly peso, which has lost 5% of its value against the dollar in the last three weeks.

Mexico is emerging from one of its worst recessions in 60 years, caused by a disastrous peso devaluation in December 1994. Last year, inflation soared to 50% for the year, thousands of businesses shut their doors and hundreds of thousands of workers lost their jobs.

The plan for 1997 was presented during the signing of the annual pacto, or pact. The agreement commits government, business and labor leaders to limits on price and wage increases and to cooperation to spur growth.

The government said Saturday that it expects to cut inflation next year to nearly half of its estimated 1996 rate of 26% to 28%. Analysts said that commitment should help push down interest rates, which are still high due to fears that inflation could erode the value of investments. The government also forecast solid 4% economic growth for 1997, a bit higher than what it predicted for this year.

Mexico, however, needs a powerhouse 5% expansion of its economic output annually just to absorb its 1 million new job-seekers each year. Therefore, unemployment may continue to drive thousands of Mexicans to seek jobs in California and other parts of the United States.

But President Ernesto Zedillo told business, government and union leaders gathered at the presidential palace that 1997 will mark a transition to a high-growth era.

“This [pact] will allow us next year to consolidate the recovery and lay the foundation so that, starting in 1998, our economy will grow firmly and solidly at over 5% a year,” he said.

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For the first time in years, the pacto could provide a small wage increase above inflation. While only a fraction of the work force earns the minimum wage--currently the equivalent of about 37 cents an hour--many labor contracts are linked to it.

Analysts said Saturday that the increase was expected after two years in which workers’ salaries were eaten up by inflation, causing a drop in purchasing power during the period of 25% or more.

With their budgets still squeezed, consumers are not spending at the rate they once did, even though the economy is again growing.

“The one major weak link to the Mexico story at the moment . . . is the weakness of domestic demand,” said Geoffrey Dennis, a senior analyst at Bear Stearns & Co., another Wall Street firm. “Higher real wages will provide some confidence to the market.”

The boost in workers’ paychecks, scheduled for December, should also help the ruling Institutional Revolutionary Party as it prepares for tough midterm elections next year.

The pact was reached after an all-night negotiating session.

In addition to the minimum-wage increase, it also sets price increases of about 20% during the next year for gasoline and 15% for electricity.

As part of its economic plan, the government also committed itself to continuing to allow the peso to float freely against the dollar.

The pact was signed after several discouraging weeks for the Zedillo administration. In the face of stiff public opposition, the government recently backtracked on one of the key provisions of its economic reform program: the privatization of much of Mexico’s petrochemical industry.

The government has also failed in its effort to begin privatizing the country’s railroad system. The first train line put on the block drew only one bidder--whose offer was deemed too low.

“What happened essentially in the last few weeks is that there was a credibility crisis in the markets as to the ability of the government to follow through on those announcements” it had made about its economic policy, said Asilis.

Such fears, he added, have now been laid to rest.