$15-Billion Windfall Presents Mexico With New Fiscal Headaches

MEXICO CITY —  With its dollar reserves at an all-time high, the government of Mexico unexpectedly finds itself with an embarrassment of riches that it has yet to decide how to spend.

The Bank of Mexico, the country’s central bank, is bulging with at least $15 billion in reserves, about five times the level of a year ago, and the money would seem to be the answer to some of Mexico’s serious economic problems.

But the government of President Miguel de la Madrid has not reached a consensus on what to do with the dollars, foreign and domestic economic sources say. De la Madrid is to give his annual state-of-the-nation speech Tuesday, and economists and political analysts expect to get word then on how the money will be used.

The windfall is the result of higher prices for petroleum, which is Mexico’s leading export, increased earnings from other exports, a boom in tourism, the return of dollars held abroad by Mexicans and the arrival of part of $7.7 billion in foreign loans promised Mexico last year.

With so many dollars in the bank, the Mexican government has a political problem that is partly of its own making. For a long time, the government blamed the stagnation in Mexico’s economy on a lack of dollar holdings that could be used to buy equipment for the construction and repair of Mexico’s roads, electric plants and other facilities of economic importance. Now the government has lost one of its primary excuses for hard times.

“The regime finds itself at a dead end,” economist Jorge Castaneda said. “Last year, it said we didn’t grow because of lack of foreign currency. Can they say this year that we won’t grow because of an excess of foreign currency? The government has to do something with the money.”

There is some clamor in the newspapers here that the cash should be used to stimulate the Mexican economy, which last year shrank by 4% and so far this year is stagnant. About 30% of the work force is unemployed and an additional 20% underemployed, with many young people working at such jobs as selling chewing gum, juggling on street corners or washing cars.

Yet converting dollars into pesos and pumping them into the economy, either as wages or to pay for construction, would probably fuel inflation, which is already running at an annual rate of more than 125%.

“We have to be very careful,” presidential spokesman Manuel Alonso said. “We don’t want inflation to run completely out of control.”

In any case, no downturn in inflation is expected. The government has been printing pesos at a fast pace in the past few months, an indication that prices will continue to rise. Excusing its performance, the De la Madrid government is now saying that inflation has “taken on a life of its own.”

In early August, government officials said Mexico might use some of the reserves to reduce its massive foreign debt, which exceeds $100 billion. Theoretically, Mexico could buy up principal that it owes to banks abroad at the rate of about 50 cents on the dollar on the open market.

Thus, the purchase of $10 billion in debt would erase $20 billion worth and save hundreds of millions of dollars a year in interest payments. Foreign banks, however, would have to agree to permit Mexico to buy up its debt because, under a 1982 accord, all creditors must be treated equally by Mexico. Mexico cannot pay off some banks and not others.

Even if the legal obstacles could be overcome, a move to repay debts would be controversial because Mexico, along with other debt-ridden Latin American countries, has in the past year insisted that the debt is unpayable.

It is virtual dogma among labor leaders and leftist politicians here that the foreign debt is sucking the blood out of Mexico’s economy and should be canceled. If Mexico paid some of the principal, it would be the same as saying that the debt can indeed be paid off, at least at discount rates.

Adrian Lajous, an author and longtime observer of Mexican politics, said: “Mexico should offer to pay some of the debts. It makes sense. But the government has invested a lot of political rhetoric in not paying it off.”

Some economists say the money should be used to reduce Mexico’s internal debt, money that the government has borrowed from its citizens to cover chronic budget overruns. The amount that Mexico owes internally is estimated at the equivalent of $20 billion. Paying off some of the internal debt would reduce interest rates, ease inflation somewhat and perhaps encourage investment. But because the government would be using dollars to pay a debt owed in pesos, this option, too, presents a problem.

Mexicans are forbidden by law to hold dollar accounts in Mexico except in certain border areas. Unless the recipients of dollars converted them into pesos, the money would probably just flow out of Mexico again into foreign bank accounts. If the money were converted into pesos, the resulting need to print more Mexican currency to cover the exchange for dollars would fuel inflation.

In the minds of not a few Mexicans, the pile of cash in the treasury raises the possibility that the government will use the money to whip up support in coming presidential elections by raising salaries, lavishing dollars on public works and buying votes outright. De la Madrid is expected to pick a candidate to succeed him late this month or in early October. Presidential elections are scheduled for July of next year, and the new president begins a six-year term the following December.

“The government may not know how to spend the money now,” a skeptical newspaper columnist said, “but it will know how come election time.”

The appearance of so many dollars has also raised suspicions that some of the money might simply be stolen by venal public officials. Corruption is frequently a problem in the last year of a presidential term. It even has a name--the Year of Hidalgo, a sly Spanish-language play on words that refers to Mexico’s hero of independence, Miguel Hidalgo, but really means that a politician is a fool if he leaves office without taking with him anything he can.

In responding to the suspicions, the government has moved to assure the public that there will be no run on the treasury.

Ignacio Pichardo, the government’s comptroller general and corruption watchdog, said: “The government of the republic intends for this (presidential) transition to be orderly, transparent and in accordance with law. The phenomenon known as the Year of Hidalgo will not present itself in public administration.”

The increase in dollar reserves follows a streak of good luck in some areas of Mexico’s economy. A year ago, the price of oil stood at about $10 a barrel but in recent weeks has topped $20. Mexico exports about 1.3 million barrels of oil a day.

Further, Mexico’s exports of other goods like lumber, paper and metals have skyrocketed. In part, this is because of the ever-declining value of the peso, which makes Mexican goods sold abroad cheaper in dollar terms.

The influx of tourists from abroad has also increased dramatically in the past 18 months after a depressed period in the wake of devastating earthquakes in September, 1985. Earthquake fears have faded, to be replaced by the realization that Mexico is a tourist’s bargain. The best hotel rooms in Mexico City can be had for about $50 a night. A good meal for two, including wine, should cost no more than $20.

Those who hold dollars or European and Japanese currencies are shielded against Mexican inflation because foreign money buys ever larger numbers of Mexican pesos. A taxi ride that cost 350 pesos two years ago costs about 1,400 pesos now. But in dollar terms, the cost is the same, about $1.

Foreign loans arrived earlier this year after being delayed by the difficulty of convincing wary foreign bankers to pitch in and offer Mexico new money. Now that the loans are arriving, they add to an already bright foreign currency picture. Foreign economic observers expect Mexico’s wealth of dollars to increase in coming months, unless oil prices collapse again as they did last year.