BUSINESS

Mexico’s slow recovery

TOM FENNELL October 12 1987
BUSINESS

Mexico’s slow recovery

TOM FENNELL October 12 1987

Mexico’s slow recovery

BUSINESS

Many Mexicans call it “the Year of Hidalgo” after Miguel Hidalgo, a hero of the Mexican independence movement whose picture adorns the nation’s currency. It happens every six years when, in the runup to presidential elections, the ruling Institutional Revolutionary Party (PRI) tries to attract votes by spending lavishly on public works projects. But now it appears that the tradition may change in the campaign for the July, 1988, election. The Mexican economy, which was almost bankrupt two years ago, is showing signs of a modest recovery. And many leading candidates are pledging to continue President Miguel de la Madrid’s conservative tight-money policies—a position that could drastically reduce their willingness to spend money on “Hidalgo.” Said Carlos Salinas de Gortari, secretary of planning and the federal budget and a leading presidential hopeful: “We want to continue the structural changes begun in this administration.”

Even though the restraint program has improved Mexico’s economy, the nation is still operating with a mas-

sive $135-billion foreign debt. But the price of Mexican oil has rebounded to $25 per barrel from $12 in 1985, and the government’s willingness to allow Mexico’s currency, the peso, to continue a free fall that began in 1982, has made the country’s manufactured exports more competitive. As well, $10 billion in new international loans has increased the government’s critical cash reserves to $20 billion from $7 billion in 1985. At the same time, Mexico’s decision last year to allow the private sector to exchange debt for foreign ownership has generated a new source of development capital. José Coballasi, president of a Mexico City financial executives’ group, said that the turnaround has been slow, 5 but it has been enough to increase confidence in Mexico’s future. “I do not think we are going to rebuild the economy in six months,” he said. “But at least we are not so pessimistic.”

That new confidence is reflected on the soaring Mexican stock exchange and by some of the nation’s wealthiest citizens who are once again investing heavily in their own country. Indeed,

billions of dollars have returned to Mexico in the past two years and are now being poured into the exchange. Since January the average share price of the 42 leading companies on the Mexican exchange shot up more than 650 per cent—outperforming even the New York and Tokyo stock exchanges. Said Timothy Heyman, a director with the Mexico City-based investment firm Estrategia Bursátil: “People now realize that they can earn more money investing in Mexico than they can outside of the country. The level of capital repatriation is somewhere between

$2.5 billion and $4 billion per year over the past two years.”

Share prices on the exchange are widely expected to climb even higher. In August, 1982, the average book value of companies listed on the exchange was at an all-time low. The value of all issued stock in a company often amounted to only about 20 per cent of the firm’s asset value. As a result, investors could buy into Mexican companies at a discounted rate, and they are now making large returns on their investments. But as the firms were allowed to sell off debt,

and in some cases expand, their value began to pick up. And in other cases share prices are still below the real value of listed firms. Heyman also said that companies that do business primarily in the United States are now being valued on the same basis by financial analysts as their U.S. counterparts, and that fact could push share prices even higher.

Underpinning the recovery is what many experts say is a fragile truce between government and business and the apparent confidence on the part of many businessmen that the PRI has made a fundamental shift away from government intervention in the economy to a more hands-off policy. Many business leaders say that they have been suspicious of the government’s intentions since the mid-1970s, when then-president Luis Echeverría Alvarez expropriated vast tracts of land and turned it over to landless peasants. And their concern was reinforced in 1982 when Echeverria’s successor, José López Portillo, nationalized the banks. Historian and businessman Enrique Krauze described the bank takeovers as the “breaking point.” Many businessmen, he said, then concluded that the government would begin seizing private property indiscriminately.

But the government signalled a change in attitude in 1985 when oil prices tumbled to $12 a barrel from $39. Instead of responding with more intervention in the economy, the government placed strict constraints on the money supply, continued to allow the peso to float—and fall—on international money markets and slashed tariffs to increase competition. At first some Mexican firms suffered, but many of them have since become more internationally competitive. Said a senior executive with Nacobre, a large producer of copper wire and pipes: “We have a very nice government at this time.”

Still, Mexico’s economy is far short of a full recovery. The Gross National Product is expected to grow by 1.5 per cent this year, leaving its average annual growth over the past five years at less than one per cent. The economy would have to produce 900,000 new jobs a year to cut into Mexico’s 15-per-cent unemployment rate, but it is now expanding at only half that amount. But de la Madrid declared, “Confidence in Mexico’s situation has grown in both Mexico and international financial circles.” The challenge that will face Mexico’s new leaders: to design a fiscal policy that will maintain that emerging confidence.

-TOM FENNELL with CHRIS McGREAL in Mexico City

CHRIS MeGREAL