February 19, 1995 in Business

U.S. Firms Face Rough Year In Mexico Devaluation Of Mexican Peso, Economic, Political Turbulence Create Unexpected Challenges

Associated Press
 
Tags:economy

President Clinton’s aid package may have helped stop the hemorrhaging in Mexico’s financial markets, but U.S. companies still are bracing for a year of plunging sales and uncertainty over investments there.

The announcement of nearly $50 billion in credits from the United States and international lending agencies sparked strong rallies at the beginning of the month in the Mexican stock and bond markets as investors anticipated an end to the financial crisis touched off by the Dec. 20 devaluation of the peso.

Signs of rising confidence helped the peso partly recover from its six-week plunge.

For American companies with big investments and sales in Mexico the news came as a relief - but much as one welcomes the end of a war.

Surveying the damage, they’re anticipating a difficult 1995 that will contrast markedly to 1994, when U.S. exports to Mexico surged to an estimated $50 billion - a record - with the implementation of the North American Free Trade Agreement.

Sales of U.S. goods ranging from Ford cars to Marlboro cigarettes are projected to drop sharply, and that could mean fewer export-linked U.S. jobs. Most economists don’t anticipate any significant dent in employment here, although the impact could pinch some industries and regions closely tied to Mexico’s economy - such as California and Texas.

Mexico was one of America’s biggest customers last year as it binged on imports. Now it faces a period of prolonged belt-tightening to shrink its high trade deficit.

Cutbacks in government, corporate and consumer spending, and a slowdown in business activity due to soaring interest rates and a dearth of foreign capital will mean minimal economic growth or recession this year.

Moreover, even if the peso stabilizes at current exchange rates, imported goods and services will cost Mexicans far more in peso terms than last year, even as they struggle with stagnant or falling incomes and higher inflation.

The WEFA group, an economic research firm in Bala Cynwyd, Pa., says U.S. exports to Mexico could fall to $27.7 billion in 1995, 50 percent lower than had been projected before the peso’s plunge. That could knock up to one-half a percentage point off America’s economic growth this year, WEFA says.

The sharpest declines are expected in consumer products, notably big-ticket durables like autos, although sales of industrial goods also will fall. Mexican manufacturers buy 70 percent of their materials from the United States.

Still, that doesn’t mean American businesses are about to yank carefully planted stakes in Mexico and relinquish what remains a promising market.

“The long-term picture for Mexico remains bright,” said David P. Hirschmann, director of Latin American affairs at the U.S. Chamber of Commerce in Washington. “Five years from now this will be seen as a jolt in the road. That’s what companies are basing their plans on.”

The peso’s depreciation could, in fact, benefit some firms. The same exchange-rate dynamic that drives up the cost of imports in Mexico brings down the dollar cost of Mexican-produced goods. Those manufacturing in Mexico will find their goods more competitive.

“For the U.S. textile industry, it’s going to be a renaissance,” said Charles Hayes, chief executive officer of Guilford Mills Inc., a Greensboro, N.C.-based fabric producer with garment operations in Mexico.

© Copyright 1995 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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