Published On: Wed, Jan 28th, 2015

Price of Oil might force Mexico to cut Public Spending

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On Monday, President Enrique Peña Nieto met with his cabinet to announce the need to cut public spending this year due to the drop in oil prices in order to preserve macroeconomic stability.

Analysts said that in 2015 Mexico’s public spending could be cut by between 100 billion pesos and 180 billion pesos (US$6.79 billion and US$12.23 billion), especially in bureaucracy, social communication, advertising and some infrastructure projects.

On Monday, President Enrique Peña Nieto met with his cabinet to announce the need to cut public spending this year in order to preserve macroeconomic stability.

According to the experts consulted by Mexico City Newspaper EL UNIVERSAL, the budget cuts will depend on the evolution of oil revenues and their impact on public finances.

Mexican crude oil has dropped 62.3% since last June, from US$102.41 per barrel on June 20, 2014, to US$38.59 yesterday, compared to the price of US$79 foreseen in the revenue budget.

Although the government bought oil hedges, they will not be enough to avoid a gap in the estimated income.

On January 8 Finance Minister Luis Videgaray announced that if revenue is insufficient, public spending will be cut instead of increasing the deficit or taxes. (Photo: EL UNIVERSAL)

On January 8 Finance Minister Luis Videgaray announced that if revenue is insufficient, public spending will be cut instead of increasing the deficit or taxes. (Photo: EL UNIVERSAL)

Alfredo Coutiño, director for Latin America at Moody’s Analytics, said that the areas in which budget could be cut are current spending, wages and salaries, non-priority social programs and even infrastructure projects.

“I am not saying that the wages and salaries of bureaucrats are cut, but that new hirings are postponed or canceled because bureaucracy has been growing in recent years,” Coutiño said.

 

Raúl Feliz, Professor at the Center for Economic Research and Teaching (CIDE), said that Pemex investment, projected at 27 billion dollars this year and 30 billion in 2016, could be cut.

He added that public spending could be cut by one percentage point of Mexico’s GDP (170 billion pesos – US$11.5 billion) in 2015, but that if oil prices remain low, cuts could reach 2% over the next years.

 

Aníbal Gutiérrez, professor at the National Autonomous University of Mexico (UNAM) also estimated that cuts could go from 100 billion to 150 billion pesos (US$6.8 billion to US$10.2 billion) given the drop in oil prices.

In addition to current expenditure, he agreed that some infrastructure programs could be revised, canceled or postponed.

 

Previously both Luis Foncerrada, general director of the Center for Economic Studies of the Private Sector (CEESP) and Juan Pardinas, general director of the Mexican Institute of Competitiveness (IMCO), said that train projects, such as the Mexico-Querétaro one, should be postponed or canceled given the current situation.

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