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Mexico to Get $3.5-Billion Emergency Loan From U.S. : To Tide It Over Fall in Oil Revenue

From Reuters

The U.S. Treasury said today that it is ready to put together an emergency loan of up to $3.5 billion for Mexico, the Third World’s second-largest debtor, to tide it over a sharp fall in oil revenues.

Mexico, which owes about $100 billion in foreign debt, stands to lose about $1.5 billion in income this year because of the recent drop in oil prices, Mexican government officials have said.

“The U.S. Treasury and Federal Reserve are prepared to develop a short-term bridge loan of up to $3.5 billion, depending on the development of loan programs by Mexico with the World Bank and the International Monetary Fund,” a Treasury statement said.

Outgoing Mexican President Miguel de la Madrid ordered the Finance Ministry over the weekend to go ahead and negotiate new foreign loans to compensate for the drop in oil prices.

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Although Mexico has managed to reduce its dependence on oil revenues in recent years, oil still accounts for about a third of its export income.

The government had budgeted for an average 1988 oil price of $16.04, which would have earned it $7.4 billion, but that projection has now been scaled back to just under $12 a barrel--a likely loss of $1.5 billion.

‘Progress Already Achieved’

Rising interest rates are likely to add another $1.5 billion to the cost of servicing Mexico’s foreign debts this year, U.S. officials said.

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The Treasury said Mexico deserves help because of the positive economic reforms it is making.

“Mexico’s adjustment record, particularly the process of fiscal consolidation and the structural transformation of its external sector, has established the basic conditions for the renewal of sustained economic growth,” it said.

“U.S. financial authorities believe that these measures build upon the progress already achieved in the sustained adjustment effort undergone by the Mexican economy.”

Mexico has recently taken steps to reduce government payrolls, sell some government-owned businesses and make it easier for foreigners to invest in Mexico.

The swift response to the Mexican government’s decision to seek new foreign loans underlined the importance that the Reagan Administration attaches to helping its populous neighbor to maintain economic and political stability.

Harder Line Feared

U.S. officials say that if Mexico’s economic difficulties get worse, the incoming administration of Carlos Salinas de Gortari, who takes office Dec. 1, might be tempted to take a harder, more populist line on debt repayments in order to consolidate his grip on power.

Handpicked by De la Madrid, the Harvard-trained Salinas was elected president in July with the slimmest margin of victory, only 50.3%, in the ruling Institutional Revolutionary Party’s six decades in power.

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Political analysts said the narrow win largely reflected frustration with years of belt-tightening, which have reduced inflation-adjusted wages 40% since 1982. That was the year when Mexico triggered the Latin American debt crisis by warning its creditors that it was running out of cash.

The U.S. Treasury made an emergency loan to Mexico in 1982 and lent a helping hand again this year when it paved the way for an innovative debt reduction plan by agreeing to sell Treasury bonds that Mexico used to back new, low-yielding securities that it issued in exchange for more expensive bank loans.

The swap reduced Mexico’s debt by $1.1 billion.

In addition to seeking new loans from the International Monetary Fund and the World Bank, Mexico is expected to request another large loan from its commercial bank creditors.


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