Bleak outlook faces Mexico

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The Independent Online
The economic outlook in Mexico this year is bleak, said the Organisation for Economic Co-operation and Development in its first report since the country joined the OECD.

Blaming the government for the gravity of the financial and economic crisis that began last December, the OECD said that it might have been avoided if the fundamental problem of an overvalued exchange rate had been tackled more promptly. An attack on poverty and the extreme inequalities of income was now essential, particularly since "the current crisis is likely to aggravate the state of the poor."

The OECD forecasts a decline in national output of 3-4 per cent in 1995, with private consumption falling by 8 per cent. It dissents from the government's projection that the economy will rebound in the second half of the year, saying that the stabilisation programme will have a more severe impact leading to "a more protracted" recovery in activity. Debts of households, banks and companies will constrain a rapid general upswing.

In its first analysis of the crisis that broke out in December last year, the OECD says that "the deepening of the crisis might have been reduced, or even avoided, had a more appropriate policy mix been adopted earlier in 1994."

Following the 10 per cent depreciation of the peso in March, the government intervened heavily in the foreign exchange markets to sustain the exchange- rate. At the same time, it replaced a large volume of conventional short- term government paper by dollar-indexed securities called Tesobonos, as a means of retaining the funds of investors who feared devaluation.

By August 1994, the value of Tesobonos exceeded foreign exchange reserves. "The renewal of outflows in November and December following further political disturbances quickly rendered the policy strategy unsustainable."

The OECD calls for special policies, especially for the extremely poor, estimated at around 13.6m. Such poverty, is concentrated in rural areas, particularly in the poorest regions like Chiapas in the south, where the Zapatista guerrilla revolt broke out in 1994.