MEXICO CITY - Mexico has begun its slow climb out of the economic abyss into which it plunged in December 1994, following the sudden and drastic devaluation of the peso. While the worst of the crisis aftershocks appear to be over, Mexico still seems set for a difficult year with slow recovery from the depths of the country's most serious recession in modern times.
For most plastics processors, 1995 was difficult. Inflation and interest rates soared, the peso - the value of which was cut in half in 1994 - raised the cost of essential imports, while the domestic market for Mexican goods shrank substantially.
During 1995, Mexico's gross domestic product contracted by about 7 percent after eight years of continual growth of 2-4 percent per year.
One year after the peso crisis, buying power in Mexico is down by more than 14 percent, while government statistics reveal that unemployment, which topped 7.6 percent of the so-called ``economically active population'' in August, still stands at a troubling 6 percent.
Year-end inflation for 1995 isexpected to stand at 50-55 percent, leaving average wage increases of no more than 30 percent far behind, according to economists.
The crisis has helped to reshape Mexico's plastics industry map. It is estimated that more than 750 firms, chiefly small and micro-sized processing companies, have gone out of business. This weeding out of financially and technologically weaker players has strengthened the healthy among the remaining companies, said Mexico City consultant Ricardo Ric rdez.
``The local industry is recomposing so that local volume remains the same and it is imports that have been absorbing the [domestic market] growth,'' said Ric rdez. ``The share of imported products is still very high.''
Ric rdez forecasts more small plastics firms will disappear during 1996, but said a flourishing niche market will remain in Mexico for a range of locally made, inexpensive goods, such as toys and housewares sold in the poorest markets.
Francesco Cecchetti, the new president of the Mexican plastics processors association Anipac, put blame for the massive shutdown of processing firms variously on the direct impact of devaluation on raw material costs, extra dollar debt for machinery, high interest rates, inflation of up to 60 percent and a cut in domestic demand.
He pointed out that not just smaller firms were hit. About 3 percent of the country's medium- and large-sized plastics companies also were forced to close.
Analysts vary in their prognosis for the Mexican economy in 1996, but all see some signs of improvement.
Growth forecasts range from less than 1 percent to a superoptimistic 5 percent. The government is opting for a cautious 3 percent prediction.
``The domestic economy is still going to be very sluggish,'' said Tim Baker, associate director for emerging markets at the newly opened Mexico City office of SBC Warburg. He predicted 1996 growth of no more than 2.2 percent.
What growth there is in 1996 will have to come from government programs, not the battered private sector with its financially ailing banks, Baker said. He warns that public finances will be under stress as the government continues to try to bail out the banks.
SBC Warburg predicts inflation will fall during the year to about 24.5 percent, while other observers remain more pessimistic, expecting it to stay higher, between 40-50 percent, Baker said.
As for the fortune of the shrinking peso, the analyst foresees the currency stabilizing because it still is undervalued by 20-30 percent. He is optimistic that continued easing of interest rates will allow new private-sector spending.
``If interest rates come down to 25-30 percent, people will be a little more encouraged .... A lot [in the domestic economy]hinges on confidence and disposable income, which will be limited,'' Baker said.
He expects company financing to be a major problem again this year. Mexican banks will not be able to afford to lend aggressively, as in 1994. But dollar-rich local firms already exporting will find funds.
``It's going to be relatively easy for big companies who export anything from PET [resin] to auto parts to get reasonably priced dollar financing,'' Baker said.
The government is looking for an export-driven recovery, headded, and is trying to attract new foreign investment for man-ufacturing.
Historically, the plastics sector, with a total market value of US$9 billion last year, has regularly outperformed the national economy. Despite a recent slowing, it should achieve growth in 1996 of up to 6 percent, according to Ric rdez.
Cecchetti pointed out that, while plastics consumption in Mexico fell by 15 percent during 1995, the year saw a 19 percent rise in business done through the maquiladora sector, helped by more export opportunities.
Cecchetti said he believes an industry recovery will begin in 1996 with firms investing, government offering security and confidence, and workers developing their activities.
What the sector needs now are accessible credit, international levels of interest, firm support to export, and fiscal reform to promote and give incentive to industrial growth, he said.
Key plastics end-markets are expected to show patchy results this year. The automotive industry, which saw output fall 15.5 percent in the first 11 months of 1995 and domestic sales plunge 70 percent, has recovered some ground with exports up 34.5 percent, according to AMIA, the national auto industry association.
Mexican suppliers of auto parts, including plastics, are making a special bid to persuade automakers to switch to local supply. Although some have done so, foreign competition will remain tough through 1996, said Jesus Ayala, president of custom molder Ayareb SA de CV, which makes bumpers and other parts.
Ayala, whose firm supplies several big auto groups, and will soon take delivery of its fifth 3,000-ton injection press, does not see any domestic auto market recovery before the last quarter of 1996.
Another sector suffering from last year's soaring interest rates is construction, which saw output fall 23 percent in the second quarter alone. A light recovery is forecast for 1996, but only will be felt in certain areas.
While office and home building will remain at very low levels, industrial construction should rise by 10-12 percent compared with 1995, said Ernst Deutsch, director general of ITP, Mexico's plastic pipe institute.
Most promising for plastics is likely to be a rise in government infrastructure spending on water, irrigation and drainage programs. Deutsch, who also heads Centro Nacional para la Calidad Pl stico SC, the national plastic industry quality and standards center, said he sees this activity expanding by up to 20 percent.