Oil Price Fall Worsens Mexico’s Ills : Experts Question Its Ability to Pay Debt, Spur Economy

As Mexico prepares to reduce the price of its oil to keep pace with the world market, Mexican experts and foreign diplomats say the continuing decline in the nation’s earnings is fast scrambling plans and predictions for its crippled economy.

Each drop of $1 a barrel in oil prices costs Mexico about $1.5 million a day in revenue. As the price for Mexican oil, which now averages close to $23 a barrel, approaches $20, the country will find it difficult to maintain payments on its massive foreign debt, observers say.

In addition, financing the imports necessary to stimulate its economy and funding government programs will become even more difficult, further complicating the problems of a country with high unemployment rates and few prospects for growth.

Less than a month ago, Mexican and foreign officials were predicting that Mexico would require $4 billion in new international loans this year to pump up its sagging economy. But, given the slide in world oil prices, that figure may jump another $2 billion.

“All bets are off,” a foreign observer said. “Mexico’s needs seem to be growing by the day.”

Urgent Situation

Mexico owes $96 billion to scores of foreign banks, most of them in the United States. Only Brazil is deeper in the hole.

If the situation were not so urgent, the performance of the government of President Miguel de la Madrid in managing Mexico’s economy might well discourage new loans. Efforts by his government to curb inflation, stop the flight of dollars out of the country and stimulate exports have, at best, been only partially successful.

But, with bankers already heavily committed to Mexico, they have little choice but to help keep the country afloat. The alternative is to risk a default or a unilateral cutback in debt payments by Mexico. For its part, Mexico has avoided talk of default or reduced payments in order to keep the door open for new loans.

“The banks and Mexico are like incompatible Siamese twins. No matter how much they may kick and scream, they can’t separate,” a U.S. banker said here.

Beginning last month, Mexico decided to wait until the first of each month and then set its oil prices retroactively. In this way, the country follows the trends in oil prices, rewriting contracts when necessary, and avoids losing customers to suppliers who can deliver oil at lower prices.

Mexico was forced to become more flexible because of the decision by the Organization of Petroleum Exporting Countries late last year to abandon fixed prices. Instead, OPEC set out to recapture customers lost to maverick producers, such as Britain and Norway, that were undercutting OPEC.

The OPEC decision has meant a virtual price war. Saudi Arabia, the world’s largest producer, took the lead by sharply increasing production even though demand remained steady. Prices in some markets dipped below $20 a barrel last week before recovering slightly.

Mexico never joined OPEC but was accustomed to following the cartel’s prices upward. Now, it is following them down.

On Jan. 1, Mexico reduced its December prices by an average of 90 cents a barrel, and some experts predict a cut of another $1 for January.

Last year, Mexico earned $14.7 billion from oil sales--about 70% of its total revenue from exports. Until oil prices started declining, sales for this year had been estimated at more than $13 billion. The country was scheduled to pay $10 billion on its debt.

Mexico’s economy had been expected to grow little if at all in 1986, and now, with oil revenue declining, some economists here are predicting that it will shrink by as much as 8%. Meanwhile, the inflation rate for 1986 is expected to exceed 50%.

The possibility of economic stagnation and runaway inflation may put pressure on the Mexican government to cancel part of its debt or limit payments on it. The latter step was taken by the new government of Peru last year and was politically popular.

Mexican Finance Minister Jesus Silva Herzog is expected to meet with U.S. bankers next month on possible loan strategies and will probably also meet with David C. Mulford, assistant secretary of the Treasury for international affairs, U.S. sources here say.