Mexico Faces 3rd Year of Economic Austerity, Finance Minister Says

Facing another year of austerity, Mexico has made an auspicious beginning by advancing a $250-million prepayment to bankers on its foreign debt, but the government sees clear signs of trouble ahead.

“We see 1985 as a difficult year because it is the third year in a row of adjustments,” Finance Minister Jesus Silva Herzog told a group of journalists and Latin American specialists here over the weekend.

If 1982 was the year of collapse in Mexico--the year the economy went into a tailspin--1983 was the year of agony when everyone felt the impact of a brutal currency devaluation. The following year, 1984, was the year of endurance, when austerity deepened.

Much of that was foreseen from the moment that President Miguel de la Madrid took office in 1982 and crafted a recovery program aimed at putting Mexico’s economic house in order by reducing public spending.

2% Growth in 1984

The inevitable lowering of the standard of living of the average Mexican was expected, but there was hope that 1985 could see the beginning of a significant recovery. Instead, it appears that there will be more of the same and that any recovery will be modest at best.

Although the final report is not in yet, Mexico’s economy in 1984 probably grew by a slight 2%. Since this is somewhat lower than the rate of population growth, it means Mexico could not create more jobs than the number of job seekers who entered the market.

Silva Herzog said that economic growth in 1985 is expected to be about 3% or 4%. This would be a spectacular improvement over 1983, when the gross national product declined by 5.7%, but barely above population growth and far from sufficient, in any case, to make up for jobs lost in the three previous years owing to economic deterioration.

“There is no question but that the social cost has been very severe,” Silva Herzog conceded, pointing to a 30% drop in real income by Mexican wage earners. “It is something really serious.”

He acknowledged that, with a passage of time, “social resistance” to the government’s austerity programs is bound to increase.

Discontent May Spread

One sign of popular discontent is the unwillingness of market suppliers to bring their products to consumers under present conditions. In Mexico City and other important cities around the country, for example, beef has been scarce for weeks because ranchers and middle men are unhappy over government controls and prices.

At its worst, the discontent can spill over into the election process, such as it did when rioting and unrest spread throughout the northern state of Coahuila in late December and early January in the wake of hard-fought municipal races.

What worries Mexican planners as much as the prospect that prolonged austerity will exhaust the patience of the average Mexican is the erratic performance of the world economy.

The success of Mexico’s economic recovery plan is based on being able to carry out a complex agreement under which Mexico will repay its $96-billion foreign debt over a period of 14 years. The plan, in turn, is founded on the projection that the price of oil will remain at or near $27 per barrel.

However, some current projections foresee the price of oil falling to as low as $20 a barrel in the next year or two. Such a development would mean that the plan would have to be scrapped, since every $1 decline in the price of a barrel of oil means a revenue loss of about $550 million a year to Mexico.

Late last year, Mexico agreed to cut oil exports by 100,000 barrels a day to strengthen the international market and to stay in stride with the international oil cartel. This, too, has meant a slight reduction in income.

So far, Mexico has been able to compensate for this dwindling revenue by the commensurate reduction in international interest rates. Evey drop of 1% in international lending rates represents a savings of about $750 million for Mexico, but the fear that interest rates will escalate at a time when oil prices are falling keeps some Mexican planners awake at night.

“We will be able to avoid serious complications as long as there is only a reasonable drop in the price of oil,” Silva Herzog told his audience, but any drastic fall would imply drastic consequences for Mexico.