Though still vulnerable, nation shows resilience through dips and swells

By RICARDO SANDOVAL / The Dallas Morning News

MEXICO CITY – For the average Mexican looking at the recent ups and downs of economic indicators, it's an invitation to whiplash.

But experts say what they're actually seeing is a more mature, increasingly stable economy able to withstand the indicator roller-coaster without sparking a crisis.

Just in the last week:

• The International Monetary Fund stunned the Mexican economy, warning that the country's international debt load was too high. Stocks on the Mexican exchange, the Bolsa, tumbled.

• Fears emerged that the U.S. Federal Reserve would raise interest rates. Stocks fell further.

• Interest-rate fears diminished, Mexico's public retirement funds were given broader investment powers, and economists dismissed the debt warnings. The Bolsa and the Mexican peso rebounded.

• Renewed fears emerged that U.S. interest-rate increases hikes would make it more expensive for Mexico to repay its $142 billion international debt. The peso and stocks plunged and lost more ground Friday. The peso declined 1.05 percent to a record low 11.57 per dollar, while the Bolsa's IPC index fell 0.62 percent to close the week at 9,790.99.

Despite the chaos, there is no sign of panic.

'Palpable recovery'

"It can be confusing with all these indicators going in different directions, but the bottom line is that Mexico's economy is healthy, and healthy under conditions that in the past may have sparked a crisis," said Luis de la Calle, director of the Mexico office of Austin-based consultancy Public Strategies Inc. "There is a palpable recovery. The conditions are good, but there's a danger that being comfortable and with a growing economy, Mexican elected officials will see that as an excuse not to make the necessary fixes to the country's economic infrastructure and to attract more foreign and domestic investment."

That's why the same economists now heaping short-term praise on Mexico also warn of trouble over the long haul if President Vicente Fox's finance team doesn't address underlying troubles, such as the country's international debt and a growing budget deficit.

Mexico remains vulnerable to fluctuations in U.S. interest rates and inflation, and it hasn't done enough to convince foreign investors it's serious about reforms, said Mr. de la Calle, a former Mexican trade negotiator and senior official in the Economy Ministry.

"Interest rates go up in the United States, and that will be a drag on Mexico's debt costs, even though the country has done well by securing fixed interest rates for 80 percent of its debt," said Alfredo Cotuñio, an economist at the Center for the Economic Forecasting of Mexico in Philadelphia. "That's why there's still worry over Mexico's debt."

Mexico has worked hard to lower its foreign obligations and is lauded for shaving $30 billion from its burden.

Yet the debt picture is smudged by Mexico's domestic balance of payments – the difference between its income and what's spent on education and other social programs.

The deficit is officially a manageable $3 billion. But the listed figure does not account for at least $100 billion in unsettled accounts for recent bailouts like those of the banking and highway systems and the takeover of the Mexican sugar industry.

"Mexico's economy is stable. There is no crisis. But that's not good news," said Eduardo Garcia, editor of "Sentido Común," a Mexico business newsletter. "The economy should be growing, responding to its growing young, dynamic population that demands jobs and economic growth. ... Young Mexicans need something to aspire to, other than just planning to migrate to the United States."

U.S. ties

Its economy is inextricably tied to U.S. financial health, so during three years of tough times north of the border, Mexico booked no economic growth.

Mexico's manufacturing jobs – the backbone of the economy – are still threatened by cheap labor in China. Foreign investors have stayed away because Mr. Fox has failed to initiate reforms of the tax and judicial systems and the financially strapped national energy companies.

However, the economy will grow as much as 4 percent this year, according to economists and the government. Jobs are rebounding after three years of layoffs as manufacturing regains vigor. And Mexican consumer confidence rose 0.7 percent in April from last year.

The upbeat prognosis has some Mexicans using a more optimistic lexicon.

"We now speak of 'soft landings,' 'slowdowns' and 'positive wealth effects,' where before Mexicans only spoke of 'financial disaster,' 'drastic pessimism,' and 'wealth destruction,' " Mr. de la Calle said. "The ups and downs – not the boom and bust – is a normal business cycle. We're just not accustomed to seeing that."

E-mail rsandoval@dallasnews.com