One Break and Mexico Will Be Ready to Boom

Amid all the news of global change these days, a story that often isn’t in the headlines could provide one of the bigger surprises of the next decade: the coming prosperity of Mexico.

The talk in New York financial circles is that Mexico is the next hot country, the rapid developer of the 1990s as were the newly industrializing countries of Asia--South Korea, Taiwan, Singapore and Hong Kong--in the 1980s.

“Mexico has more potential than all the other developing countries put together,” says a Wall Street investment banker, reflecting widely held opinion. It has a disciplined labor force, able and willing workers--and lots more of them.

New York’s confidence is matched in Mexico City. “We’re going to have a boom,” says John Rhoads, a former Californian who heads CBI Casa de Bolsa, a major investment house in Mexico City. Mexico’s economic growth, based on the predictions of President Carlos Salinas de Gortari, could speed up to more than 7% a year--from practically no growth since 1982. “We’re heading into another cycle of optimism,” says Rhoads.

But “another cycle” are the operative words there. Mexico has boomed before, especially in the 1970s after major new oil discoveries. And it has gone bust before--severely in this decade, when living standards have been cut in half.

So how much of today’s confidence reflects reality? And why should Americans care, when they have their own troubles with far larger economies in Japan and Europe?

Americans should care because a neighboring country of 85 million people holds enormous implications for the United States. First, it’s a great customer. In 1981, before its economy declined, Mexico took $20 billion of U.S. exports--as much as Japan that year. Last year, even with a stagnant economy, Mexico took $23 billion of U.S. goods, far more than any of the smaller Asian nations, and 75% of what Japan bought. Real development in Mexico would provide a big and growing market for U.S. industry.

History of Investment

Also its development would provide opportunity for investment--and put to useful purpose some of the billions now rocketing around the global money markets.

Mexico has a long history of foreign investment. First it brought in too much, from Britain and America during the 19th-Century regime of Porfirio Diaz. The money led eventually to revolution and a reaction against foreign ownership that was capped by the seizure of U.S.-owned oil properties in 1938.

Now, 50 years later, policies against foreign investment are being relaxed by the Salinas government, which recently announced limited openings for foreign ownership. Ultimately, Salinas--who stresses the fact that his two sons are studying the Japanese language--wants to attract sizable foreign investments.

They will be needed, among other things, to help expand and modernize the telephone system. D. A. Campbell Inc., a Los Angeles investment company that specializes in Mexican securities, estimates that Telefonos Mexicanos, the national telephone company, will have to increase its current $1-billion annual capital investment by 10% a year in the next decade just to keep up with expanding demand. Yet despite such needs, TelMex stock has been rising in both Mexican and U.S. trading because it is seen as a symbol of the country’s potential.

So far, however, confidence in that potential is more political than economic, resting largely on the performance of the Salinas government. Salinas, who is only 40 years old, won the Mexican election last year with a narrow majority, because powerful unions--particularly the corrupt oil workers union--swung their votes to another candidate. Derided as “the mouse” by political commentators in Mexico City, Salinas took office amid expectations that he would be too weak to rule.

But he turned apparent weakness into strength. He used the oil workers defection from Mexico’s ruling party as a weapon against them, moving boldly to arrest the head of the union. Other moves followed, asserting presidential authority over labor and business.

Yet still, the Mexican economy is growing at a rate of less than 1% a year and Mexican business, to say nothing of foreigners, are reluctant to invest. At least $25 billion of Mexican capital remains outside the country.

What’s the economy waiting for? It’s waiting for some sign of success in June as Mexico once again renegotiates terms of more than $50 billion of its foreign debt with international banks. It has had such negotiations every year since 1982.

This year, however, is different. This year, Mexico’s request for debt reduction--for the opportunity to give the banks long-term bonds in exchange for its loans--has the backing of the U.S. Treasury, which has announced a policy favoring debt reduction. Success in the negotiations could reduce Mexico’s interest payments by $3 billion a year and, more important, attract back Mexican capital and new foreign capital.

“In the next month must come the solution,” said Mexico’s leading newspaper Excelsior Monday. If it does, confidence in Mexico will be more than just talk.