Defying the past, Mexico stays afloat in election year

Oil prices are stronger. The peso is firming. And if Mexico's financial authorities are right, 2000 will be the first presidential election year here in more than two decades that hasn't been accompanied by a major Mexican meltdown.

The recurring crises have muddied relations and exacerbated an asymmetrical relationship between the US and Mexico - as in 1994, when a peso crash and massive capital flight prompted President Clinton to offer Mexico a $40 billion rescue package.

The Clinton package set off a round of Mexico-bashing north of the Rio Grande, perpetuating the perception of Mexico as a "problem" on the American southern flank.

But now Mexico's books are in good shape. "Our primary objective is stability in the economy for the change in administrations in 2000," Mexico Central Bank governor Guillermo Ortiz told an American Chamber of Commerce audience in Mexico City recently. In New York, Finance Minister Jos Angel Gurra said in a speech to US business leaders that "we have already put into practice the necessary actions so we won't have any surprises.... For the first time in 30 years there will not be a crisis at the end of the presidential term" in December 2000.

Past political jolts

Of course part of Mexico's financial instability in the past has been due to political factors, and neither Mr. Ortiz nor Mr. Gurra can armor-plate the economy against political shocks like assassinations or guerrilla uprisings - both of which contributed to the 1994-95 crash.

But in many ways Mexico's economy is in better shape than it was when former President Carlos Salinas turned Mexico's green, white, and red presidential sash over to Ernesto Zedillo.

"Today the economy's vulnerability is significantly less" than in 1994, says Mr. Ortiz. Before the peso's December 1994 crash, about $40 billion in short-term capital investment left Mexico exposed to abrupt capital flight. About $20 billion of that fled the country with the assassination of ruling party presidential candidate Luis Donaldo Colosio in April 1994. But today such short-term investment is down to about $4 billion. At the same time private investment, including long-term, is at a record high.

The current account deficit is much lower than in 1994. And Mexico now has a free-floating peso, a change Ortiz says reduces risks of an abrupt adjustment.

Although Mexico has a history of opening the spending floodgates in an election year to favor the ruling Institutional Revolutionary Party (PRI), analysts expect Gurra to keep the budget under control, at the behest of President Zedillo.

"Zedillo wants to pass into history as the first president in 30 years who didn't end his term in crisis," says Isaac Katz, an economist at Mexico City's Autonomous Technological Institute. While he sees the peso weakening over the next year, Mr. Katz says the flexible exchange rate reduces the risk of "abrupt swings" in the peso-dollar exchange rate.

Another factor favoring a smooth sail through the July 2000 presidential election is falling inflation. Now at a 13 percent annual rate, Mexico's goal is to reach US levels by 2003, says Mario Rodarte, an economics analyst with the Center for Private Sector Economic Studies (CEESP).

Public distrust of government

Still, there are some caution lights on the horizon that could yet trouble placid waters, Katz says. One is public perception. "The public doesn't believe the government," he says, so people with savings and a memory of past crises can be expected to convert peso savings to dollars, ratcheting up pressure on the peso.

The other unknown is the country's political course. One strong runner in the PRI's Nov. 7 primary, Roberto Madrazo, "is much more populist and in favor of government intervention," says Katz. A Madrazo victory "would be more likely to upset foreign capital flows."

Even with that, the country's more open presidential process is largely a factor in favor of economic stability "because with things out in the open, there's less room for surprises," says the CEESP's Mr. Rodarte. Bank of Mexico's Ortiz says a more stable external picture - a stabilizing Brazil, a return to growth in Asia - should also help Mexico.

(c) Copyright 1999. The Christian Science Publishing Society