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Mexico Plans Fresh Budget Cuts in 2017 as oil Slump Bites

Mexico relies on oil for a large part of its income and has been hit hard by low prices
By The News · 02 of April 2016 13:27:32
, MÉXICO, D.F., 30DICIEMBRE2015.- La secretaría de Hacienda y Crédito Público anunció que bajarán los precios de la gasolina magna la cual será de 13.16 pesos por litro (41 centavos menos que el precio que vigente en 2015), mientras que la prémium costará 13.98 pesos por litro (40 centavos menos que este año). El costo del díesel se reducirá en 43 centavos y quedará en 13.77 pesos por litro.FOTO: MOISÉS PABLO /CUARTOSCURO.COM, No available

Mexico’s finance ministry on Friday said it plans further spending cuts next year, as weak oil prices pile pressure on a budget that has had billions of dollars sucked from it since the start of 2015.

A Ceremony to commemorate the nationalization of oil in Mexico in 1938. Photo: Cuartoscuro.com/Saul López.

A Ceremony to commemorate the nationalization of oil in Mexico in 1938.
Photo: Cuartoscuro.com/Saul López.

One day after Moody’s lowered the outlook on Mexico’s credit rating, the ministry said it aimed to make savings of 175.1 billion pesos ($10.1 billion) in 2017. That followed a February announcement in which it cut 2016 spending by 132 billion pesos, or 0.7 percent of gross domestic product (GDP).

Mexico’s public finances would have to cope with a “complicated international outlook” next year and “a substantial improvement in the fundamentals of the oil market was not foreseeable,” the ministry said in a statement.

Oil revenues have traditionally funded about one third of the federal budget, and the ministry said it foresaw Mexican crude prices would slightly recover in 2017 to $35 per barrel, compared to its estimate of $25 per barrel for this year.

However, Mexico has hedged around half of its expected crude exports in 2016 for at least $49 a barrel.

The ministry also said it expects economic growth to be between 2.6 and 3.6 percent in 2017, better than the central bank’s current 2016 forecast of between 2.0 and 3.0 percent.

The dip in oil prices has battered the peso, but the ministry forecast the average exchange rate would strengthen next year to 17.2 pesos per dollar, compared to its prediction of 18.00 pesos per dollar for 2016.

Mexico has opened up its oil and gas industry to private investment in a bid to reverse a slide in crude output, but the ministry forecast production would drop in 2017 to 2.028 million barrels per day (bpd) from 2.123 million bpd this year.

After oil prices tumbled during the second half of 2014, the government in January 2015 sought to reassure investors it had its finances in order by reducing the budget by 3 percent.

Despite the bleak oil revenue outlook, the ministry expects a public sector borrowing requirement of 3.0 percent of GDP in 2017, down from an estimated 3.5 percent in 2016.