Better Deal on Foreign Debt Also Sought : Oil’s Plunge Triggers Budget Cuts in Mexico

MEXICO CITY — The plunge in prices for oil, Mexico’s leading export, has prompted the government to announce painful budget cuts, consider an International Monetary Fund contingency loan and renew calls for a better deal on the foreign debt.

It also highlights a stubborn battle against inflation and an ambitious trade liberalization program meant to diversify Mexico’s export earnings and wean the nation from dependence on oil-generated revenues.

Pemex, the government oil monopoly, said on Oct. 7 that average spot market prices for Mexican crude had sunk to about $9 a barrel and that revenues for this year would fall below 1987’s $8.6 billion.

Last year, oil accounted for 41% of total Mexican export revenues and helped the country post an overall $8.4-billion trade surplus.

Reacting to the drop in oil-based earnings--estimated by one Energy Department official at $2 billion below official projections so far this year--President Miguel de la Madrid’s Administration announced more than $200 million in budget cuts last Friday.

The administration took pains to assure Mexicans, whose paychecks are worth half what they were in 1982, that the cuts would spare social programs.

“We can manage the problems (caused by falling oil prices) with some sacrifices,” Agustin F. Legorreta, president of the private Business Coordinating Council, said Tuesday.

The falling price of oil has spurred new calls for renegotiation of Mexico’s $104-billion foreign debt. Legorreta said interest payments on the debt are sucking funds away from economic development.

However, Mexico has ruled out a suspension of its debt payments, Finance Ministry Under-Secretary Francisco Suarez Davila said Wednesday.

Left-wing congressmen also called on Mexico to suspend payments but Suarez Davila rejected this on the grounds that it would cut the country off from new credit.

The government has been using its foreign reserves to support a 7-month-old peso currency exchange rate freeze as part of an anti-inflation wage and price stabilization program. If the price of oil keeps dropping, however, the government may actually be forced to add to the debt burden.

Most analysts believe the government when it says that inflation is its No. 1 economic priority and say that President-elect Carlos Salinas de Gortari will try to maintain the fight. Salinas takes office Dec. 1.

“The danger of hyper-inflation is so big that the effort should continue,” said Jacobo Zaidenweber, president of the Mexico-United States Chamber of Commerce, in a recent interview. “It could take between one and three years in one form or another.”

Under terms of a 1987 foreign debt rescheduling agreement with the IMF, Mexico has the option to draw up to $1.2 billion in contingency loans if the price of crude oil drops below the $9 barrier.

Hard currency reserves, which reached a high of $16 billion in April, dropped to an estimated $12 billion in July as the government propped up the peso against the dollar.

The government has resisted fresh calls to devalue and give Mexican entrepreneurs a new export advantage that could help offset the shrinking trade surplus. A devaluation would generate new inflationary pressures; the anti-inflation plan has, officially, reduced annualized inflation from a record 159.2% in 1987 to about 45% this year.

Although resisting the calls to devalue, the Administration has stressed the importance of non-oil exports to make up for the shortfall in oil revenues.

Through June, Mexico’s first-half merchandise trade surplus totalled $2.4 billion, well below 1987’s first-half surplus of $4.76 billion, according to the Center for Private Sector Economic Studies.