”We will live, and we will rebuild,” President Miguel de la Madrid declared last week in ordering the ”immediate reconstruction” of this capital city.
But it will be weeks, even months, before an accurate estimate is available of the damage suffered in the earthquake that leveled parts of Mexico City 10 days ago. The president`s optimism aside, the reconstruction is likely to take years.
The total damage is certain to run into the hundreds of billions of pesos, and the expense of rebuilding will drive Mexico even further into its already deep financial morass. In the end, however, the damage done by the earthquake may prove to be more metaphysical than physical.
By refocusing world attention on the precarious state of its national finances, the quake shattered any remaining notion that Mexico could somehow realize its dream of economic self-sufficiency before the end of this century. As damage survey teams make their way through Mexico City, the magnitude of the disaster continues to grow. More than 1,130 buildings are listed as destroyed or severely damaged, and engineers who at first thought many could be saved have changed their minds and scheduled them for demolition. The buildings represent only a tiny percentage of the estimated 1.4 million structures that make up this city of 18 million people.
A good deal of the cost of reconstruction will come from private capital. The great majority of the damaged buildings were privately owned–even some of those occupied by government agencies were rented from civilian landlords–and one Mexican economist with close ties to the government said he believed most of the larger ones had been insured for at least 75 percent of their current replacement value.
Some of the Mexican insurance companies, he added, had amassed contingency funds for a disaster such as this one, and others had made arrangements to ”lay off” up to half their liability with brokers in the U.S. and other countries.
But an American economist, while agreeing that the Mexican insurance industry would survive the disaster, predicted that settling the claims involved would be ”a nightmare” in which the government almost certainly would be forced to play some role.
Apart from rebuilding its own damaged structures, a major cost to the Mexican government will be the excavation and removal operations that are underway across the city`s center, and there will be some expensive public works projects as well.
A number of the city`s highway overpasses, for example, were cracked by the quake, and water mains and drainage systems will have to be replaced or repaired. More than 100 schools are reported damaged, including some large technical and secondary schools that were destroyed.
Mexico`s ultimate salvation, if one is to be found, appears to lie in the fact that its manufacturing and export sectors, with the minor exception of the steel-producing center of Lazaro Cardenas, were virtually untouched by the quake. ”The productive base of the country didn`t get hit,” said one foreign banker here. ”What got wiped out was the administrative part and the financial part.”
Only a relative handful of the destroyed or damaged buildings here belonged to the government. But some of those–the Commerce Secretariat, the Budget and Planning Office, the Finance Ministry, the National Development Bank and some branches of the Banco de Mexico–are at the center of the troubled Mexican economy.
The government as a whole may benefit from the disaster by speeding the decision-making process. The process has been characterized by what might be called consensus-building, a slow process but one which ensures that the decisions that are made have been agreed to more or less unanimously. Though the process has contributed much to the stability of Mexico`s unique form of one-party government, it has cost the country some important economic opportunities.
But one economist here predicts that the sense of urgency generated by the earthquake will give government planners an excuse to abandon political considerations and act more quickly. ”This is going to make decision-making a faster process than it was before,” the economist said.
On balance, however, the immediate prospects here are grim. The fact is that Mexico cannot rebuild entirely on its own, and it is the urgent need to import expensive equipment and technology, which is likely to deliver the most serious blow to an already shaky economy.
Several large government hospitals were damaged or destroyed by the quake, for example, leaving officials with the task of replacing not only the buildings themselves but also the medical equipment they contained. The central telephone office was ruined, along with the sophisticated electronic switching machines that handle long-distance and overseas calls. The city`s television broadcast tower and the studios of three of its channels were also lost, along with a number of expensive computer systems.
To bring in replacements from abroad means using up Mexico`s precious foreign exchange–primarily its dollars, the common currency of international trade–which were in critically short supply before the quake.
Three years ago Mexico simply ran out of dollars, with the result that imports of any kind virtually ground to a halt. The situation is better now, but not by much. Before last week there were about 6 billion U.S. dollars in the Mexican treasury, but dollar reserves have been falling all year as imports continue to exceed earning from exports. Now, unless some external source of funds can be found, the unexpected need to import items destroyed by the earthquake threatens to speed the outflow of foreign exchange from a disturbing pace to an alarming one.
Economists here see no way that Mexico can make up the dollar difference on its own, even though the rich oilfields and refineries along the Gulf Coast, the country`s primary source of foreign exchange, were spared any damage from the quake.
Pemex, the government-controlled petroleum company, said last week that it would continue exporting 1.5 million barrels of crude oil a day, just as it has been all along. But the money to repair and rebuild will not come from oil, once thought to be Mexico`s economic salvation and now seen by many as its curse.
Oil production, which accounts for two-thirds of Mexico`s export income, theoretically could be doubled, though much of the capital investment necessary to open the spigots wider was abandoned three years ago when the world oil price began to fall. But economists here say that even if oil production were stepped up, it would increase petroleum revenues only minimally while driving down the world price of oil.
Even without increased production by Mexico, the price of oil now threatens to go lower still. Saudi Arabia, the world`s leading producer and still the guiding force among nations who belong to the Organization of Petroleum Exporting Countries (OPEC), reportedly has signed export agreements with several major oil companies that will drop the price of its best light crude from $28 a barrel to as low as $22 over the next year.
Though Mexico has never been a member of OPEC, the price of its own light crude, now close to $27 a barrel, is bound to suffer. One Canadian economist here who watches the petroleum industry closely said that Mexico might be able to hold its current price through the middle of winter, when demand for heating oil peaks in the U.S. and Canada, but that it eventually would have to follow the Saudis` suit.
Mexico`s other main producer of foreign exchange is tourism, and there is concern here that revenues from that source may fall sharply as Americans who were planning to visit Mexico see television pictures of ruined hotels and smoking rubble and cancel their reservations.
Last year visitors to Mexico, the great majority of them Americans, left more than $2 billion behind. With the peso at an all-time low of 370 to the dollar, there were hopes that the coming winter season might set a new record for tourism. Within days of the quake, however, a number of resorts were reporting cancellations. An alarmed secretary of tourism, Antonio Enriquez Savignac, flew to the U.S. to reassure potential visitors that the bulk of Mexico`s tourist facilities were open for business.
By all accounts, he is correct. More than a dozen Mexico City hotels containing some 1,500 rooms were destroyed or damaged severely in the quake, but only one, the Presidente in the Zona Rosa, is among the larger, newer hotels favored by American visitors. Moreover, Mexico City is crowded and smoggy and generally is not a major tourist center. Most foreign visitors here are commercial travelers who come in pursuit of profits, not pleasure.
The mainstay of Mexico`s tourist industry is its idyllic Pacific coast where both of last week`s earthquakes were centered. Because the Pacific resorts are built on a foundation of solid rock, the damage there was minimal. Hardest hit was the resort town of Ixtapa-Zihuatanejo, where five hotels were damaged enough to warrant evacuation. Some Acapulco hotels were damaged, but less seriously.
Even so, it may be months before public confidence in the Mexican tourist industry is restored, and by that time a Mexican vacation may no longer be the bargain it is today. Last week`s agreement by the U.S. to try to lower the value of the dollar against foreign currencies is bound to make visits here more expensive for Americans–and, what is worse, it may encourage more Mexicans to visit the U.S., taking badly needed dollars with them.
As a result, most economists here agree, Mexico probably will be forced to choose the option that it–not to mention its many foreign creditors
–favors least: borrowing still more money from abroad and adding to an already intolerable foreign debt that has been compiled over the last decade. When large deposits of oil were first discovered here in the mid-1970s, the government of President Jose Lopez Portillo began to borrow furiously against future petroleum production. Foreign banks, including hundreds in the U.S., were all too willing to make credit available.
The money was spent as quickly as it rolled in–not just on government buildings and tourist resorts, but on schools, clinics, water purification plants and the capital`s impressive subway system, to name just a few of hundreds of beneficiaries. (Ironically, some of the government buildings destroyed in the quake were those built with petropesos–and, according to American construction experts who have inspected the damage, built far too hastily and cheaply.)
For the most part, the expenditures unquestionably improved the quality of life here. But the expectation that the foreign loans that made them possible could be repaid vanished as the OPEC nations stepped up production and flooded the world oil market.
Loans held by private foreign banks were rescheduled according to a complicated formula under which Mexico would make only interest payments for several years. (Just a month ago, most of the foreign banks agreed to extend the repayment schedule again, this time until the year 2000.)
Protracted negotiations with the International Monetary Fund, the world`s lender of last resort, also produced an emergency loan of $3.4 billion to be paid out over the following three years. In return, the IMF demanded stringent economic concessions from Mexico–reductions in government spending and the budget deficit, and a cap on inflation far below the 100-plus percent a year by which prices had then been rising.
De la Madrid, who succeeded Lopez Portillo at the end of 1982, set the country on a course of austerity in hopes of meeting the IMF`s targets. Public works projects were left unfinished, nonessential imports were restricted and government subsidies for everything from tortillas to gasoline were reduced or abandoned.
De la Madrid`s reforms have not worked well enough; in the weeks before the earthquake struck, it was becoming clear that Mexico would not be able to meet the targets. Prices have been rising nearly twice as fast as the 35 percent annual rate demanded by the IMF, and the federal deficit is still about double what it was supposed to have been by now.
Mexico`s foreign debt also has continued to rise, from $81 billion in 1982 to more than $96 billion today. Virtually all of the increase has gone to underwrite interest payments on the pre-existing debt, payments that now total $12 billion a year, and Mexican officials were warning before the quake that they would require another $3 billion to $5 billion in loans next year just to keep the interest current.
Last week the Mexican government said it would be able to meet the next payment of $50 million to private foreign lenders that is due Tuesday. But banking sources here were quoted as saying that the lenders had privately agreed to relend the money immediately as a gesture of ”good will.”
Just before the earthquake occurred, the IMF said it would temporarily withhold the final $900 million installment of the three-year emergency loan. Whether it will change its mind is uncertain. As is clear from the stringent requirements it imposed in bailing out Mexico three years ago, the IMF has a reputation for harshness with profligate Third World nations.
But the economic problems that beset Mexico before the quake were of the government`s making, not the result of a natural disaster, and the IMF may display some mercy. The finance ministers of several European nations met last week with U.S. Treasury Secretary James Baker to discuss the IMF`s options, among them freeing the remaining $900 million and granting Mexico further repayment guarantees to private lenders in the U.S. and abroad.
There appear to be some alternatives to the IMF as sources of foreign credit. At week`s end, the U.S. Commodity Credit Corp. had promised a $600 million loan against purchases of Mexican agricultural products, and the U.S. Treasury and the Inter-American Development Bank were said to be considering emergency loans.
Despite its earlier suggestions that no external redevelopment assistance was necessary, the Mexican government undoubtedly will accept whatever new or restructured loans are available.
The issue, after all, is not economics, but pride. The additional debt to be incurred, probably a few billion dollars at most, will be more like a kidney punch to the Mexican economy than a fatal blow. The real fatality will be the illusion, put forward until recently by the Mexican government, that its sorely troubled economy was at last on the mend.
