Mexico's political and social stability will be threatened if the severe recession brought on by its debt crisis continues beyond 1984, Mexican Finance Minister Jesus Silva Herzog said yesterday.
In response to the debt crisis that struck Mexico last August, the country has trimmed public spending, cut many subsidies and raised taxes in an attempt to reduce its need to borrow from abroad.
Silva Herzog called those measures "the only way out we have," but he warned, "I don't think Mexico would be able to maintain a stagnant economy for more than two years--1983 and 1984." If the recession lasts longer than that "it will certainly pose, well, additional risks for the social and political stability" of the nation, he said during an interview with Washington Post writers and editors.
Mexico owes more than $80 billion to foreign banks and foreign institutions that it cannot pay back on time. It is among a number of debt-ridden Latin American countries that have adopted austerity programs to get international banks to ease repayment terms on the outstanding loans and to get infusions of new cash from the banks and the International Monetary Fund.
Silva Herzog said that if Mexico and other big debtor nations--such as Brazil, Argentina, Chile and Peru--are to recover from their financial problems, the United States and other industrialized nations must be prepared to boost their imports from the Third World.
The "only way to earn foreign exchange to service debts and pay for imports is to export," he said. "I think that's a basic question for the next five to 10 years: Are the industrial countries going to stimulate the growth of exports from the Third World countries or not?"
He warned that if the needed finance does not flow into the Third World, "the rate of growth . . . is going to be diminished, and if the reduction is a substantial one then I think we have to be prepared for not having a very stable system."
Half of Mexico's 75 million population is locked in poverty, Silva Herzog said, pointing out that rapid population growth means that "it's a good number of Mexicans that go into the labor force each year and increase the demand for everything" from jobs to schools and hospitals. Mexico needs to keep its economy growing because of that expanding population, he said.
This year will be the first since World War II that Mexico's economy has not grown. Silva Herzog said he expects the output of goods and services in Mexico to decline between 2 and 4 percent in 1983 and not grow at all in 1984 as a result of the austerity program.
In recent years, Mexico's economy had grown about 8 percent annually boosted by its substantial oil earnings and a surge of foreign loans. In 1981 alone, about $20 billion flowed into Mexico from abroad, the finance minister said.
The severe worldwide recession that began in 1981 depressed prices and demand for the general commodities Mexico exports. A similar decline in demand for oil hit the Mexican economy hard.
By last August, Mexico knew it could not continue to pay its debts. It was Mexico's brush with bankruptcy that triggered the Third World debt crisis.
In return for money from the International Monetary Fund, the debtor nations have adopted programs aimed at cutting public spending and borrowing, slowing inflation and narrowing balance of payments deficits so that they do not need to borrow so much from overseas.
Mexico recently told its bankers that the IMF has approved its economic performance in the first three months of this year, clearing the way for the release of the next installments of money from both the IMF and commercial banks.
Silva Herzog admitted that the decline in the price of oil--which accounts for 70 percent of the country's export earnings--reduced the anticipated revenues in Mexico's economic program. But he said his nation had anticipated higher interest costs than they are now paying. Lower interest rates about cancel the bad effects of lower oil prices, he said.
But any further significant declines in oil prices would make it more difficult for Mexico to keep to its IMF performance targets, he said.
There is some popular pressure in Mexico to declare a default on foreign debts rather than undergo the painful measures necessary to satisfy bankers and keep up debt payments, Silva Herzog said. But he said it would be "terrible mistake" for Mexico to renege on its debts.
Mexico imports 10 million tons of grain a year and much of its industrial economy is linked to imports as well. A default would force Mexico to pay cash for everything it bought from abroad rather than financing them. "Within three months the welfare of the people" would be severely affected, he said, and the chances of "bringing the economy up again would be severely limited" were Mexico to default on its debts.
He said that it was reasonable to expect Mexicans to tighten their belts, but warned that the "limit comes" because there are a "good number of Mexicans that do not even have a belt."
Silva Herzog said Mexico no longer is the darling of international bankers. He said that instead of the usual raft of invitations from bankers attending last year's International Monetary Fund meeting, "We ate breakfast by ourselves, lunch by ourselves and dinner by ourselves."
"We have to realize Mexico is not going to get as much money from the outside world as we did in the last five years." he said.