MEXICO CITY — President Carlos Salinas de Gortari has pursued single-digit inflation with the fervor of Sir Galahad seeking the Holy Grail, imposing tough economic policies that have cut annual price increases from 159% in 1987--the year before he took office--to about 15%.
But even as inflation reaches its lowest levels in two decades, knights are threatening to desert the quest, impatient with the slow progress and upset about the casualties it is claiming.
The National Manufacturing Industry Chamber contends that anti-inflation policy has shrunk wages to the point that consumers have stopped buying some products, leaving companies without enough customers.
Mexico City merchants also complained to Salinas last week that the fight against inflation has tightened credit as well as sharply reduced consumer buying power.
"It's taking them five years" of austerity to get this far, but the annual inflation rate remains in double digits, said economist Rogelio Ramirez de la O. He is predicting that inflation will still be above 11% by the end of this year.
While that is enviable by Latin American standards, Mexicans were accustomed to 40 years of steady growth with low inflation before the oil and debt debacle that began in the mid-1970s. They are becoming impatient.
Meanwhile, other parts of the administration's economic program are beginning to spring leaks. The stock market has dropped steadily since June, wiping out gains made during the first six months of the year. Foreign reserves slipped $67 million from March to August.
Despite such problems, Salinas insists that fighting inflation remains his top priority.
In fact, the struggle has taken on new importance with the pending North American Free Trade Agreement, which would tie Mexico more closely to the low-inflation economies of the United States and Canada. Mexico cannot hope to compete unless it stabilizes prices.
"We cannot pay attention to the few voices that propose relaxing financial discipline to adjust the nation to their own inefficiencies," Salinas told bankers last week. "They say they are opposed to inflation yet spend their time promoting its root causes."
His comments were a clear rebuttal to recent economic reports that have laid the blame for uneven industrial performance on the prolonged fight against inflation.
"Wage restraints have been one of the methods used since 1982 to control inflation," noted a report from the manufacturing industry chamber, whose members are mainly small businesses. From 1987 to 1991, the purchasing power of the minimum wage fell 27%, forcing the poorest consumers to spend less. That has reduced sales, the report noted.
"The challenge is to find ways to recover the buying power of large sectors of the population without undermining economic stability," the manufacturers concluded.
A report from Banco Nacional de Mexico, the nation's largest bank, released about the same time, predicted that economic growth will not reach last year's 3.6%.
Further, 71% of the growth this year has been in services. Manufacturing is growing at a rate of only 3%, and half of that growth is in a single industry: automobiles.
"This should worry us, but not surprise us," bank economists observed. Tighter monetary and fiscal policies--aimed at controlling inflation--combined with the international recession and restructuring of many companies to compete on the world market were bound to slow growth, they explained.
Slower growth and higher interest rates have also reversed the three-year surge on the Mexican Stock Exchange, according to analysts.
Mexico promoters, such as the Mexican Investment Board, have blamed the stock market doldrums on the international economic situation, particularly the slump on Wall Street that pushed down prices of Mexican stocks quoted in the United States and affected their prices here as a result.
The market drop also reflects investor worries that the North American Free Trade Agreement may not get through the U.S. Congress, many of whose members have expressed concerns about lost jobs and pollution, other analysts have said.
Moreover, in Mexico, the stock market is more than an economic barometer. Investment in the stock market keeps the country's international accounts in balance despite a burgeoning trade deficit. Nearly two-thirds of the $5.5 billion in foreign investment that flowed into Mexico in the first six months of this year was invested in the stock and bond markets.
The government has been forced to raise interest rates on Treasury bills by 5.5% to 16.5% over the past five months in order to retain part of foreign capital. Even so, Salomon Bros. is predicting that there will be a $2-billion shortfall--the gap between what Mexico spends on imports and the money coming into the country from exports and foreign investment. That would force the government to dip into its $18.2 billion in foreign reserves to cover the gap.
The alternatives are to raise interest rates further in order to attract more capital, or to devalue the peso, which would set off inflation again and wipe out confidence in the government's economic program.
"They are betting that this will be a temporary situation" and that investor confidence in Mexico will be restored by year-end, after the U.S. presidential election in November decreases uncertainty in the United States, said Ramirez de la O. "Even if that's true, it's going to be a long four months," he said.