Austerity policy spells tough year for Mexico

BY PHIL DAVISON

Latin America Correspondent

Mexicans, already reeling over a series of high-level murder and corruption scandals, are braced for a hard year of austerity and possible social unrest, after the government announced the toughest economic measures in the country's modern history.

Using a live nationwide television broadcast to get the message across, the Finance Minister, Guillermo Ortiz, unveiled a shock therapy package including a 35 per cent rise in petrol prices, a 20 per cent rise in electricity, a boost in VAT from 10 to 15 per cent and wage restrictions that will cut workers' purchasing power by more than a third this year.

The aim was to stabilise the peso, which has fallen to less than half its value of three months ago, and halt a mass outflow of the Mexican currency. After falling for five consecutive days to record lows, touching an unofficial rate of eight to the dollar on Thursday, the peso gained ground yesterday to trade at around 6.5 against the dollar. But dealers said the gains may have had more to do with intervention by the central bank, Banco de Mexico, than investor and public confidence. Mr Ortiz said the peso would continue to float, and predicted it would edge upwards during the year.

Warning that "in the short term, this programme is going to be difficult for all Mexicans", Mr Ortiz said: "There is no easy way out". He predicted that the measures would lead to 42 per cent inflation this year, and the economy would slide into recession with minus 2 per cent growth.

A key aim of the package is to slash the crippling current account deficit, which reached $30bn last year as Mexico imported far more than it could afford. Mr Ortiz said he hoped to reduce the deficit to around $2bn, or even eliminate it.

The austerity package stunned Mexicans, even though they had been expecting it. The fact that an International Monetary Fund (IMF) team had been in Mexico City for several days, apparently guiding policy, and that the US ambassador, James Jones, had pre-empted Mr Ortiz a day earlier by heralding the measures, brought further criticism that President Ernesto Zedillo had become a prisoner of the US administration and the world financial community.

Not surprisingly, since the austerity measures were almost textbook IMF prescriptions, the IMF welcomed them. It is providing more than $18bn as part of a worldwide total of $50bn in loan guarantees led by the US.

"We don't like the measures, but we have to move forward," said Fernando Legaretta, head of the Confederation of Chambers of Industry. "This project will be difficult for society but there are no other options," added Luis German Carcoba, another employers' leader.