Mexico Tightens Its Belt

By John S. DeMott

Brutal austerity measures aim at shrinking an $86 billion mountain of debt

Mexico is a place where worlds come and go, sometimes sinking out of sight. In the 16th century, Cortes obliterated the Aztec culture in one of history's more thorough conquests. But 200 years before that, the Aztecs had built their own civilization near the ruins of an earlier, forgotten people. To this day, Mexicans are haunted by the ever present fear of still another apocalypse, and there is enough bad news in their economy at present to keep the specter alive.

Almost always, it seems, the Mexicans fall into success and then out of it before it does much toward eliminating the country's rampant poverty and underemployment. No sooner had Mexico begun to reap riches from vast new oil finds in the 1970s, for example, than the world's industrial economies became mired in recession, and unneeded oil was squirting out everywhere. Petroleum prices plummeted, deflating the hopes and dreams Mexico had fashioned for itself when it became the world's fourth largest oil producer.

During that bonanza, Mexico added $48 billion to its foreign debt, for a total at present of $85.5 billion, and only last summer it tottered on the brink of national bankruptcy. Now, however, the country appears to be making some headway toward dealing with the debt, which is expected to cost $10.5 billion in interest payments this year alone. The new government of President Miguel de la Madrid Hurtado, which was inaugurated in December, has begun an austerity program aimed at slashing Mexico's huge budget deficit, halting unnecessary government spending programs and slowing its virulent, 116% inflation. If the world economic recovery continues, Mexico may be able to step back from the brink. Says Finance Secretary Jesus Silva Herzog: "The pace of the U.S. recovery, interest rates and the oil market will decide our fate. All we need now is a little luck."

Loan-repayment targets for the first four months of the year have been met, and Silva Herzog says confidently, "Whatever happens, Mexico will live up to its financial commitments." Almost all new money the country gets is going to pay back old debts. Mexico should receive some $12.3 billion in emergency loans from the International Monetary Fund and other lenders this year. Boasts Silva Herzog of recent cash infusions: "Of the $3 billion from new loans since March, the entire $3 billion flowed right back out the entire $3 billion flowed right back out again to amortize some of our debts and pay interest on others."

Few economies have been jolted so hard, so rapidly as Mexico's. After four years of an oil-induced boom that saw the gross national product grow at an 8% average annual rate, Mexico's economy nosedived last year when the price of oil fell. This year the G.N.P. may decline by as much as 5%. During the first three months of the year, as the government's austerity program took hold, industrial production was off 11%. Mexico's auto industry, the country's largest non-oil enterprise, suffered a 50% drop in sales. Iron and steel production cooled by 11.5%. The output of radios and other appliances dropped 20%. Even beer consumption was off 20%. The number of jobs in the economy shrank by about 8%, adding perhaps as many as 1.6 million more people to the 10 million already out of work or underemployed in a work force of 30 million.

De la Madrid began the belt tightening by devaluing the peso immediately after taking office. At the same time, he adopted very strict measures to bring down inflation. The goal is an annual rate of 55% by year's end. Consumer interest rates were increased from 40% to 70% per year, gasoline prices were doubled, and a 15% value-added tax was slapped on all but the most essential goods.

The results of the austerity program show up everywhere. Mexico City's shops are bursting with goods, but there are few customers; bored clerks chat idle hours away. Auto showrooms are deserted, and understandably so: a Volkswagen Rabbit sells for 800,000 pesos, more than double the 360,000 of last summer. Ford, GM and Chrysler have stopped including fancy U.S.-made electronics in their Mexican-built cars to get around import restrictions.

On the streets, men in tattered clothing water shrubs, scrub public monuments, whitewash scaly tree trunks or sweep nearly empty stretches of roadway gutters. Business has slowed drastically even in places that cater to the rich. At Las Mananitas in Cuernavaca, a favorite weekend retreat for the capital's elite, stately white peacocks pick their way among sparsely occupied cane lawn chairs. A few months ago, Mexico's well-to-do had to wait an hour to get a table. Says Claudio Weiz, an Argentine businessman in Mexico City: "Mexicans are in a trauma. They have never suffered this kind of crisis."

Many of the businesses still open are deeply in debt. Sales of Rodacarga Co., a maker of materials-handling equipment, shrank from $20 million to less than $5 million as the peso became worth less and less and the austerity program began taking hold. A loan the company has from Philadelphia's Girard Bank now exceeds its entire peso capital. The firm's order backlog, usually nine months, has dropped to four. Company President Carlos Lopez has been forced to close down two of his company's three plants and lay off 362 of his 509 workers.

The squeeze may serve as a warning for countries who once sought quick riches from their natural resources only to find themselves stymied when commodity prices fell. Counting on a permanent high price for oil, Mexico had borrowed heavily from banks in the U.S. and elsewhere to finance drilling, steel production, roads, hospitals and increased automobile manufacturing. Bankers in New York, Tokyo and London dispensed the money after only cursory precautions because the loans were paying lucratively high interest rates of as much as 17%. Moreover, it all seemed so safe. Mexico's oil exports were rising from a paltry 200,000 bbls. daily in 1977 to 1.5 million bbls. in 1982. Last year, in fact, the country surpassed Saudi Arabia as the largest supplier of foreign oil to the U.S.

Then, almost as suddenly as it began, the Mexican "economic miracle" ended. In August, Finance Secretary Silva Herzog announced at a gathering of bankers in New York that Mexico would not be able to make scheduled payments, due over the following 90 days, of more than $3 billion. Weak oil prices had robbed the country of anticipated revenues and left it almost penniless. Says Jorge Chapa, co-owner of a large Mexican supermarket chain: "We were rich at $16 per bbl. of oil, and at $32 we were broke because we spent as if the price were already $36."

Washington, mindful of the $7.2 billion invested by American companies in Mexican enterprise and fearful of economic and political instability on its border, moved in with nearly $3 billion in emergency funds, including $1 billion in advance payments for strategic reserve oil purchases from Mexico, $1 billion in short-term funds to tide the country over, and another $1 billion in credits for such commodities as corn and beans. The International Monetary Fund gave promise of support but in return demanded the austerity program that De la Madrid has put in place.

Despite all the troubles, a few signs are beginning to indicate that the economy may be starting to pick up. At the Bolsa, the Mexican stock exchange, the mood is improving. Analysts there lightly chide each other for being perhaps a little too apocalyptic. "Not all is lost," said one observer, "because of weak demand, lack of investments and sales." Mexican companies, he feels, will just have to learn to live without profits for a while. The Bolsa's stock index, which anticipated the crisis last year and sank to 450 points in August after hitting a high of 1450 two years ago, recently rebounded and closed last week at 1087. Nonetheless, many stocks still sell for only two or three times earnings, vs. an average of almost 13 for American companies on the Standard & Poor's 500.

Here and there around Mexico, other signs of an economic upturn can be seen. The clampdown on foreign goods, for example, has worked. Imports are down 70%, running at $4 billion below targets. That has helped create a balance of payments surplus of $3.4 billion vs. a $708 million deficit for the same period last year.

More money is pouring into the country too. Two weeks ago, Xerox officials announced they would be spending $100 million to $150 million on a new manufacturing plant for small copiers, which will be exported to the U.S. Sheraton will build five more hotels to take advantage of the new tourist boom. Americans are now rushing to Mexico to bask in the sun and pick up bargains with their strong dollars. A Japanese consortium is ready to start work on a new 700-room hotel in Mexico City.

Yet even as Mexico tries to hold the line against disaster, its biggest problems remain largely unsolved. Two-thirds of the country's 76 million people live as rock-poor campesinos on subsistence farms in some of the worst rural and urban slums anywhere in the world. Undernourishment is widespread. Four of ten Mexicans never drink milk; two of ten never eat meat, eggs or bread. They live mainly on tortillas and refried beans. Some government solutions seem almost pitiful. Coca-Cola and other soft drinks are subsidized to sell for a pittance of 6-c- because their sugar content is considered nutritious.

Nothing seems to go far toward breaking the old Mexican pattern of maldistribution of wealth or bridging the vast chasm between rich and poor. Meanwhile the population keeps growing at a rate of 2 million annually. That increases pressure on authorities to deliver more jobs and social services. It also increases U.S. worries about a tide of illegal aliens.

Right now, one of the few things relieving some of the pressure on the Mexican government seems to be a widespread attitude of ni modo, a fatalist mood of "nothing can be done about it." Even labor unions are not optimistic about getting big wage increases. They had been asking for a 50% hike but probably will get only 20% at best, even though inflation has chopped the buying power of the average worker by 60%. Working union members seem happy enough just to have jobs. Two weeks ago, attempts to get a general strike off the ground fizzled. While bankers and economists feverishly work to pay interest on the country's huge debt, politicians and businessmen nervously hope that the present political calm will last.

--By John S. DeMott. Reported by Frederick Ungeheuer/Mexico City

With reporting by Frederick Ungeheuer This file is automatically generated by a robot program, so viewer discretion is required.