Taking the biggest gamble in its economic history, Mexico last month agreed to open up its highly protected markets to U.S. and Canadian competition under a North American Free Trade Agreement.

The agreement, linking more than 360 million people in a $6 trillion economy, is expected to spur a major surge in trade among the three countries.

"Mexico is emerging as a major force in generating economic growth, jobs, and new business opportunities throughout North America," according to a recent Conference Board study.

"While the Mexican market makes up less than 5% of the North American market, it will account for about 15% of growth in North American demand this year," the report predicted.

"What the free trade agreement does is make foreign investors more comfortable because they know there is an international framework controlling the Mexican economy and the Mexicans won't misbehave and renationalize industries," said Stefano Natella, a Latin American analyst at First Boston Corp. in New York.

U.S. bankers expressed similar views.

"The agreement will increase economic integration and increase the awareness of companies around this country of Mexican opportunities," said M. Peter McPherson, executive vice president at BankAmerica Corp. and chairman of the U.S. bank task force on free trade.

Companies Look Abroad

For Mexico, it is a calculated risk that its industries will develop in time the ability to meet foreign competition. Many Mexican companies have already made significant progress.

Companies like Vitro, which bought Anchor Glass Corp. in the United States, and Cemex, the world's fourth-largest cement company, which recently acquired Spain's two largest cement companies Valenciana and Sanson, have already gone a long way toward internationalizing their operations.

But foreign companies, like banks, may find it harder to crack the Mexican market than they had initially believed.

And although U.S. manufacturing companies, like Smith Corona Corp., are proceeding with plans to shift production to Mexico, concern is growing about the Mexican economy's fast growth.

Foreign portfolio investors, in particular, have become more wary since a sharp fall in the Mexican stock market beginning last June. One market index fell to 1,302 points in late August, from a high of 1,790 this year, a 27% decline.

Observers explained the drop as a natural reaction to an earlier fast rise in stock prices. But they added that it means foreign investors are likely to become much more selective about where they put their money.

Data compiled by the Washington-based International Finance Corp. show that Mexican stock market capitalization surged from $32.76 billion at Dec. 31, 1990, to $98 billion a year later. The growth was stoked by falling interest rates, domestic growth, increased foreign investment, and progress in free trade talks.

Real gross domestic product in 1991 grew at a relatively slow pace of 3.6% as the U.S. recession made itself felt in Mexico, while interest rates continued to fall through the year and the consumer price index finished 1991 up 18.8%.

Foreign exchange reserves rose to an estimated $18 billion, from $10.3 billion. A current account deficit of $12 billion was financed by some $15.5 billion of capital inflows, of which $6 billion went into equities, $4 billion into fixed-income instruments, and $5.5 billion was direct foreign investment.

Growth Seen Resuming

Despite a recently estimated $2 billion exodus of foreign capital in the wake of the stock market slump, observers said they believe Mexico's economic growth, and foreign investment, is poised for a new takeoff.

"Basically, you'll still have a lot of people investing in Mexico," predicted Mr. Natella of First Boston.

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