The drop in international oil prices has always been a bad forecast for Mexican public finances. Between 3 and 4 out of every 10 pesos spent by the government comes from oil revenue. The decrease in this resource can mainly be explained to external factors, specifically to an increase in world supply, which has been boosted by the U.S. production increase – let us remember that the latter is a country interested both in reducing its energy dependence as well as maintaining low fuel prices in order to put pressure on Russia and minimize its oil and gas profits – and the stability of extraction levels in the countries that are part of the Organization of Petroleum Exporting Countries (OPEC). Other factor that has influenced is the contraction of worldwide hydrocarbon demand due to a lack of growth within Chinese economy as well as the lackluster performance of most European economies. The price decrease contains an opportunity for Saudi Arabia to undermine the Iranian power, which is equally dependent on high oil prices.
Now that the international scenario has become increasingly complex, not only in economic terms, Mexico is in the middle of the discussion of its 2015 Economic Package. As it is well known, two of the most important measures when developing the budget account are the exchange rate peso-dollar – which has skyrocketed to 13.40 pesos per dollar – and the price of the Mexican Oil Mix (MME, for its acronym in Spanish). Initially, the Executive Power proposal estimated the MME price in 82 dollars per barrel. Afterwards, the Chamber of Deputies adjusted it to 81 dollars and later on, the Secretariat of Public Finance (SHCP) proposed to settle it in 79 dollars. What are the budgetary implications of this adjustment?
The question itself is relevant but it gains a particular edge when considering that 2015 is an election year. The federal government, local authorities and political parties are looking for more financial resources than the usual. With that in mind, the loss in the expected revenue of an oil price adjustment would be up to 11,400 million pesos – approximately the annual budget of all the Legislative Power- However, the aforementioned sum may increase since MME keeps on showing a decreasing trend; just last month, its price had a 16 percent decrease. According to data provided by Grupo BBVA Bancomer, it is believed that for each 10 dollars the MME price decreases, public revenue will lose around 0.2 percent of GDP.
As if this was not enough, the method used to calculate the estimation is not transparent, which makes it harder to verify its technical solidity. The likelihood of error is not low when considering the recent history of failures within SCHP’s forecasts – as it has happened with the case of mistaken calculations over the growth of the Mexican economy or, as it occurred in the past, with the effects of so-called “little malaises”. In addition, according to Goldman Sachs as well as the main bond investor, Jeffrey Gundlach, the price will drop to less than 70 dollars per barrel. Even Venezuela, a country known worldwide as having little responsibility regarding its economic control, has fixed a conservative figure for its 2015 budget, with a level of 60 dollars per barrel, almost 20 dollars below what was stated by SCHP. An unsettling fact, indeed.
This justifies the need for Mexico to have an insurance coverage, with the aim of sorting the risks of a potential greater decrease in the MME price. This coverage is being negotiated but its cost is quite expensive. In 2014, the coverage expenses were paid with resources from the Fund for the Stabilization of Oil Income (FEIP, for its Spanish acronym) and a guarantee of 85 dollars per barrel was established. According to data from the SHCP Sub-Secretary of Income, Miguel Messmacher, PEMEX reports an average price of almost 95 dollars, which has made the activation of the insurance an unnecessary ordeal. On October 22nd, in a working session at the United Commissions of Public Finances and Legislative Studies, Messmacher stated that the peso-dollar exchange rate and its behavior, where there is an appreciated dollar, creates an increasing difference that may compensate a potential sub-estimation of the oil price.
Although the logic of the Public Finance officers appears to be unrelenting on paper, the reality often brings disenchantment. The risk is that if these equations of budgetary balance turn out to be unsustainable, it is very likely that an old temptation of PRI may appear once again: contracting debt and increasing deficit. In addition to the aforementioned, the incentive to spend significant amounts in order to finance politically attractive projects is quite high. It should also be taken into account the great deal of expectations – that are currently just that, expectations – on the investments that will derive from the energy reform. Mexico has lived through scenarios where the country trusts on “managing wealth” and ends up in damage control.
CIDAC
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