Finance secretary sticks to plan: Gil Diaz insists on 3% growth, fiscal discipline. (Spotlight).

Mexico is in a strong position to withstand current international instability, maintain fiscal discipline and fight to keep inflation in check. This was the message Finance Secretary Francisco Gil Diaz gave to a packed conference room during a graph-intensive presentation organized by the AMERICAN CHAMBER/MEXICO.

TOUGH CLIMATE FOR GROWTH

The Iraq conflict, corporate scandals in both the United States and Europe and the depreciation of the dollar against the euro have clouded economic recovery north of the border, the destination of 85% of Mexican exports. Gil Diaz said this scenario has created a challenging climate for growth in the national economy, despite rapidly increasing trade with Canada, Mexico's second-largest business partner.

Before Nafta, Gil Diaz said, the performance of the Mexican economy was only loosely connected to that of the United States. This meant that if the financial situation in the United States sagged, Mexico was lightly scathed. But today, there is a 99% correlation, and the ebbs and flows in the U.S. economy directly impact Mexico, he said. Despite the economies' close relationship, he joked that he "did not have the slightest idea" why the peso is so closely mimicking the appreciation and deprecation of the dollar against the euro.

Various parts of the government are currently in disagreement over this year's growth rate. On April 6, the Banco de Mexico revised down the nation's economic growth forecast to 2.5%, but the following day, the Finance Secretariat stubbornly reissued its prediction of3%, a forecast Gil Diaz reiterated during his speech. That same week, the investment firm JP Morgan put Mexican economic growth at 2.1 % for 2003.

Another factor that will hurt national economic prospects this year are high oil prices. In the weeks before the U.S.-led war in Iraq, oil prices rose sharply. This provided Mexico with an income that while unexpected, is "not as much as some people think," the official said. The higher prices have stunted demand, particularly in developed countries. The phenomenon has been particularly evident in Mexico's automobile industry: Car exports are down 9% so far in 2003 as compared to the first three months of last year, according to the Mexican Automotive Industry Association.

STICKING TO FISCAL DISCIPLINE

Despite the adverse climate, the Finance secretary insisted the government would stick to its inflation target of 3% this year. However, achieving this goal is more dependent on internal factors than external turbulence. Decisions to continue granting salary increases above the level of productivity would put upward pressure on inflation, Gil Diaz said.

Fiscal discipline, the guiding force of the Fox administration's economic policy, was touted again as the principle that will continue to attract foreign investment and prevent shocks from disrupting the economy.

The official said people believe in the long-term stability of the national economy. As proof, he pointed to increased purchases of 10-year Mexican bonds, and to the fact that Mexico received 50% of all foreign investment in Latin America last year. However, he said the government's biggest economic challenge will be how to stimulate economic growth without threatening fiscal discipline or increasing government debt.

On the issue of debt, Gil Diaz said his office plans to decrease the amount of foreign reserves the Banco de Mexico currently holds, which now stands at about US$50 billion. A depreciated currency is making it more expensive for the government to pay interest on the peso-denominated debt, forcing officials to dig deeper into federal revenue.

He also addressed the topic of reform, particularly labor and fiscal reform, saying it is impossible to know the likelihood or scope of the changes before federal elections this summer. He did, however, tout as a significant achievement the recent passage in the lower house of the "Ley de Garantias," which gives banks greater leverage to recuperate payments from delinquent debtors.

Armondo Saliba is the associate editor of BUSINESS MEXICO.