Peso's decline leaves mark here

THE BALTIMORE SUN

The sharp decline in the peso over the past week has left its mark on companies in Maryland and across the nation who invest or do business in Mexico.

In the past three years, Mexico has become one of the fastest-growing export markets for Maryland businesses, with such companies as dredge manufacturer Ellicott Machine Corp. International and architectural firm RTKL Associates Inc. ringing up sales and joint venture agreements across the border.

In the first nine months of this year, Maryland exports to Mexico rose more than 28 percent, to $71.4 million, according to the Maryland Department of Economic and Employment Development.

But depending on the Mexican government's reaction to the currency situation, that market could begin to dry up.

The currency crisis eased somewhat yesterday as the government nearly doubled short-term interest rates in an effort to attract foreign investors.

The peso also appeared to draw strength from anticipation of a rescue effort by the United States and other countries. And a breakthrough in talks with rebel leaders in the southern state of Chiapas added to the calming atmosphere.

Still, investor sentiment already has started to turn sour on Mexico. A group of 16 mutual funds that invest in Mexico and Latin America lost an average of 6 percent of their value on Tuesday, the first trading day after the Christmas weekend. Most funds continued their declines yesterday, including the T. Rowe Price Latin America fund, which doubled its one-week decline by falling another 6 percent.

The earlier 38 percent drop in the value of the peso against the dollar, tempered by yesterday's 10 percent rebound, also raised concerns about the viability of trade agreements in general and the North American Free Trade Agreement, or NAFTA, in particular.

"The devaluation runs counter to everything countries want to do when they establish a free trade area," said Tom Carpenter, chief economist and managing director of ASB Capital Management, a Washington investment firm. Those goals include increasing the flow of goods and capital between countries, enhancing direct investments across borders and improving the predictability of those transactions.

"American portfolio investors who had bought equity positions in Mexican stocks had a very quick 12.7 percent drop in the value of their investments," after the Mexican government's decision last week to cut the peso's ties to the value of the dollar, Mr. Carpenter said.

The Mexican government, led by its new president, Ernesto Zedillo, intervened yesterday in the currency crisis for the first time since it erupted on Dec. 20. The government allowed interest rates on the country's bellwether 28-day Treasury Certificate, or Cetes, to nearly double, to 31 percent from 16 percent.

The move was intended to stop the flow of foreign capital out of Mexico. And it appeared to have had an effect: The peso closed at 4.9750 against the dollar, up from its 5.5000 close late Tuesday.

Further easing concerns about the stability of the government was news that the Zapatista National Liberation Army, which occupied several southern towns during a surprise offensive Jan. 1, applauded the government's acceptance of a Roman Catholic church-led commission to mediate the revolt in Chiapas state.

Some investors also appeared to draw hope from the prospect of U.S. intervention. There were reports that Mexico may have begun using nearly $7 billion in support lines already offered by the United States and the Bank of Canada, and rumors began to spread of another credit facility in the works, possibly as big as $10 billion. A spokesman at the International Monetary Fund said the fund was working with Mexico to stabilize its economy.

But if allowed to stand, the crisis and the resulting high interest rates are bound to slow the nation's economy and send it back into recession, economists said.

Mutual fund managers, for instance, "to the extent that they are burned once, are going to be a little more cautious going forward," said Mr. Carpenter. "And this is going to work to the detriment of the standard of living in Mexico." With less capital flowing into the country, fewer businesses will be able to expand.

In the short term, many U.S. companies are protected against currency fluctuations because their business is transacted in dollars. NationsBank Corp., for instance, said it has minimal exposure to the crisis because all its loans in Mexico are dollar-denominated.

RTKL has a joint venture agreement with a Guadalajara architectural firm, Gomez Vazquez Aldana & Asociados. But "we're still going to be paid our full amount," said Kurt Haglund, an associate vice president at the Baltimore firm. "Whatever we expend in U.S. dollars we expect to be paid in U.S. dollars," he said. "We generally don't take the currency risk."

Other Maryland firms that do business in Mexico include Black & Decker Corp., McCormick & Co. and Bethlehem Steel Corp. Most hedge their exposures to foreign markets with various currency transactions.

But if the Zedillo administration's response to the crisis causes an economic slowdown, that will hurt companies such as RTKL and Baltimore-based Ellicott Machine, which sold two dredging machines to Mexico last year.

As for fears that the devaluation will draw U.S. companies into moving factories to Mexico, some analysts dismissed those concerns.

"Very few big companies actually move facilities based on currency fluctuations because they're not permanent," said Gary Horlick, a lawyer at the Washington firm of O'Melveny and Myers.

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