Recession-Weary Mexico Begins Wobbly Recovery

Tomas Tarno, a Mexican shoemaker, has cut his production by half. He’s wrestled with the bank to stretch out his loan payments. He’s begged for an extension on his Social Security contributions.

So what does he call 1996?

An improvement.

“We haven’t earned any money,” admitted the businessman, a short, gray-suited figure with crinkly gray hair, sitting in an office cluttered with his collection of hundreds of tiny ceramic and plastic toy shoes.

“But last year we lost a lot of money. This year, we’re not losing.”

Welcome to Mexico’s long-awaited recovery.

After its worst economic crisis in six decades, the United States’ No. 3 trading partner is finally turning the corner. It is a prospect welcomed not only here but across the hemisphere, particularly in places like California and Texas, where a stronger Mexico slows the influx of undocumented immigrants and buys more U.S. products.

But burdened by huge debts, persistent high joblessness and a lack of fresh investment, Mexico faces a long climb back to economic health.

“The recovery will not happen overnight,” admitted Alejandro Valenzuela, a Finance Ministry official, noting that Mexico is struggling back from a staggering 7% plunge in output last year. “The last crisis of this magnitude was in 1932. That’s like ‘The Grapes of Wrath.’ ”

For recession-weary Mexicans, recent weeks have finally brought uplifting news. The country’s output, or gross domestic product, shrank only 1% in the first quarter from a year earlier--better than the 3% drop officials had forecast. President Ernesto Zedillo is predicting a 5% jump in the current quarter.

Meanwhile, interest rates on government debt have skidded to their lowest levels since the disastrous December 1994 peso devaluation, which touched off the recession.

The wobbly peso has stabilized, inflation is tapering off, and exports--aided by the cheap peso--are booming.

The Mexican government, which has followed an unpopular program of attacking inflation and slashing spending, is jubilant. So is Washington, which lent Mexico about $13 billion--and has so far been repaid $3 billion--during the crisis.

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Yet for Tarno and thousands of other business people and their tens of thousands of workers, the recovery is barely visible.

“I think things have hit bottom,” Tarno said, speaking over the whine of shoemaking machines in his factory in a gritty Mexico City neighborhood. “The danger is, we’re not moving forward. We risk dying of starvation.”

Economic recoveries, of course, often are slow in trickling down to consumers and smaller businesses. But analysts say the current Mexican turnaround may be especially rocky.

In part, that’s because Mexican entrepreneurs are still struggling through a historic opening of their once-closed economy.

Even before the devaluation, for example, Tarno’s business was hit hard by a flood of cheap Asian-made shoes. His response: importing higher-quality materials and opening stores to promote his footwear.

“We managed to survive,” he recalled.

But then came the recession. Those imported materials soared in price because of the peso’s devaluation. As sales plummeted, his already difficult situation became impossible. Finally, he laid off nearly three dozen of his 170 employees. Today, only one of his two production lines is operating.

An even more important drag on Mexico’s recovery is the extraordinary debt that continues to weigh down businesses and consumers alike. At least 30% of the system’s loans are estimated to be past due.

The problem of swelling loans is particularly acute for big-time entrepreneurs like Jorge and Jose Martinez Guitron, who borrowed in dollars.

The brothers, who run a prominent tourism-and-steel conglomerate, Grupo Sidek, went on a hotel-and-condo building spree in the early 1990s. Gleeful about Mexico’s expected boom, they racked up $2.1 billion in debt.

But with the economic crisis, Sidek’s sales of land plunged. Condo owners defaulted on mortgages financed by the company. To top it off, Sidek’s debt suddenly doubled in peso terms.

In what has become one of Latin America’s biggest corporate debt disasters, Sidek shocked financial markets in February by defaulting on a $20-million international note. It also has stopped paying interest to Mexican banks on $1.5 billion in loans while it tries to restructure.

Rogelio Ramirez de la O, an independent economist, said Sidek’s case is extreme--but not rare. Burdened by debt, unable to find new investment and suffering low demand for their goods, many companies are prostrate, he said.

“One-third to one-half of the companies that issued dollar-denominated debt in international capital markets are virtually broke,” he said. “The private sector has fallen out of bed and can’t get up.”

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Indeed, even if banks were lending, many people couldn’t borrow. And if they could, they couldn’t pay the money back: Inflation has caused loan payments to mushroom. Although interest rates are off their peak, credit-card borrowers are still paying 50%, mortgage-holders more than 30%.

The stubbornly high rates reflect a lack of confidence among investors stung by the 1994 devaluation.

Jose Vicente Arguelles has seen customers start trickling back to his Mexico City plastic-sheeting company in recent months. But he often has nothing to sell.

“I don’t have money to buy raw materials, contract people or pay taxes,” he complained.

The reason he can’t borrow: He’s already over his head in debt. After he repeatedly missed payments last year, his 900,000-peso debt jumped to 1.45 million pesos, or more than $200,000.

“Every day we wake up with more debt,” he said with a sigh.

Alarmed, the government has spent $12 billion on programs to help banks unload bad loans and borrowers restructure debts on more favorable terms. The government recently announced another plan under which it will pay up to 30% of homeowners’ mortgage payments if the borrowers don’t default.

Perhaps the most serious consequence of the slow recovery is high unemployment. Officials estimate Mexico needs 5% growth just to provide jobs for the 1 million people entering the work force each year.

That’s not likely soon. Ciemex/Wefa, a U.S. firm that analyzes Mexico’s economy, predicts that only 1 million jobs will be created during Zedillo’s entire six-year term. That could translate into still higher numbers of Mexicans seeking to emigrate.

Grim as it is at street level, however, some macroeconomic pieces are falling into place. For example, thanks to its cautious policies and the U.S. loan package, Mexico has been able to raise money in world financial markets. Last month, it sold $1.7 billion in 30-year bonds--with no collateral.

“While Mexico still has a long way to go to recover from this shock . . . we’ve been successful in avoiding a catastrophe,” U.S. Deputy Treasury Secretary Lawrence Summers said in a recent interview in Mexico City.

Some economists say Mexico could eventually even see a boom in production--if it can avoid more of the political turmoil that has unnerved investors in the last two years. Increasingly efficient thanks to brisk competition, and more geared to export, Mexico could achieve strong, sustained growth in the next century, economists say.

“We’re beginning to see the light at the end of the tunnel,” said Tarno, the shoe-factory owner. But he’s still wary of political turbulence.

“Something could happen with the government, interest rates could go up--and boom! The light goes out.”