Mexico confronts economic crisis with tough austerity plan

January 04, 1995|By New York Times News Service

MEXICO CITY -- President Ernesto Zedillo, who had promised Mexicans personal prosperity during his election campaign last year, announced an austerity plan yesterday that is intended to stabilize Mexico's battered economy.

The plan reduces the purchasing power of workers, cuts corporate profit, trims the nation's budget and sells some state-owned resources.

Investors and financial analysts reacted cautiously to Mr. Zedillo's announcement, which had been delayed for a day to gain the assent of labor union leaders. Some analysts said the measures were not strong enough to help Mexico recover from the shock of the peso's 30 percent devaluation and the flight of billions of dollars in foreign investment over the last two weeks.

Others said they had hoped that the president would address the worries of international investors more directly.

In a 25-minute address carried on national television, Mr. Zedillo, a 43-year-old Yale-educated economist, appealed to the Mexican people, trying to soften the edges of his harsh recovery plan with calls for patriotism and self-sacrifice.

"As president, I am perfectly aware that many of the measures and actions we must carry out are difficult," he said. "Nevertheless, I am also aware that those measures and actions are essential."

Mr. Zedillo's speech did nothing to impress the financial markets in New York or here in Mexico City. The Mexican stock exchange dropped 3.2 percent yesterday, to close at 2,278.47, down 75.77 points. In New York, American depositary receipts of the bellwether Mexican stock, Telefonos de Mexico, lost 5.8 percent. The dollar rose to 5.275 pesos, up from 4.925 pesos on Monday.

"I don't think many people were impressed," said Jonathan Heath, director of Macro Assessoria Economica, a consulting firm in Mexico City. "In general, the market wanted more specifics."

Mr. Zedillo did briefly mention the aid offered by Mexico's international trading partners. This includes an $18 billion line of credit, half of it from the United States. Canada agreed to increase its credit line with Mexico to $1.5 billion Canadian. The Bank for International Settlements in Switzerland, representing the central banks of several European nations, is making available a $5 billion credit line, and international commercial banks, including Citibank, are going to syndicate a $3 billion loan.

The Mexican central bank acknowledges that it holds $6.15 billion in international reserves that it can use to avert further turmoil in the domestic financial market by purchasing pesos when the currency falls in value. Whatever funds Mexico uses would have to be repaid, with interest.

The agreement with its international partners prohibits the Mexican government from using the credit lines to finance its $28 billion current-account deficit, a broad measure of trade, which has resulted from an excess of imports over exports in recent years.

The International Monetary Fund gave prompt approval to the Mexican plan. Stanley Fischer, the fund's acting managing director, said in a statement that the policies outlined yesterday afternoon by Mr. Zedillo "show the capacity of authorities to respond promptly and effectively to economic and financial developments."

Mr. Zedillo's plan abandons the narrow trading band that Mexico had used to restrict the currency-exchange rate and control inflation. Instead, the value of the peso will be determined by buyers and sellers in currency markets, as it has been since the government was forced to allow it to float freely last month.

To address another big problem, the government says it is working with investment banks to come up with new bonds that offer longer terms and higher rates. The intention of such new bonds is to encourage investors not to pull out any more of the $7 billion in treasury bonds that fall due by the end of March.

Union opposition delayed the speech by one day. Yesterday, the unions still had reservations but signed the plan.

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