From iatp@igc.apc.orgThu Jan 26 15:43:03 1995 Date: Mon, 23 Jan 1995 11:51:54 -0800 (PST) From: IATP To: Recipients of conference Subject: NAFTA & Inter-AM ade Monitor 1- - - - - - - - - - - - - - - - - - - NAFTA and Inter-American Trade Monitor Produced by the Institute for Agriculture and Trade Policy January 24, 1995 Volume 2, Number 3 - - - - - - - - - - - - - - - - - - HEADLINES - - - - - - - - - - - - - - - - - - "TEQUILA EFFECT" IN LATIN AMERICA AND BEYOND SELLING MEXICO: PRIVATIZATION AND LOANS IMPACT OF DEVALUATION ON U.S. LABOR AND INDUSTRY - - - - - - - - - - - - - - - - - - "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. - - - - - - - - - - - - - - - - - - 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. - - - - - - - - - - - - - - - - - - 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. - - - - - - - - - - - - - - - - - - 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. ======================================================= Produced by the Institute for Agriculture and Trade Policy. Editor: Mary Turck. For information on other publications available from IATP, contact: 1313 5th Street SE, Suite 303, Minneapolis, MN 55414. 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