Keeping the Faith

Porfirio Munoz Ledo could scarcely contain his joy. The leftist leader’s party had just made historic gains in Mexican elections. The big loser was the ruling PRI, which has championed NAFTA and free markets.

“This is the new Mexican revolution!” exclaimed the plump politician, flinging open his arms as he spotted a reporter. “The PRI goes down, and the peso goes up!”

Last Sunday’s elections have produced one of the unlikeliest sights since Jerry Rubin traded his hippie sandals for wingtips and Wall Street.

Leftists eager to tax investors and weaken the North American Free Trade Agreement have made their biggest electoral advance in years in Mexico. And the stock market has greeted the news with a breathless rally.

On the heels of a preelection surge, the market set four daily records this week before finally dipping on Friday, with the index falling 0.8% to 4,821.62 points. The peso closed at its strongest level since February.

What gives?

Analysts say investors are mainly relieved that the midterm elections went off without a hitch. In the vote, Mexicans denied the Institutional Revolutionary Party, or PRI, its seven-decade hold on Congress. A leftist, Cuauhtemoc Cardenas, swept into office as Mexico City’s first elected mayor.

Despite the dramatic changes, there was little of the demonstrations and cries of fraud that had followed past elections. Instead, the vote was seen as fortifying the democratic process, presumably positive for political stability.

And while it made gains, the left-wing party--the Democratic Revolution Party, or PRD--remains a minority. It is roughly tied for No. 2 with the conservative, pro-business National Action Party, or PAN, in the lower house of Congress.

Finally, Congress doesn’t take office until September. To many investors, that’s light years away.

Meanwhile, Mexican consumers are returning to stores for the first time since the 1995 recession. Add to that the expectation of strong earnings from Mexican companies, and it becomes clear why cash-flush investors are hopping into the market.

“Whatever happens in the negative sense is going to take time to brew,” said Rogelio Ramirez de la O, a prominent economist. “And the market is not going to miss an opportunity for a 20% gain.”

Longer term, though, it’s unclear what the left-wing surge could produce. It will almost certainly increase pressure on President Ernesto Zedillo to soften his tight-credit, low-spending policies. Those policies gradually renewed investors’ confidence after the collapse of the peso in 1994. But many Mexicans still haven’t felt the recovery.

“The main message of this election was a slap in the face of the Zedillo administration,” political scientist Federico Estevez noted. “The pocketbook vote was not willing to give him another mandate, let alone a legislative majority, for his policy package.”

He did caution, however, that while voters were unhappy with the recession, they were not necessarily calling for left-wing solutions.

A visit to the PRD’s spare, six-story headquarters suggests a party still firmly committed to leftist ideals. Outside, hawkers sell T-shirts and videos of Cuban revolutionary hero Che Guevara. Inside, workers politely address a visitor as “comrade.”

Rosa Albina Garavito, a member of the PRD’s economic team, stiffens at the suggestion that the party has softened its leftist positions, as Britain’s Labor Party has done under Tony Blair.

“The PRD’s economic project is the same as when the party was founded” in 1988, she said in an interview. The PRD split from the ruling PRI in part because of the latter’s move toward free-market economics.

The PRD’s platform calls for renegotiating Mexico’s foreign debt, taxing short-term foreign investment and reining in the inflation-fighting central bank. Each is enough to give investors a Maalox day.

But such positions aren’t shared by either the PRI or PAN. Thus the chances of PRD’s platform being passed are slim.

Where PAN and PRD do agree is on tax cuts and a redistribution of tax revenues to cash-starved states and towns. Currently, Mexico’s central government gobbles up 80% of federal taxes.

But it’s unlikely the opposition can pass such changes without intense negotiations with the PRI. That’s because tax policy must also be approved by the upper house of Congress, still controlled by the PRI.

The elections, however, still could weaken Zedillo and his policies. His fierce anti-inflation stance has helped Mexico recover from the recession and obtain billions of dollars in loans. But with wages still trailing 1994 levels and bank loans scarce, the country’s economic recovery hasn’t reached most Mexicans.

The first test of Zedillo’s policies will come at year’s end, as Congress debates the budget. The opposition will probably push for faster domestic growth, even if it means higher inflation and a weaker peso. The PRD could attract allies, even from the president’s own PRI.

“The PRI faction in Congress will be the first to say, ‘One moment--I can no longer support economic programs that lead us to lose popular support,’ ” Ramirez de la O said.

Still, no one expects an about-face in Mexico’s transformation to a free-market economy.

The old, state-dominated economy has mostly been dismantled. The government has few properties left, for example, that it is still trying to sell off. And analysts say Zedillo’s most important economic reform--privatization of the pension system--will be too far advanced to turn back.

The real test could come in 2000, when presidential elections are held. Cardenas is expected to use the high-profile Mexico City mayor’s job to make a run for president. Considered a member of the PRD’s left wing, he has already earned the enmity of some big businessmen by calling for a reversal of Zedillo’s pension reform.

But whether Cardenas can duplicate his overwhelming victory of last Sunday is unclear. The elections in 2000 will probably force the PRD to moderate its policies, analysts say. To win the presidency, the party will need the critical middle-class vote.

“They have to kowtow to some of the grass-roots pressures,” Estevez said. “But they have to balance that if they mean to keep winning.”

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PRI Goes Down, Bolsa Goes Up

The 1994 devaluation lof the peso caused a devastating recession in Mexico and sent inflation soaring. But the devaluation, also cheapened Mexican products, producing a fresh surge in exports. And the government’s willingness to stick with a painful austerity program has brought inflation down again.

Exports are booming . . .

Value of Mexican exports to industrialized countries, in billions of dollars:

1996: $81.3

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. . . inflation is falling . . .

Annual change in Mexican consumer prices:

1997: 20.4% (Annualized, year-to-date through June

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. . . and the Mexican stock market reacts.

Monthly closes of the Bolsa index since January 1994 and the latest:

1997: Friday, 4,821.62

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Sources: Organization for Economic Cooperation and Development, Bloomberg News.