Market Focus : Mexico Watches the New Oil Boom and Holds Its Breath : The last time petrodollars poured in, the economy took a huge nose dive. The question now: Will the country’s leaders know how to manage the wealth?

A cartoon in the Mexico City daily newspaper Excelsior depicts a barefoot peasant jumping for joy: “Oil prices are up!” he cheers. “We’re not going to be poor anymore!”

But in the next frame the bedraggled soul falls to the ground: “Oh, my memory is failing me,” he says, scratching his head. “Well, they won’t fool me again.”

As the Persian Gulf crisis continues to drive up world petroleum prices, delivering a $500-million-a-month windfall to oil-rich Mexico, many Mexicans are suddenly reminded of the last oil boom that promised them riches but somehow resulted in economic disaster.

They are wondering if history will repeat itself or if this government will know how to manage its good fortune better than previous administrations. In short, will the added oil income substantially benefit Mexico in months to come?

Most officials and business analysts say yes, that President Carlos Salinas de Gortari has a first-class economic cabinet that has learned from past mistakes. The government will continue to reform the economy and to manage it smartly, they argue, and will not be beguiled by the sudden cash.

There are cautionary voices, however. The Mexican government will face pressure to increase spending, pressure especially from the poor and working classes, who have paid a heavy price during eight years of economic austerity brought on largely by the government’s failure to manage its previous boom.

The ruling Institutional Revolutionary Party (PRI) faces competitive congressional elections next year and may be tempted to beef up public works projects before the vote or to postpone difficult economic decisions until afterward.

Also, Mexico’s sustained economic recovery depends greatly on the United States. A U.S. recession brought on by the high oil prices could limit badly needed foreign investment in Mexico and make it more difficult for Mexico to negotiate a favorable free-trade agreement. Mexico needs access to U.S. markets for its goods, but a serious recession probably would raise protectionist sentiment in the United States. A bill passed by the House this month that would limit textile and shoe imports is a good indicator.

With the new oil money, Mexico’s imports most likely will rise, and so will its trade deficit.

“High oil prices produce money now, but it is like a drug,” said Heberto Castillo, an engineer and leader of the leftist Democratic Revolutionary Party. “At first you feel the euphoria, and you think you have a greater capacity to work. But you have to remember what it’s like to wake up the next day. The government should not increase borrowing or production and export of oil.”

Castillo was one of the few voices warning against the “petrolization” of the Mexican economy in the late 1970s and early 1980s.

Mexico discovered its vast oil reserves in 1976 and 1977, and for an underdeveloped country, it was like a dream come true. The government began pumping as fast as it could, and before long the Mexicans were being called the Arabs of Latin America. Oil prices climbed from $13.31 a barrel in 1978 to $33.19 in 1981. During those years, Mexico earned $50 billion in oil revenues.

Meanwhile, U.S. and European banks, filled with petrodollars from the Middle East, came knocking at Mexico’s door, offering to lend against future oil income. The foreign debt grew from $49 billion in 1980 to $86.7 billion in 1982.

Much of the money went back into Petroleos Mexicanos--the giant state-owned oil monopoly, known as Pemex--for exploration, drilling and the construction of petrochemical plants. Pursuing accelerated growth, the government of President Jose Lopez Portillo initiated expensive and large-scale public works projects.

“Lopez Portillo believed it was preferable to grow with inflation than not to grow with low inflation,” said Carlos Ramirez, an editor and columnist for El Financiero newspaper.

Growth reached 8% a year, but annual inflation rose from 16% in 1978 to 29% in 1981 to 98% in 1982.

“Everyone thought oil prices would keep going up,” said Jonathan Heath, chief economist at the Macro Asesoria consulting firm.

But they didn’t. They began to weaken, but the Mexican government did not react. When Jorge Diaz Serrano, then chief of Pemex, cut oil prices by $4 a barrel, he was fired. The government failed to reduce spending. Nor did it devalue the peso against inflation or raise interest rates to keep money in the country. Much of the oil money was flowing out of the country for investment elsewhere, while still another portion was lost to widespread corruption.

By August, 1982, the government was bankrupt. Reserves were gone, and suddenly Mexico could not make payments on its now-bulging foreign debt.

“There was a lack of adaptability on the part of the Mexican government when the crisis hit,” said Heath. “They didn’t adjust to world conditions.”

This time, Heath and others contend, not only is Mexico’s economic cabinet smarter because of past errors but the Mexican economy is stronger and less prone to a crisis. For example, in 1982 the public deficit was 16.9% of the gross domestic product; by last year, the government had brought it down to 5.8%

In 1982, the peso was 40% overvalued, economists say. Now, although the government is holding the peso fairly stable, observers say that at worst it is 5% to 10% overvalued. And Mexico has more than $7 billion in reserves.

Inflation, which was 98% in 1982 and reached 159% in 1987, is about 28% now.

While the size of the federal government grew during the 1970s and early 1980s, President Salinas has been selling off state enterprises and shrinking the bureaucracy. His government has implemented fiscal reforms and is collecting more taxes than its predecessors.

Mexico also has increased its other exports. Oil, which accounted for 73% of exports in 1982, was down to 32% last year.

Most important, economists say, is the attitude of international banks. While Mexico has begun to borrow internationally again, banks aren’t likely to lend on the same scale as before.

“More than guarantees against petrolization is the fact that the conditions are not there for the petrolization of the economy,” said Carlos Ramirez. “In the past, petrolization was based on debt. Now the conditions are not there for the banks to keep lending.”

“The risks are there, but they are relative,” said economist Heath. “Even in the worst-case scenario, Mexico is still way better off than in 1982. Too much has happened for things to go back the way they were.”

Mexico exports about 1.3 million barrels of oil a day. Every dollar increase in oil brings the government $40 million a month. Every point increase in interest rates costs Mexico about $70 million a month in added foreign debt payments.

Right now, the government is using the additional money to pay off internal debt and beef up reserves. One senior official said that Pemex will have its entire internal debt paid off by the end of October.

Economists say they believe that the government will have to make concessions and open up the oil industry to further foreign investment in order to reach a free-trade agreement with the United States.

They expect the government to allow more imports, particularly of capital goods, to fuel growth. But they do not expect the Salinas administration to launch massive investment projects that would be vulnerable to a drop in oil prices.

Heath warns that the government could be forced by elections and social pressure to spend more of the oil income than it should or to postpone devaluations and other adjustments. But even that, he says, would mean only that Mexico will not reach its goals on inflation and growth. It will not mean a crisis, he said.

Oil and Money

Mexico’s crude oil exports dipped sharply in the 1980s but are starting to rebound thanks to the crisis in the Persian Gulf.