Haircutter, Analysts Question Revival of Mexican Economy
HORACIO LPEZ is no economist; he's a haircutter in a central Mexico City neighborhood.
Yet Mr. Lopez often sounds pretty much like one of the domestic or foreign analysts with eyes fixed on Mexico. Between trimming locks he grouses about a shrunken economy that shows few signs of stabilizing and a government economic team that wants him to view the coming months through rose-tinted glasses.
''How many times has the government told us this year that we've reached bottom, only to see the peso fall again, interest rates go back up, and life become a little more difficult?'' he says. ''Now they want us to believe the way is set for growth next year, but I have my doubts.''
Lopez is not alone. After Mexico's Finance Minister Guillermo Ortiz Martinez predicted last week a 3 percent growth rate for 1996, with inflation tamed to 20 percent, a peso stabilized at 7.7 to the dollar, and interest rates well below today's activity-choking 60 percent levels, even the most optimistic economic analysts replied: You may get close on one or two of those predictions, Mr. Ortiz, but taken together they're pie in the sky.
''We think something near 3 percent growth is possible, maybe in the 2.5 to 2.8 range, but this talk of 20 percent inflation is way off,'' says Jeffry Taylor, a senior investment strategist in emerging markets at Bear, Stearns & Co. in New York.
''We're looking at something closer to this year's rate of 50 percent'' inflation, he says.
Risks for government
The problem with predictions that no one accepts is that they set up the government for the debilitating lack of confidence now dragging down the Mexican economy.
Some analysts believe even 2 percent growth next year is optimistic, especially given figures released last week showing the economy shrank at an unexpectedly high 9.6 percent annual rate in the third quarter - only slightly better than the second quarter's devastating 10.5 percent retraction rate. The crux for Mexicans is that even a return to growth in 1996 will leave them well behind where they were when the economy crashed following the country's financial crisis of December 1994.
''The Mexican economy is set to contract 7 to 8 percent easily for 1995, so even if they achieve the 3 percent growth over next year, you'll still have economic activity at the end of 1996 well below where it was'' in 1994, says Lacey Gallagher, director of Latin American sovereign ratings for Standard & Poor's Corp. in New York.
The government is pinning much of its growth forecast on continuing gains in exports. But economists point out that little real recovery will register in Mexico until the domestic market fires and takes off again. ''Anything exposed to the Mexican domestic market, like retailing, banking, and construction, will remain weak, and that's what really drives the economy,'' Mr. Taylor says. ''Growth in exports is good, but that's only 30 percent of the economy.''
Anxious to offer any sign that the domestic picture is improving, the government also trumpeted unemployment figures that showed the second consecutive monthly drop, from 7.3 percent in August to 6.8 percent in October. ''That did catch our eye,'' says Daniel Goldstein, assistant director of research at Bursamex brokerage house in Mexico City. ''But what that reflects is about 75,000 new jobs in six months, and that's still very small.''
Focus on exports
With the government maintaining its tight fiscal policies and taking only moderate steps to stimulate the internal market, the focus on exports' role in Mexico's economic recovery will continue.
Fueled by a heavily devalued and free-floating peso, exports through October were up 33.7 percent over the same period a year ago. (Imports over the same 10 months contracted by 7.6 percent.)
But several factors indicate why exports alone cannot reverse Mexico's economic woes, economists say. First, exports are still highly concentrated - less than 250 companies handle more than 70 percent of Mexico's exports. In addition, a large part of Mexican exports are from maquiladoras, or in-bond plants, that use well under 5 percent Mexican components in their assembly. Finally, this year's rapid expansion of exports also means that ''at some point capacity constraints kick in,'' Ms. Gallagher says, limiting the export sector's ability to continue growing.
Normally such constraints would motivate companies to expand production capacity. But expansion requires some certainty about where the economy is headed - and that right now is what Mexico lacks. Doubts over where interest rates are going, to what extent higher inflation will offset the benefits of a lower peso, or how many more economic recovery plans the government will announce, are making any economic moves a gamble.
''That's the confidence factor, and restoring that in Mexico will be a long process,'' says Standard & Poor's Gallagher.