Word: peso
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...President Ernesto Zedillo Ponce de Leon still must reform the policies that caused the latest crisis--specifically, Mexico's reliance on foreign capital. Much of those funds fled in December when the government, unable to prop up the overvalued peso any longer, let the currency float. Now Zedillo is taking the politically risky steps of slashing government spending and jacking up interest rates to slow the economy and wean it from its dependence on ``hot money''--foreign investments in securities that can easily be dumped. Says Allen Sinai, the chief economist for Lehman Bros.: ``Mexico must swallow a recession...
...Under NAFTA the country accelerated its consumption of imported products ranging from shampoo to computers that drove thousands of inefficient domestic firms out of business. Now many Mexican companies can't find local replacements for foreign suppliers, whose prices have jumped as much as 50% since Zedillo devalued the peso...
...make matters more painful, the dismantling of government subsidies that saved firms a decade ago leaves today's companies unshielded from harm. Termoplasticos Inyectados, a small electrical-parts company, had been gradually winning back customers after losing them to imports for several years. But the collapse of the peso drove up the price of raw materials and brought the company's business to a standstill. ``Everything has stopped,'' says manager Ricardo Villanueva. ``If you ask me what I'm going to do, the answer is I just don't know...
Other companies that turned lean under the pressure of foreign competition are now poised to profit from a cheap peso that lowers the price of their exports. Min-Cer, a maker of wheel and drum components for tractor-trailers, plans to export 90% of its output this year. ``We are expecting a very steep drop in domestic demand, but we're working three shifts a day for exports,'' general director Carlos de la Garza says...
Despite such success stories, the widespread Mexican hardship puts enormous pressure on Zedillo, a Yale-trained economist who took office Dec. 1, to ease his austerity campaign. But that would almost certainly destroy foreign confidence in Mexico's ability to regain its footing and would thus send the peso slipping again. ``This time there's no free lunch,'' says Mauricio Gonzalez, managing partner of a Mexico City consulting firm...