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Despite Debt, Mexico Could Be a Good Bet

February 07, 1988|JAMES FLANIGAN

Is this the time to invest in Mexico?

The question seems odd when Mexico's economic news is so bleak. The nation of 80 million people and a gross national product of less than $200 billion remains burdened by $76 billion in foreign debt.

And right now its economy is lashed by a stringent austerity program, following a 140% rise in consumer prices last year. Mexican stock exchange prices are less than half last year's levels, and the value of the peso is roughly a tenth of what it was three years ago.

Yet it is just at this time that some highly sophisticated investors are thinking about Mexico and the rest of Latin America as a focus for venture capital.

Specifically, "junk bond" impresario Michael Milken and the investment firm Drexel Burnham Lambert, have organized DBL Americas, a development fund that has $174 million in Drexel clients' money ready to invest in businesses south of the Rio Grande.

Milken and Drexel--subjects of a long-running probe of their U.S. market activities by the Securities and Exchange Commission--recently drew 65 Latin American companies and U.S. congressional leaders and investment bankers to a conference in Beverly Hills.

At the two-day meeting, the Latin companies made presentations to the U.S. financiers, and the congressional leaders praised the gathering as a private sector solution to Latin problems--which was overstating the case.

The conference accentuated the positive, discussing Latin America's prospects rather than its past problems. "The past is always Triple-A and the future single-B," but only in appearances, said Milken, borrowing a line from the bond market to suggest that today's underrated investment would be tomorrow's winner.

"It's good at last to hear some optimism," exclaimed David Mahoney, retired chairman of Norton Simon Corp., who has $2 million or so invested in DBL Americas.

But is optimism justified? Perhaps it is. Latin debt, to be sure, remains a problem--an impasse in the hundreds of billions that hinders progress and ultimately governments will have to solve. For now, the banks make new loans so that borrowers can pay interest on old ones. But neither side forces the issue. "The major banks want to retain their long-term presence in Latin America," says banking analyst Raphael Soifer of the investment firm Brown Bros., Harriman.

How Trouble Began

What's the attraction? The same one that is luring Drexel's venture capital: the industrial potential of countries such as Mexico.

That potential is not widely understood north of the Rio Grande, where Mexico is too often seen as a poor Third World nation, with no real industrial ability.

But that's a misperception. It should be recalled that Mexico got in trouble in the first place borrowing against oil reserves to build an industrial base and develop jobs for its growing population. More than just another oil-supplying Saudi Arabia, Mexico wanted to be another Japan or South Korea.

And it was on its way, with growing production of steel and petrochemicals and automobiles until the 1981 fall in the oil price clobbered both its ambitions and its ability to pay back loans.

But the country's industrial abilities are still there. And in the next decade or two, they are going to surprise a lot of people.

Perhaps, but why take risks in Mexico when there are safer opportunities in the United States, Japan and Europe? Because companies of those nations need to be in new and growing markets, and the spare capital of those nations--the dollars and yen flooding global investment markets--is seeking a return that goes beyond the dividends of IBM or Hitachi, or the interest on a government bond.

Such returns can only be had in a new industry--computer software, say, or biotech--or in places like Mexico and Brazil, where whole populations are trying to achieve a better life, where change is headlong and seemingly chaotic.

Mexico may not be suitable for all investors, says John Rhoads, a former Californian who heads CBI Casa de Bolsa, an investment firm in Mexico City. But for business investment, or sophisticated venture capital, no guts no glory, Rhoads says. "Since everyone is depressed, now's the time to buy."

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