Mexican Crisis May Shift Focus to Private Sector : Government Likely to Be Less Dominant in the Marketplace

By DAN WILLIAMS

March 31, 1986 12 AM PT

Times Staff Writer

MEXICO CITY — Luis Garza Sosa’s workshop used to be piled high with coils and plates of sheet steel, a sign that business was good.

Garza Laminated Products, on the outskirts of the city, makes storage tanks, and the government of Mexico is--or used to be--his main customer. But the government, the dominant element in Mexico’s economy, is short of money these days, and so is Luis Garza Sosa.

Mexico’s income from oil exports is plunging, along with the world price of oil, and meeting payments on the $96-billion foreign debt is emptying the government treasury. There is little money left to buy anything from people like Garza, 58, a self-made industrialist.

As a result, his workshop is nearly empty. He has laid off half of his workers, and his sons are leaving the business. Even when the government orders something, he said the other day, “they don’t pay.”

Foreign Bankers Grudging

Garza’s experience is typical of what is happening to Mexicans, rich and poor, employers and employees, industrialists and day laborers, as the country undergoes its greatest economic crisis ever.

Not long ago, foreign bankers willingly were lending billions to Mexico; all they asked was how high the price of oil would go. Now they are grudgingly offering a few loans to keep the country afloat--but with many strings attached.

The conditions for the new loans, if strictly adhered to, could lead to what amounts to a counterrevolution.

For years, the government has been moving increasingly into commerce and industry; government spending now accounts for more than 40% of the gross domestic product.

But strings attached to the new financing could turn this around, erode the government’s dominance in the marketplace and signal the ascendancy of private enterprise and foreign capital.

If the bankers and their U.S. intermediaries have their way, private companies, not the government, will be Garza’s best customers.

“There is no choice but for the banks to sustain Mexico,” said Rogelio Ramirez de la O, a private economic forecaster. “The problem is they will seek changes--changes that can be verified.”

The extent of the change is fueling debate not only between Mexico and its creditors but among politicians and economists here: Is Mexico trading its sovereignty for solvency? Are the egalitarian goals of the 1910-17 Mexican Revolution being lost to foreign-imposed models of development? Can Mexico make such difficult changes at a moment of its deepest economic troubles?

The situation is complicated by the pivotal role of the United States in formulating a prescription for Mexico’s economic recovery. Through an initiative proposed last October by Treasury Secretary James A. Baker III, bail-out agreements for Third World countries are supposed to encourage free enterprise, spur foreign investment and reduce government intervention.

$10 Billion for Interest

In the meantime, though, there seems to be no improvement in sight for businesses like Garza’s. “Something must change,” Garza said. “Oil is no longer gold for us.”

Interest payments on Mexico’s debt amount to about $10 billion a year, and they eat up almost three of every four dollars that Mexico earns from its exports and the tourist trade.

Among the debtor countries of Latin America, Mexico ranks second only to Brazil. But Brazil, which imports much of its oil, should benefit from lower oil prices, while Mexico is highly dependent on its earnings from oil exports.

Loans to Mexico were based on the expectation that oil prices would continue at $32 a barrel, at least, through the 1980s. But last year, the world price averaged about $25, and it now has slipped to the $12 range. Unless the price recovers, Mexico can look for a shortfall of $7 billion in expected oil revenue this year.

Running Out of Money

The result is that Mexico is running out of money. Its treasury holds about $4 billion in foreign reserves, enough to cover interest payments on its debt for about four months.

In 1982, Mexico emptied its coffers and set off a scramble for emergency loans that brought the Latin debt crisis into public view.

Mexican officials recently sought relief from payments on the old debt and at the same time requested new loans to keep the economy from tumbling. A reduced debt burden would permit the government to divert money to purchases of all kinds of goods and services within Mexico.

“We needed a radical restructuring of the debt, not just new loans,” presidential spokesman Manuel Alonso said.

In two meetings with high U.S. officials in Washington, Mexican Finance Minister Jesus Silva Herzog advanced at least two proposals to relieve the debt burden: across-the-board reduction of interest rates to 6%, or linking debt payments to the price of oil. At present, Mexico pays between 9% and 10% in interest; a reduction to 6% would save it between $3 billion and $4 billion a year.

‘Not Going to Happen’

Both proposals were rejected, according to U.S. and Mexican sources. Of the proposal to lower interest rates, U.S. Ambassador John Gavin declared: “It’s not going to happen.”

Lower interest rates would mean staggering losses for the creditor banks, as could the linking of payments to oil prices. U.S. officials, whose approval would be needed for any such changes, also fear that bowing to Mexico’s requests would inspire other debtor nations to seek similar concessions.

The negotiators agreed only that Mexico needs about $6 billion in new loans. The talks will be resumed soon to look into the questions of who is to make the loans and on what terms.

“A formula will be worked out,” said Jose Carral, the representative here for Bank of America, one of Mexico’s creditors, “but the banks cannot accept losses.”

Pressure From Unions

The creditors’ tough position appeared to mock the harder position that the Mexican government recently has taken on the debt. President Miguel de la Madrid has been under pressure from unions and some politicians to cancel or limit the debt. His party faces state elections this year.

In a speech last year, De la Madrid said that Mexico cannot meet its obligations on the foreign debt unless there is an improvement in the Mexican economy. And last month, in a speech considered especially direct, he called for an “adjustment in the service of the debt to the country’s real capacity to pay.”

“Permanent stagnation is unacceptable for Mexico and not convenient for the international economy,” he said. “The adjustment also requires sacrifices on the part of international creditors who have been co-responsible in the debt process.”

The speech was a prelude to Finance Minister Silva Herzog’s request for interest relief.

Structural Reform

As things stand, the new loans will not be enough to pull Mexico out of its deep recession, and the bankers and Reagan Administration intermediaries are pressing for major reforms in the Mexican economy. The latest buzzwords are structural reform.

They want Mexico to increase its exports, to open its doors to foreign investment and to sell off government-owned companies to private enterprise. They insist that Mexico, by devaluing its currency and raising interest rates, must try to lure back money that has been sent abroad.

And they want the Mexican government to reduce spending by, among other things, eliminating a broad range of government subsidies.

Theoretically, these steps would enable private business to produce wealth enough to stimulate growth and pay off the debt. But reduced government participation in the economy and lower spending would, in effect, overturn a longstanding government policy known as economic rectorship.

And any increase in foreign investment would aggravate Mexico’s official resistance to alien influence on the Mexican economy.

Golden Age

For 25 years after World War II, before Mexico began to export oil, the economy grew at a steady pace. The currency was stable and exports were varied.

Bankers look back on that period as a golden age. Mexico began to industrialize and entrepreneurs such as Garza started the kind of small businesses that still dominate private industry.

In 1958, with money borrowed from friends, Garza, who did not own a pair of shoes until he was 12, began making large containers out of sheet steel. He sold to the government and to private customers, and he prospered. He acquired another plant.

But Luis Echevarria Alvarez, who became president in 1970, decided that the proceeds of Mexico’s economic progress were not reaching the poor. His solution: heavier government involvement in industry, stepped-up distribution of land and subsidies for everything from tortillas to subway tickets.

What it meant for Garza was more government business and fewer private customers.

Government Investment

The soaring oil prices of the 1970s hastened the pace of government investment, for Mexico’s oil has been in government hands since 1938.

By 1976, when Jose Lopez Portillo took office as president, Mexico was moving quickly to expand production and to increase government investments. The government built steel mills and a hotel chain, took over airlines, bought a soccer team. The bureaucracy burgeoned.

Lopez Portillo boasted: “You can divide the countries of the world into two kinds--the ones that have oil and the ones that do not. We have oil.”

Industrialist Garza took on more and more projects: gasoline fuel tanks for the national oil company, corn oil storage tanks for the government food distribution agency. He had 36 workers and planned for more.

Fading Oil Boom

“We did well under Lopez Portillo,” he said.

By the end of Lopez Portillo’s term, in 1982, the oil boom had begun to fade. Mexico had borrowed heavily and already was having difficulty making payments.

Lopez Portillo assured Mexico that the debt was no problem. “If the world lent to us, it’s because it knows our capacity to pay,” he said. “What we have done through oil in just a few years is amazing. Let’s not bewilder ourselves. We will do more, much more.”

As a final blow for economic rectorship, Lopez Portillo nationalized Mexico’s banks. The government accounted for about half of the entire economy, and corrupt officials siphoned off millions of dollars into foreign bank accounts.

By all accounts, Lopez Portillo left his successor, Miguel de la Madrid, with a mess. The new president quickly renegotiated the terms of outstanding loans, slashed government spending and threw the country into a recession to curb inflation.

He was praised by the bankers. Oil prices, after all, were still high.

But weaknesses soon surfaced. As oil revenue declined, it became clear that no other industry could produce comparable revenue from abroad. The economy stagnated.

Garza began to see his business decline. He laid off workers and canceled plans to build a new plant on a lot that he had bought when Lopez Portillo was president.

Last year, the De la Madrid government, panicky over the approach of state elections, increased spending. This stimulated growth but also inflation, which rose to an annual rate of 60%.

No Growth Predicted

With further government cutbacks on the way, Mexico prepared for more recession this year. In December, economists predicted no growth in the economy in 1986. Unemployment and underemployment are estimated to be as high as 45% of the labor force. A working man’s wage buys one-third less than it did five years ago.

The latest plunge in oil prices is expected to depress all of the economic forecasts. Symptoms of decline are everywhere.

Pemex, the giant state oil company, recently suspended payments to its domestic suppliers. Cancellation of several drilling, refining and storage projects is costing some 4,000 firms, including Garza’s, the contracts that they need.

Trying to Cope

Not long ago, the government tried to lure street-corner fire-breathers away from their unhealthful work by offering them job training. The fire-breathers, who gargle gasoline and spit it out over a flame for the entertainment of commuters, declined because their unhealthful work was more secure than any other job available.

“The real question is not whether Mexico can pay the debt,” economist Jorge Castaneda said. “It is this: ‘When is Mexico going to grow again? How long can the people stand recession?’ ”

Garza is trying to cope. He has put his original shop up for sale, along with the lot next door. He plans more layoffs. One son has gone to Colombia to teach; the other, a computer expert, is looking for a job.

“People say I am rich,” Garza said, “but pretty soon I’m going to have to eat my desk.”