The dramatic slide in oil prices will double Mexico's need for additional foreign loans to nearly $5 billion this year, and then boost it to nearly $8 billion annually in the following three years, according to William R. Cline of the Institute for International Economics.
Mexico "is the most serious casualty of the recent decline of oil prices . . . and the possibility of still further declines as Saudi Arabia seeks to discipline the market by thrusting sharply increased production onto the market," Cline said.
In a new evaluation of Mexico's economy in a low-oil-price period, Cline said that, although it seems probable that industrial nations and their banks can mobilize the extra money needed to support Mexico, the Mexican government will have to develop a new economic strategy that relies less on austerity.
"The real vulnerability of Mexico may be less on the side of mobilization of financing, and more on the side of political sustainability . . . of an adjustment program," Cline said.
He suggested that a further sacrifice of economic growth to meet the new oil shock was not politically viable, and that the Mexican government might have to "shift toward an incomes policy" along the lines of measures adopted late last year by Argentine President Raul Alfonsin to restrain wage and price increases.
The Mexican government already had planned to let economic growth slide this year to between minus 1 percent to plus 1 percent of gross national product.
"The key ingredient for mobilizing" support for additional borrowing "would be an effective demonstration" of a corrective policy by the Mexican government, Cline said. He suggested that a further devaluation of the peso, a return to positive real domestic interest rates and further cuts in the budget would be among the elements of the Mexican response.
Cline's grim assessment of the impact of the oil slide on Mexico is based on the assumption that the price of Mexican crude oil would average $18 a barrel in 1986, drop to $15 a barrel in 1987 and 1988, and then grow 5 percent a year. Last weekend, Mexico cut its basic price from $23.50 to $19.50.
Although Cline said that his price assumptions "are probably too pessimistic," other oil experts have predicted declines that go even beyond his projections.
Prior to the latest slide in oil prices, Cline had calculated Mexico's new-money needs at $2.5 billion for this year and $3.5 billion for 1987 and 1988 -- about in line with slightly more pessimistic official Mexican projections.
But a decline in prices to $15 a barrel next year would result in a $4 billion drop in Mexican oil export earnings to $8.5 billion, Cline said. A beneficial feedback from a one-half-point gain in economic growth rates among industrial nations and a one-point drop in interest rates -- expected by many economists from lower oil prices -- would cut the new-money requirement by only $1 billion in 1987 and by $1.5 billion in 1989, according to Cline.
Without the favorable feedback, Cline estimated that Mexico's new-money needs would be $4.7 billion this year, rising to $7.7 billion in 1987; $8.4 billion in 1988; $7.4 billion in 1989, and $7.9 billion in 1990. Assuming that two-thirds would come from private banks, Cline put the additional commercial bank package for Mexico at an average of $5.2 billion for 1987-89, or about 9 percent of total bank exposure in Mexico.
This lending rate would about equal the interest rate on Mexico's debt, which means that "new lending would almost exhaust, but not exceed, interest payments due." If the banks concluded that the Mexican government were "taking proper policy measures," they probably would agree to extend the larger amounts temporarily, he said.