Mexico Maintains Even Keel Despite Brazilian Storm

Brazil’s financial miseries were widely expected to drown the rest of Latin America, much as the “tequila effect” from Mexico’s 1994 peso crisis rippled through emerging markets elsewhere.

But Mexico’s markets have merely shrugged--as if to say, “What crisis?” Interest rates have fallen to their lowest level since August. And the once-vulnerable peso has actually gained value amid the Brazil turmoil.

So why, in an era when crisis in one emerging market usually means trouble for all of them, has Mexico been able to resist this latest infection?

The answer lies partly in Mexico’s unflinching self-discipline following its own devaluation crisis in 1994-95, often at painful cost to its 95 million people.

Equally important, Mexico has managed to distinguish itself from other emerging markets, not least because it has become so closely tied to the U.S. economy and is riding the American coattails to buoyant export growth.

“Four months ago, the popular wisdom was that if Brazil fell, then Mexico would fall. And we have seen that it didn’t happen. We have seen that our economy is stronger than the popular wisdom,” said Marco Provencio, chief government spokesman on the economy.

The decline in interest rates has been accompanied by a steady strengthening of the peso, which closed Friday at 9.95 to the dollar compared to its all-time low of 10.61 in September.

Mexican stocks, meanwhile, have recovered all the ground lost in the early January tumult surrounding Brazil’s devaluation. The key IPC index surged Friday to close at 4,200.12 points, up 6% for the year and far above its 1998 low of 2,856.10 last September.

“I believe the markets are beginning to distinguish between the different developing countries,” Provencio declared. “The fact that the Brazilian crisis was anticipated so far in advance also allowed the markets to study the differences between the emerging market economies.”

In another reflection of the fiscal discipline imposed during the mid-1990s peso crisis, officials declared proudly this month that the 1998 budget deficit was held to 1.24% of gross domestic product (compared with 7% in Brazil).

That virtually nailed the government’s target of 1.25% of GDP, enhancing Mexico’s once-shaky credibility in the eyes of market analysts.

The narrow deficit came with plenty of pain.

As oil prices plummeted last year, costing the government millions in lost revenues from oil exports, Mexico cut the budget three times, shaving nearly a full percentage point from spending so that the deficit would stay within the target range.

“It’s very impressive, and just as we have criticized Mexico for not meeting its inflation targets, so we have to be amazed at how close they come on the fiscal targets since 1995,” said Alfredo Thorn, chief Mexico economist for JP Morgan in Mexico City.

A dangerous December surge in inflation pushed the annual rate for 1998 to 18.6%, far above the original 12% forecast. But the Central Bank has since imposed a series of increasingly restrictive monetary measures, and January’s inflation rate was a shade below analysts’ forecasts.

Even amid the global upsets last year, Mexico’s GDP grew 4.8%, according to the Finance Ministry. The official forecast is for a more modest 3% growth this year, but many other Latin nations foresee negative growth.

Mauricio Gonzalez, director of the influential Grupo Economistas y Asociados consulting group, said part of Mexico’s success lies in its cautious consistency in recent years, to the extent that “Mexico has been quite boring.

“We are experiencing moderate growth, moderate reduction of inflation, our path to stability has been very gradual,” Gonzalez said. And investors are again proving willing to return to Mexico, as evidenced by this month’s successful $1-billion government bond issue, he added.

The U.S. relationship is critical to Mexico’s resilience. Non-oil exports grew 6.4% last year, less than in 1997 but still the second highest growth rate among the world’s 25 largest trading nations, according to the Finance Ministry. With nearly 90% of exports going to the United States, the continued health of U.S. markets has been a boon to Mexico.

Of course, a strengthening peso could become a drag on export growth. In 1994 an overvalued peso encouraged a torrent of imports that fueled a balance-of-payments crisis. That led finally to the government’s decision to let the peso float freely, as Brazil also did last month.

Though the peso’s dramatic fall was enormously painful to Mexicans, the floating currency policy has largely worked. The peso has been relatively stable, and Mexico’s foreign reserves have been rebuilt to a record $30 billion.

Robert J. Pelosky Jr., emerging markets analyst for Morgan Stanley Dean Witter in New York, advised investors this month to focus on “markets with high real [interest] rates, stable inflation outlooks and solid currencies as areas of opportunity.” He singled out two strong prospects: Mexico and South Africa.

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Showing Strength

Mexico’s peso dipped briefly when Brazil allowed its currency, the real, to float in mid-January, but quickly recovered. Daily closes since Jan. 1, pesos per dollar and reals per dollar:

Real: Real on Friday: 1.93

Peso: Peso on Friday: 9.96

Source: Bloomberg News