Mexico's Recovery Rides on Investor Confidence

MEXICAN President Ernesto Zedillo Ponce de Leon is trying to convince the international financial community that his country's future is bright.

In Washington last week, Mr. Zedillo basked in President Clinton's praise for his stewardship of the post-peso crisis recovery. And Zedillo moved easily among central bank governors, finance ministers, and commercial bankers gathered here for the annual meetings of the International Monetary Fund (IMF) and the World Bank.

Appearances with this crowd are important to Zedillo, who underscored his political leadership and management of an economy rebounding from troubles that rocked financial markets worldwide. As part of an international rescue package extended after the Mexican peso collapsed last December, the United States made $20 billion available to Mexico (Zedillo drew on $12.5 billion), while the IMF pledged another $17.8 billion.

"Investors lost confidence and markets lost value," says Lawrence Summers, deputy secretary of the US Treasury. But "our support is safe and is serving its purpose," he says. "Mexico has made economic progress ... the North American Free Trade Agreement [NAFTA] is protecting our exports. Mexico's revival was in America's interest."

Sen. Alfonse D'Amato (R) of New York, chairman of the Senate Banking Committee and a leading critic of the Clinton administration's position on Mexico, says the US Treasury Department has something to hide by refusing to release a classified IMF report. He says it reportedly shows the Fund responding to political pressure from the Mexican government as it determined its own role in the post-peso recovery plan. Senator D'Amato is also demanding an immediate repayment of the $12.5 billion.

US Treasury officials counter that D'Amato knows well the IMF, not the US, decided to classify its internal report on Mexico, and it is up to the IMF, not the Clinton administration, to make it public.

The senator is simply revving up for a broadside against the administration in the next two weeks, they say, when the $1.3 billion balance of Mexico's $2 billion short-term loan from the US (Zedillo paid $700 million last week) comes due. The three-month short-term loan, originally extended in February, has been rolled over twice, in May and July; international financiers anticipate a third rollover on Oct. 31.

Still financially strained

While Mr. Summers says Zedillo's economic team is on course with a $4 billion return of foreign investment this year, a buildup of Mexican reserves from $6 billion to $15 billion since January, and falling interest rates, the country is still financially strained and relying on the available support.

"Mexico is probably headed in the right direction, but that doesn't mean that it will get where it needs to go," says Peter Hakim, president of the Inter-American Dialogue in Washington.

Economists point to Mexico's big obstacles ahead. The country has not bounced back from a formidable 10.5 percent drop in gross domestic product (GDP) during the first six months of this year. Impoverished by the sharp devaluation of their currency, Mexicans have slashed consumption.

Despite limited government efforts to create jobs for the country's poorest, work prospects are bleak in Mexico, where there are 1 million new entrants into the work force each year.

"Mexico's giant conglomerates, Grupo Sidek and Grupo Financiero Banamex, are on the verge of financial collapse and threaten to eviscerate the country's financial structure," says Jeremy Adelman, a history professor at Princeton University.

To many of Mexico's banks, default is more likely than repayment. At risk are loans to highly indebted business and consumer borrowers, for whom the cost of borrowing soared after the value of the peso plummeted.

Financial-sector woes

"The financial-sector problem looks deeper than meets the eye," warns a top World Bank official. In the medium-term, he says, the country will struggle with bank failures and bailouts. "But Mexico has shown a remarkable ability to recover, and in five years they'll be out of it." Before then, according to Mexican finance officials, the government will spend at least 4 percent of Mexico's GDP to bail out the banks.

The Paris-based Organization of Economic Cooperation and Development predicates Mexico's slow recovery on two conditions: strong investor confidence and the containment of inflation, now raging at an annualized rate of 35 percent.

International lenders have a lot riding on those results. Together, they made almost $50 billion available to Mexico in the rescue package.

Zedillo, who saw international buyers snap up the bonds he floated last week to raise funds for his first payment on the loans, is under constant pressure to win global investors' confidence. He relies on them to supply added emergency financing and counts on their return to Mexico with longer-term investments.