Latin American debtor nations on the whole would be hurt by a sharp decline in world oil prices, although the impact throughout the region would be mixed.
This was the view of bankers and economists familiar with the Latin American debt situation this week as they surveyed the possibility of a large drop in oil prices resulting from the current disarray within the Organization of Petroleum Exporting Countries.
Among the biggest Latin American debtors -- which account for nearly 90 percent of the region's $360 billion in foreign loans -- the benefits that importers Brazil and Chile will derive from lower oil prices will be overwhelmed by the decline in export earnings in Mexico, Venezuela and Peru.
Argentina, self-sufficient in energy, would be neither measurably hurt nor helped by a decline in oil prices.
Oil-exporting countries like Mexico and Venezuela, which to date have the best record among the Latin debtor nations, would find it increasingly difficult to maintain their debt payments and foster the economic growth needed to overcome the social devastation wreaked by severe recessions in 1983.
"In 1983, Mexico chose austerity in order to adjust to a new world in which commodity prices were lower, interest rates were higher and foreign money dried up. Whether it would be able to do it again is questionable," according to an analyst for a major New York bank.
The big decline in interest rates in the last nine months has given debtor nations unanticipated relief from their repayment burden, according to Donna M. Nemer, an international economist at American Security Bank. As a result, Mexico and Venezuela can absorb some decline in oil prices and still remain on their projected paths of internal economic recovery and steady payment of their foreign obligations.
The crucial question is whether and by how much oil prices will decline in the months ahead. Disarray in the ranks of the Organization of Petroleum Exporting Countries and the big and growing glut of oil in the world almost surely portends further price declines in oil.
How big those declines are seems to depend on whether Saudi Arabia doubles or triples its production -- as it has threatened to do. If it does either, prices surely would tumble significantly and the downward slide would be exacerbated as hard-pressed countries such as Nigeria -- and even Mexico and Venezuela -- increased production to attempt to maintain the same revenue with falling prices.
An oil prices collapse -- say a decline of $5 a barrel -- would be disastrous, according to an economist at a major U.S. money center bank. But a smaller decline might not only be manageable but desirable if it was accompanied by continued levels of current interest rates.
In Mexico, for example, government officials estimate the country loses $545 million a year in export revenue for each $1 decline in the average price of oil. But Mexico saves $800 million in interest payments for each percentage point decline in interest rates.
This week, Mexico announced it was cutting its oil prices by about $1.25 per barrel. It was Mexico's most significant break with OPEC to date.
In Venezuela, the trade-off is worse -- assuming that oil prices and interest rates can be traded on a dollar-for-percentage-point basis. Venezuela would lose about $550 million to $600 million for each dollar decline in oil prices, but would save only $310 million or so in interest payments for every percentage-point fall in rates.
The reason is simple: Mexico owes foreign creditors about $96 billion; Venezuela owes $35 billion. On the other hand, Mexico may suffer more than Venezuela because Mexico's population is far larger and poorer. Venezuela, experts said, has more latitude to take further austerity measures than does Mexico.
Peru, although not a major oil exporter, is in far worse shape than either Venezuela or Mexico -- politically and economically. It is already far behind in its debt repayments. Venezuela and Mexico are current in their payments. Peru has taken few, if any, steps to bring its budget deficits and its inflation under control. Its president-elect, Alan Garcia, has been mouthing rhetoric against both austerity and the International Monetary Fund.
Although Peruvian analysts say that Garcia is far more conventional than his campaign statements would have it, politics probably will prevent him from following a more conventional path, at least for a time. Lost oil revenue will make life just that more difficult for already hard-pressed Peru and push off even further an accommodation with the IMF and a new repayment accord with bank lenders.
Although a steep decline in oil prices might spell serious difficulties in 1986 and beyond for Mexico and Brazil, even more modest declines will eat into many of the benefits of the four-percentage-point decline in interest rates in the last nine months or so.
To generate the dollars they need to pay their debts, Latin American countries have been running large balance-of-payments surpluses. To achieve those surpluses, the countries have boosted exports and held down imports.
The decline in rates would permit them to run far smaller trade surpluses and still have the wherewithal to pay their foreign loans.
The countries were able to run trade surpluses in part because a fast-growing U.S. economy was absorbing huge amounts of Latin American exports. Latin American countries such as Mexico were able to boost their exports sharply because manufacturers had to look to foreign sales to replace lost domestic sales in the recession. Last year, for example, Mexican oil export revenue was nearly static -- at about $16.5 billion. But non-oil exports increased by nearly $3 billion.
As Mexico's economy began to recover last year, so did imports of vital goods that are not produced in Mexico -- although the country still imported $3 billion less last year than in 1982, the year the debt crisis struck. The increase in non-oil exports enabled Mexico to increase imports without reducing its trade surplus.
This year, as domestic demand continues to rise, even if at a slower pace than before 1982, excess capacity in Mexican industry will decline and the need for imports will rise. With the bigger-than-anticipated decline in rates, the country could support a faster domestic recovery than planned and still stay current on its debt payments.
A drop of several dollars in oil prices would prevent a faster recovery, a recovery that would provide jobs not only for Mexico's burgeoning work force but also begin to eat into the huge pool of workers idled in the austerity-induced recession of late 1982 and 1983.
Oil exports accounted for about 66 percent of Mexico's exports last year. In Venezuela, oil revenue makes up more than 90 percent of the country's foreign trade earnings. Both Mexico and Venezuela have built up reserves of foreign currencies that will enable them to continue their debt payments and imports for some period of time -- probably about eight months in Mexico and more than a year in Venezuela.
Brazil, on the other hand, benefits about the same as Mexico from the decline in rates and benefits as well from the decline in oil prices.
But following the oil shocks of 1973 and 1979, Brazil actively set out to reduce its dependence on foreign oil; a fair amount of Brazil's $100 billion in foreign borrowings was plowed into energy development. In the last three years, much of that development has come to fruition. Once nearly totally dependent on foreign energy sources, Brazil now produces nearly 60 percent of its energy needs. Its self-reliance will grow in coming years.
Brazil would have been helped by the oil price decline far more in 1982 than today, according to American Security's Nemer.
Today Brazil saves less than $200 million a year with each $1 decline in oil prices. Each percentage point decline in rates produces $800 million in interest savings.
According to a New York bank economist, the most difficult scenario for the debtors and their creditors would be renewal of interest rate increases while oil prices slide. The most optmistic one would be a sufficient decline in oil prices to give a boost the U.S. economy and trigger stronger economic growth -- and demand for imports -- in Europe and Japan, while the decline would be small enough so that Mexico and Venezuela were not seriously hurt.