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ECONOMIC OUTLOOK FOR MEXICO CONTINUES TO BE POSITIVE, ALTHOUGH CHALLENGES REMAIN, KEMPER CHIEF ECONOMIST SAYS

 ECONOMIC OUTLOOK FOR MEXICO CONTINUES TO BE POSITIVE,
 ALTHOUGH CHALLENGES REMAIN, KEMPER CHIEF ECONOMIST SAYS
 CHICAGO, March 24 /PRNewswire/ -- Although challenges remain for Mexico in the area of fiscal policy, the outlook for the Mexican economy continues to be positive, according to Dr. John Silvia, chief economist of Kemper Financial Services, Inc. ("KFS").
 "As long as the government of Mexico maintains its current prudent fiscal policy, foreign investment should continue to flow into the country, helping to finance Mexico's current 4 percent rate of growth in its economy. Mexico has excellent economic leadership, and the economy will continue to expand provided its policymakers stay on course," Silvia said.
 For example, one of Mexico's critical economic challenges is a stable exchange rate between the Mexican peso and the U.S. dollar, Silvia said. "And for Mexican authorities, their exchange rate policy is their monetary policy. Therefore, to achieve the exchange rate goal of a stable peso/dollar, inflation in the Mexican economy must be brought down through a combination of 'high' real interest rates, tight fiscal policy and 'pactos,' an approach similar to that utilized in Spain, where government, company and union officials come together to negotiate wage and price increases in line with national goals."
 Silvia cautioned however, that "pactos" are a complement, rather than a substitute, for good economic policy. "Measuring the success of a 'pacto' is on a contract-by-contract basis," he explained. "With current inflation targets of 10 percent in 1992, the key for policymakers is to be sure that contracts for future wages remain at or below that level, since it is hoped that future inflation during the existence of that contract would be consistent with those lower levels. In effect, the pacto is an attempt to directly alter inflation expectations, and thereby shorten the amount of time between lower measured inflation and lower wage settlements."
 The rate of inflation in the Mexican economy, currently at about 14 percent, remains far above the U.S. rate of inflation, and therefore suggests a continued deterioration in trade competitiveness, Silvia said. "Mexican officials need to bring this level of inflation down so that this continued loss of competitiveness can be ended, and pactos are a way of bringing this about," he said.
 Among the bright spots in the Mexican economy is the fact that the country's budget deficit has declined every year for the past three years and a budget surplus is anticipated for fiscal 1992. "This declining fiscal deficit has occurred within the context of a reduction in taxes on households, corporations and sales |VAT, or value-added tax~," Silvia said. "As a matter of fact, the 6 percent VAT in northern Mexico is below the sales tax rate of its neighbor California. Base- broadening, not rate-raising, has been the tax approach. Meanwhile, public spending has been reoriented. Privatization in Mexico has been an added benefit, as public spending on subsidies for inefficient public services have been reduced through the sale of public enterprises. Therefore, tax revenue is increased while government expenditures have been reduced."
 "Two options are now available to Mexico in the area of fiscal policy," Silvia continued. "Starting with a balanced budget, the Mexican authorities have the opportunity to promote growth through further modest tax reductions or through greater public spending on education, health and human services. These are options which, ironically, the U.S. does not have because of its enormous budget deficit."
 Mexico's current account deficit would also appear, on the surface to be another problem for the Mexican government, Silvia said. "In part, the deficit reflects weakness in the price that Mexico receives for its oil. But the current account deficit the country experienced in 1991 of $11 billion was more than covered by capital inflows, which totaled $18.7 billion. Mexican imports have grown rapidly in the area of capital goods, rising 35 percent in 1991, but especially in the area of intermediate goods (which represents inputs to manufactured goods), which rose 25 percent during the year. These rapid gains in capital and intermediate goods imports reflect very strong, positive expectations for future Mexican economic growth."
 "For now, 4 percent or more economic growth in Mexico's gross domestic product seems assured. And a commitment by the financial authorities to reduce inflation and a continued, conservative policy suggest further improvement in the areas of exchange rates and interest rates," Silvia said.
 Kemper Financial Services is one of three financial services operating units of Kemper Corp. KFS currently has over $67 billion in assets under management. Kemper Corp. is a non-operating holding company with major subsidiaries in property casualty insurance, life insurance, reinsurance and investment services.
 -0- 3/24/92
 /CONTACT: Martin Gawne, 312-845-1905, or Steve Radis, 312-917-8393, both of Kemper Financial Services/ CO: Kemper Financial Services, Inc. ST: IN: SU: ECO


TQ -- NY050 -- 1189 03/24/92 15:13 EST
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Date:Mar 24, 1992
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