MEXICO: Economic Downturn Deepens

From farms and automotive plants on the
outskirts of Mexico City to the industrial heartland of Monterrey and the
wineries and electronics firms in Tijuana and Guadalajara, signs are that
this nation's recession is becoming more entrenched.

Every day, another big company or industry is hit by layoffs, the
most recent being the pivotal steel industry, where hundreds last week
received pink slips. Even the maquiladoras--the factories on the border
with the U.S. that have been jewels of Mexican economic development--are
feeling pain as never before.

Tenant farmer or textile magnate, there is no shortage of victims who
could be overwhelmed by the spreading recession. The hard times increase
fears of social unrest as well as the prospect of illegal immigration,
which could lead to more people dying in risky border crossings. With the
U.S. facing its own economic troubles, more economic refugees won't be
greeted with open arms.

The most prominent victim may be President Vicente Fox, whose
ambitious plans to transform Mexican society require a good economy. A
reform candidate whose election last year ended the 71-year rule of the
Institutional Revolutionary Party, Fox swept to power by promising to boost
prosperity, add 1.3 million new jobs in his first year and create more
social programs to address grinding poverty and inequality.

Although still enormously popular, Fox has reason to be concerned. A
failure to deliver new jobs and prosperity will weaken him politically and
hinder efforts to carry out a bold slate of reforms ranging from boosting
the rights of indigenous peoples to overhauling the judicial and tax systems.

The worsening times have farmers such as Rodolfo Hernandez in a bind.
Corn, carrot and lima bean prices are sinking while the costs of diesel
fuel and fertilizer are rising. All he expects to harvest from his 25-acre
farm here 40 miles southwest of Mexico City are headaches and big losses.

"In the past, at least there was movement, equilibrium. Now, there
are no buyers at all," said Hernandez, 40.

Times have become so brutal, he said, that his younger brother
Antonio, an out-of-work tailor, illegally emigrated to Washington state,
where he quickly landed a job in construction. Rodolfo said he may follow
if things don't turn around soon. Antonio "knows the risks, but in spite of
all that he went with seven others from the town."

Also alarmed is businessman Mayer Zaga, who has lowered prices by an
average 17% on the fabrics, threads and apparel produced by his company,
Zagis SA. He said his goal is to avoid having to lay off any of the 3,000
workers at his multimillion-dollar firm, the country's largest yarn
wholesaler.

"This is a crisis, whether we understand it or not," Zaga said as he
surveyed the gray-and-green ranks of looms on the floor of his factory in
Tepeji del Rio in Hidalgo state, 50 miles north of the capital.

Mexico dipped into recession late last year, and figures are likely
to show the nation having continued to be mired in one at least through the
second quarter of this year, which ended Saturday, according to Ciemex/Wefa
economic consultants of Philadelphia.

Mauricio Gonzalez, a director at GEA business consultants in Mexico
City, said disappointment could run deep because of heightened expectations
after Fox's election.

"Everyone was going to be happy and entertained. Now there is no
party," he said.

"People are now realizing it's not going to be as good as they
thought and that maybe [the recession] will affect them personally."

Fox had counted on a recipe of free trade and his own businesslike
efficiency to rev up Mexico's economic performance, generating enough
income to help the government carry out sweeping new initiatives in health
coverage and education. But tax collections have declined along with the
economy, dropping an alarming 7% in May from the same month last year. The
Finance Ministry is expected to soon announce a second round of spending
cuts.

Instead of all the new jobs he had promised during the grueling
election campaign, Fox has seen the loss of 200,000 jobs so far this
year--and will be lucky to end the year with as many workers as he started
with in January. Economist Rogelio Ramirez de la O of Ecanal, a Mexico City
consulting firm, thinks that the job base could shrink by as much as
700,000. That would leave Fox 2 million jobs short of his promised 1.3
million new jobs.

"Fox will be under pressure in the coming months as the economy
deteriorates and as people present him with his promises," said Raul Feliz,
a macroeconomist at the independent Center for Economic Research and
Teaching in Mexico City.

Feliz predicts "net zero to negative" growth in new jobs and sees
serious political problems ahead. "Lower economic development makes
everything more difficult," he said.

Duration of Downturn Out of Fox's Control

It was bad news like this that finally forced Fox in mid-June to
admit for the first time that Mexico was in a recession and that he would
probably miss his economic targets.

"We need to go to the Basilica and pray to the Virgin of Guadalupe"
for a speedy economic recovery, Fox joked to reporters. But it was a rare
moment of levity. He is said by associates to be extremely worried about
the political fallout if the recession drags on.

That the recession's duration and severity are out of his hands is
adding to Fox's frustration. The duration of the U.S. slowdown is the
determining factor because a quarter of all Mexican goods and services is
sold in the United States.

Since the U.S. recovery is an open question, so is Mexico's. The
reliance on the U.S. economy, which a few years ago shielded Mexico's
economy from foreign contagion, is now a handicap.

"Mexico was not that deeply affected by the 1997 Asian crisis because
of its U.S. exports. Today, however, the alliance with the U.S. economy is
playing the other way and Mexico has to hang on," said Carlos Janada, a
Wall Street economist specializing in Latin America.

U.S. immigration officials also have reason to worry. If historical
patterns hold up, a prolonged Mexican recession will generate more illegal
immigration at a time when jobs are increasingly scarce on the other side
of the border, GEA's Gonzalez said.

Wayne A. Cornelius, director of the Center for Comparative
Immigration Studies at UC San Diego, said illegal immigration rose more
than 50% in the two years of Mexico's last recession, from 1994 to 1996,
based on U.S. Border Patrol apprehensions.

Making matters worse for the Southern California regional economy is
that Mexican businesses along the U.S.-Mexico border are being hit harder
than those in the rest of Mexico because of the concentration of
maquiladoras, which produce goods mainly for export to the United States.

Although there has been no measurable effect on the San Diego economy
so far, with unemployment rates holding steady, there could be a
"developing effect," said James Gerber, professor of economics at San Diego
State University and a border economics researcher.

"I've heard of Asian manufacturers who would like to move out of
Baja, and there has been a downturn in employment in maquiladora firms, but
it's not clear what's driving that," Gerber said. "It could be the slowdown
in the United States, the overvalued peso, the uncertainty of the Mexican
tax structure or fears for the security of foreign executives. All of
that's in the mix."

Maquiladora exports are down 5% so far this year, giving rise to a
unique occurrence: layoffs in an industry that has been accustomed to
double-digit growth.

"We're seeing the first sustained drop in maquiladora jobs in 20
years," said Alfonso Mercado, a professor at College of Mexico in Mexico
City who studies the U.S.-Mexico border economy. "The region might suffer a
higher cost and longer [recovery] time than other regions in Mexico, and
this is new."

Japanese Firms Have Scaled Back Production

A deepening recession could mean higher unemployment, less
consumption and lower investment, whereas in previous Mexican downturns, in
1982 and from 1994 to 1996, the Mexican border had a much shorter crisis
period than the rest of the country, Mercado said.

Jose Ibarra, a maquiladora manager at Hitachi's television factory in
Tijuana, said most Japanese consumer electronics firms have scaled back
production in response to the U.S. slowdown. Sales of Hitachi's line of
televisions are off 45% this year. Only its popular line of high-definition
digital TVs has kept things from getting worse.

Unlike last year, when maquiladoras were desperate for workers,
Hitachi has a six-month waiting list for job applicants, Ibarra said.

"There aren't the jobs there used to be, especially for people who
have less than high school skills," Ibarra said. "The people know the
situation is bad."

Like their counterparts in the United States, Mexican consumers by
and large have not felt the weight of the recession. A strong peso and wage
hikes have increased individual purchasing power. This has pushed up
consumer purchases by 6.5% this year, even as the nation's manufacturing
output has declined by an estimated 3%.

But the purchases are uneven. Even as some of the poor have trouble
making ends meet, there are waiting lists for new vehicles at imported-car
dealerships in Mexico City, as more affluent consumers try to take
advantage of the strength of the peso, one of the world's strongest
currencies against the dollar this year.

The peso's strength derives in part from a massive inflow of foreign
capital, including $6.25 billion in cash that U.S. banking giant Citigroup
is paying to acquire the parent firm of Banamex, Mexico's largest
independent bank.

Economists say it's only a matter of time before the problems in
Mexico's industrial and agricultural sectors filter down to consumers. Wage
increases, easing credit and the strong peso will eventually be negated by
the effects of job losses and declining consumer confidence.

Automotive engineer Juan Carlos Martinez of Toluca has gotten the
message. About 20% of his co-workers at the Johnson Controls plant outside
Mexico City have lost their jobs since February, partly because of
production cutbacks at DaimlerChrysler in Toluca, a big customer.

"A year ago, it was easy to find a job. There were vacancies
everywhere," he said. "But then came the recession and everything froze."

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