Solution, Not Rescue, Must Be Found for Mexico’s Economy

Last month’s plunge in oil prices was no surprise, and its consequences will be no surprise, either: balance-of-payments relief for oil importers--particularly nations deeply in debt, such as Brazil--and financial disaster for oil exporters deeply in debt--such as Nigeria and Mexico.

The price decline was foreseen last September, when Saudi Arabia doubled its production. In response to the glut on the world market, Mexico anticipated having to drop its prices an average of $2 per barrel. But last week, as the key price on British oil slipped below $18, Mexico had to drop its prices by $2.50 to $5.85 per barrel.

Even if last year’s low of $25 had held, Mexico would still need $4 billion in loans this year to pay interest on its foreign debt. Oil accounts for nearly 70% of Mexico’s total exports, and the country loses $550 million annually in hard-currency earnings with every dollar drop on the world petroleum market.

The last time the country faced a major oil-revenue shortfall, in July, 1981, the effects were devastating. That was the real beginning of Mexico’s economic crisis, and also signified severe damage to its political system, which has been stable since 1934.

Matters will be no better, and perhaps will be worse, this time around. Mexico has undergone a three-year economic stabilization shock treatment, including a 40% fall in real wages and a net disbursement of more than $40 billion in interest payments to its foreign creditors. Unfortunately, it has little to show for its efforts: Despite President Miguel de la Madrid’s best intentions, the Mexican economy is no better equipped today for a major drop in oil earnings.

This year was going to be a bad one for the Mexican economy under any circumstances. The government budget included gloomy forecasts--minus-1% economic growth, 50% inflation, a reduced trade surplus--and reasonably optimistic assumptions: a $2 drop in the price of oil, $4 billion more in foreign loans, and stable or moderately declining interest rates. But developments in the oil markets have made these plans largely irrelevant, and have left Mexico with a painful alternative.

Roughly speaking, for every dollar that the price of oil falls below $20 per barrel, Mexico requires $500 million more in foreign financing, in addition to the $4 billion that it has requested. It can either try to obtain these funds from the international financial community, with great difficulty and increased conditionality at best. Or it can reduce its debt service by that much--or more--at the risk of confrontation with its creditors. In each case the numbers are the same--they “net out,” as the financial people say--but the politics are different.

The political pressures for De la Madrid to take unilateral steps on the debt issue were mounting before the plunge in oil prices. A new “Mexican rescue plan”--if stitched together by the Reagan Administration, commercial banks and the International Monetary Fund and World Bank--would solve Mexico’s immediate cash problems, as was done in August, 1982. But it would only make matters worse from a political standpoint, underlining the futility of the country’s efforts and its continued reliance on quick fixes from abroad to keep solvent.

Mexico’s debt crisis has been punctuated by missed opportunities. The most recent ones--the earthquakes in September and the De la Madrid-Reagan talks a month ago--were particularly flagrant, since each might have been used to forestall the coming--and expected--catastrophe. Now the fall in oil prices could be a starting point for a lasting solution to Mexico’s dilemma, or another opportunity missed due to shortsightedness or lack of statesmanship (or both).

The Reagan Administration would have to devote more time and thought to its neighbor and less to squeezing money from Congress to fund the contras in Nicaragua (against Mexico’s and Latin America’s better judgment). It would have to accept that the earnings on banks’ balance sheets should not determine its Third World debt policy. And it would have to realize that writing off part of Mexico’s debt, reducing interest on another part and lending new money to Mexico on concessional terms are the only alternative to a Mexican breakdown.

Soon Mexico will have to stop paying interest on its foreign debt or receive massive infusions of new funds. The former solution would spell disaster for the country and its creditors; the latter would simply postpone the problem until the next crisis.

Mexico must take the initiative in finding a third way out, but the Reagan Administration must be ready to support it actively. The technical solutions are on every think tank’s drawing boards. What has been sadly lacking is the political will in Washington, backed by financial muscle, to ensure that a “Mexican solution,” as opposed to a “Mexican rescue,” is implemented in time. And time, like money, is running short.