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[email protected] Jan 26 15:43:03 1995
Date: Mon, 23 Jan 1995 11:51:54 -0800 (PST)
From: IATP <
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To: Recipients of conference <
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Subject: NAFTA & Inter-AM ade Monitor 1-
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NAFTA and Inter-American Trade Monitor
Produced by the Institute for Agriculture and Trade Policy
January 24, 1995
Volume 2, Number 3
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HEADLINES
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"TEQUILA EFFECT" IN LATIN AMERICA AND BEYOND
SELLING MEXICO: PRIVATIZATION AND LOANS
IMPACT OF DEVALUATION ON U.S. LABOR AND INDUSTRY
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"TEQUILA EFFECT" IN LATIN AMERICA AND BEYOND
The devaluation of the Mexican peso initially rattled markets and
confidence throughout Latin America.
Lines of Argentines waited at banks to change pesos into dollars in
late December, and markets plunged 19 percent. Economic Minister
Domingo Cavallo said that the government would not devalue, and
that Argentina would prefer total "dollarization" of its economy to
devaluation on the Mexican model. Cavallo also announced
continuing privatization during 1995, including planned sales of
several hydroelectric plants, a petrochemical plant, and three
nuclear power stations, to raise a total of three billion dollars.
The Argentine experience of hyperinflation in the 1980's led to
adoption of convertibility, which fixes the peso by law at a strict
one-to-one ratio with the dollar. Argentina's trade deficit is
proportionately half that of Mexico and its growth rate has been at
seven percent annually for four years. After the initial shock,
Argentines appeared to regain confidence in their economy, though
foreign investors remained wary of all Latin American markets.
Brazil's markets also fell in response to the peso's devaluation,
losing nearly 20 percent in the first few days after the devaluation,
and continuing to slide in the succeeding weeks. Announcement of
a billion dollar error in December trade figures, resulting in a total
trade deficit for the month of nearly a billion dollars also shook
investor confidence, though Brazil will still show a total trade
surplus of about $10.5 billion for 1994.
The Brazilian government's move to take over two of the country's
biggest banks, Sao Paulo's Banespa and Rio de Janeiro's Banerj, did
not seem to affect customer and banking confidence. The bank
takeover was made in response to liquidity problems, not to the
peso devaluation. Banks owned by states and the central
government hold slightly more than half of the country's banking
assets, but are widely seen as inefficient, and have survived until
now mainly due to inflationary windfalls.
Peruvian markets fell by 19 percent, and even Asian and Eastern
European investments suffered from shaken investor confidence.
All of the so-called emerging markets suffered from loss of investor
confidence, with Hong Kong's stock market sliding by 12.7 percent
since the end of November, Poland by seven percent, and Morgan
Stanley's emerging markets index, based on 768 large companies in
19 nations, falling by 14.91 percent.
In addition to stock market and currency fluctuations sparked by
the peso devaluation, Caribbean and Central American countries
fear the devalued peso will further handicap their own apparel
export sectors. Mexico's apparel exports to the United States were
already taking market share away from these countries, aided by
Mexico's NAFTA preference, and the devaluation will give Mexico
an added advantage.
According to a study by the German non-governmental
organization, World Economy, Ecology and Development (WEED),
Latin American debt has increased by nearly $40 billion since the
end of 1990, to a total of $513 billion at the end of 1993. Debt
service charges increased from $46.1 billion in 1990 to $57.3 billion
in 1993. In Argentina alone, debt service during 1995 will require
$5.2 billion.
WEED warned that the rise in interest charges may signal an
impending crisis, especially as interest rates continue to increase.
Nearly half of Latin American foreign debts are on variable interest
rates. The WEED report noted that much recent foreign investment
in Latin America is short-term and speculative and could be
quickly withdrawn. "Increasing interest charges and at the same
time growing withdrawal of capital: precisely this constellation had
led Latin America into a debt crisis in the 1980's," warned WEED.
Source: David Pilling, "Argentina Battered by 'Tequila Effect,'"
FINANCIAL TIMES, 1/5/95; Michael R. Sesit, "Dollar Darwinism,"
WALL STREET JOURNAL, 1/12/95; David Pilling, "Argentina
Combats Mexican Wave," FINANCIAL TIMES, 1/9/95; "Watching for
the Tequila Hangover," FINANCIAL TIMES, 1/9/95; Angus Foster,
"Brazil Makes $1bn Error in Trade Figures," FINANCIAL TIMES,
1/17/95; David Pilling, "Argentina to 'Raise $3bn in Sell-Offs,'"
FINANCIAL TIMES, 1/11/95; Ramesh Jaura, "German Study Warns
of Another Debt Crisis," INTERPRESS SERVICE, 12/13/94; Paul B.
Carroll and Craig Torres, "Doubts Persist on Mexico's Rescue Plan,"
WALL STREET JOURNAL, 1/5/95; Canute James, "Caribbean Apparel
Sector Fears Fall of Peso to Aid Mexico Exports to US," JOURNAL OF
COMMERCE, 1/10/95; Angus Foster, "Brazil Bank Takeover Heralds
an Overhaul," FINANCIAL TIMES, 1/6/95; Matt Moffett, "Central
Bank of Brazil Takes Over 2 Lenders," WALL STREET JOURNAL,
1/2/95; Francis Flaherty, "In Emerging Markets, Mexico Is
Everywhere," NEW YORK TIMES, 1/14/95; "A Testing Time for
South America's Markets," FINANCIAL TIMES, 1/9/95.
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SELLING MEXICO: PRIVATIZATION AND LOANS
Finance Minister Guillermo Ortiz announced plans to expand
Mexico's privatization program as part of the government's move to
respond to the current financial crisis. Privatization will now
extend to sale of significant parts of CFE, the state electricity
monopoly, generating as much as $6 billion from CFE alone. The
government also plans to sell toll roads ($1-1.5 billion), its
remaining 23 percent share in Bancomer bank ($500 million to $1
billion), airports ($250 million to $1 billion), satellite access ($1.5
billion), petrochemicals ($1.3 billion), long-distance and local
telephones ($1-1.5 billion), and ports ($200 million). According to
Ortiz, total new privatization revenues will reach $12.2-$14.5
billion over the next four to five years. The finance minister made
the announcement at a meeting of bankers and investors in New
York on January 5.
Like Pemex (the national oil company), CFE itself will continue to be
state-owned, according to the Mexican Energy Ministry, with the
government merely continuing "processes already begun of private
capital participation in secondary petrochemicals and electricity
generation." The government will allow private investment in
building new electricity plants, and will also sell securities backed
by current generating plants' future income. Given these
limitations, industry experts doubt that CFE sales will generate as
much income as Ortiz has projected.
Under NAFTA, Mexico agreed to gradually open its borders to
foreign banks, allowing a 15 percent share in the Mexican market
by 1999. Last year, Mexico approved opening of a limited number
of foreign branch banks. Now, as part of its response to the crisis,
the Mexican government has proposed allowing 100 percent foreign
ownership of any of the country's financial institutions. Foreign
purchase of Mexican banks would have an added advantage of
recapitalizing banks that see a large increase in outstanding and
overdue loans as a result of the current financial crisis. On the
other hand, the increase in overdue loans makes the banks less
attractive to foreign purchasers.
Under NAFTA, Mexico also retained exemptions for a number of
government-owned industries, including railroads and satellite
operations. Both are now up for sale. Analysts say, however, that
privatization may not bring as much income as projected by the
Mexican government because of both investor uncertainty and loss
in value of some assets, such as railroads and container terminals,
due to diminution of trade.
None of the multi-billion dollar rescue package from foreign sources
is coming to Mexico as aid. All of the money pledged is in the form
of loans or loan guarantees. Thus, Mexican debt will grow in
proportion to the amount of the loan guarantees that eventually are
used to strengthen the peso. The latest U.S. package, which would
come on top of the initial $18 billion international credit line, may
run as high as $40 billion.
If the U.S. loan guarantees, proposed by the Clinton administration
and agreed to by Republican leaders in Congress, are used, Mexico
will issue bonds underwritten by Wall Street and will pay investors
only the U.S. Treasury rate or slightly more. A one-year U.S.
Treasury bill pays 6.44 percent interest, in contrast to a one-year
Mexican tesobono (pegged to the dollar exchange rate), which pays
almost 20 percent. In addition to the interest, Mexico will make
up-front, non-refundable fee payments to the U.S. government if
and when the loan guarantees are used. These fees, still under
negotiation, could run as high as 10 percent.
While Republican leaders have agreed to the loan package, rank-
and-file Republicans, and some Democrats, oppose the package, and
its passage is far from certain. One month after the peso
devaluation, the Mexican stock market had lost one-third of its
value and the peso was trading at about 5.5 to the dollar, down
from the pre-devaluation level of 3.46 to the dollar. Mexican
markets continued to slide in response to doubts over the loan
package.
Source: Stephen Fidler and Lisa Bransten, "Mexican Sell-offs to Help
Solve the Debt Crisis," FINANCIAL TIMES, 1/8/95; Kevin G. Hall,
"Weak Peso Jeopardizes Privatization Calculations," JOURNAL OF
COMMERCE, 1/12/95; Ted Bardacke, "Mexico to Revamp Power Sell-
Off Plan," FINANCIAL TIMES, 1/13/95; "Mexico's High Expectations
Puzzle Energy Analysts," REUTERS (via JOURNAL OF COMMERCE,
1/13/95); Daniel Dombey, Banks Take Devaluation Beating," EL
FINANCIERO, 1/9-15/95; Ted Bardacke, "Investors Get Jitters Over
Mexican Banks," FINANCIAL TIMES, 1/11/95; Bob Davis, "Nafta is
Key to Mexico's Rescue of Peso; U.S. Exporters May Not See Tariff
Help," WALL STREET JOURNAL, 1/4/95; Anthony DePalma, "Mexico
Says It Will Pay Loan Fees," NEW YORK TIMES, 1/14/95; Keith
Bradsher, "U.S. Debates Price for Mexican Aid," NEW YORK TIMES,
1/14/95; David E. Sanger, "Leaders of G.O.P. in Congress Back
Clinton on Mexico," NEW YORK TIMES, 1/13/95; Anthony DePalma,
"Aid Doubts Strain Mexican Markets," NEW YORK TIMES, 1/21/95;
Anthony DePalma, "U.S. Dispute on Loan Guarantees Hurts Mexican
Stocks," NEW YORK TIMES, 1/20/95.
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IMPACT OF DEVALUATION ON U.S. LABOR AND INDUSTRY
Two U.S. administrations have used theoretical calculations to
defend NAFTA as a job-creating mechanism. The calculations were
based on an assertion that increased exports created U.S. jobs. With
the peso's devaluation, U.S. exports to Mexico are certain to
decrease, because U.S. goods have become more expensive. Now
the U.S. looks toward projected trade deficits with Mexico, on top of
actual trade deficits in the last quarter of 1994. Even the
theoretical calculations previously used to show job growth cannot
paint an encouraging picture.
"[NAFTA has] cost tens of thousands of U.S. jobs already," said Rep.
Peter DeFazio (D-OR), a long-time NAFTA opponent, "and is now
well on its way to becoming the biggest taxpayer bailout for banks
and foreign interests since the savings and loan scandal."
Retailers have been forced to hold back shipments of consumer
goods to Mexico, while canceled orders and delayed payments have
stalled shipping at the border. Both Wal-Mart and Kmart report
drastic decreases in shipments to Mexico, and Wal-Mart has laid off
250 people in its Laredo warehouse.
The prices of imported capital goods will rise, slowing Mexican
acquisition of technology for its manufacturing and
telecommunications sectors. If industrial development slows as a
result, jobs will be lost. As Mexican wages decrease in value, and as
small businesses close their doors, many Mexicans are considering a
move north.
The impact of the peso devaluation on burgeoning U.S. agricultural-
sector exports to Mexico remains unclear, according to the U.S.
Department of Agriculture. Poultry exports more than quadrupled
between 1989 and 1993. Fish and seafood products, soybeans and
wheat benefited from reduced import barriers in the first year of
NAFTA. Total U.S. agricultural exports to Mexico from January-
October 1994 were $3.7 billion, up 23.6 percent from the same
period in 1993. U.S. beef exporters, however, estimate that their
shipments to Mexico have fallen 70-80 percent in the last month.
U.S. beef exports to Mexico totaled 63,800 tons during the first ten
months of 1994.
Source: Bob Davis, "Nafta is Key to Mexico's Rescue of Peso; U.S.
Exporters May Not See Tariff Help," WALL STREET JOURNAL,
1/4/95; Martin Crutsinger, "Fallout From Peso's Fall," ASSOCIATED
PRESS, 1/14/95; Daniel Dombey, "Post Devaluation Outlook Unclear
for U.S. Agricultural Exports," EL FINANCIERO, 1/2-8/95; Kevin G.
Hall, "Peso Woes Leave Cargo Languishing in Ports, Railyards,"
JOURNAL OF COMMERCE, 1/9/95; Gregory Johnson, "Crisis Keeps
Consumer Products in the US," JOURNAL OF COMMERCE, 1/17/95;
John M. Nagel, "Devaluation Trade-Off," EL FINANCIERO, 1/2-8/94;
Al Taranto, "Devaluation Will Fuel Immigration," EL FINANCIERO,
1/2-8/95.
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The NAFTA and Inter-American Trade Monitor is available in both
English and Spanish on Association for Progressive Communications
(APC) computer networks on the conference eai.news. It can also
be faxed or sent via mail on request. We welcome your comments
and contributions.
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