Mexican Peso Appreciation in 2023 Affects Public Revenues

The appreciation of the peso against the dollar in 2023 posed challenges to public revenues, impacting both the Value Added Tax (IVA) on exports and petroleum income, according to the Ministry of Finance and Public Credit (SHCP).

In the previous year, budgetary revenues totaled MX$7.03 trillion, representing a 1% growth compared to 2022 but falling below the figures approved in the Federal Revenue Law (LIF).

"Despite the challenges, the fiscal management we have undertaken has kept the fiscal balances in line with what we presented to the Congress of the Union, with only slight deviations.  We believe that the markets will respond positively," said Gabriel Yorio, Deputy Minister, SHCP, attributing the lower revenues to the impact of the strong peso on IVA from exports and petroleum income. The fiscal management, however, maintained fiscal balances that aligned with congressional expectations, albeit with slight deviations. 

The strong peso also impacted other sectors, including exports and remittances. The exchange rate closed the year at MX$16.97 per dollar, having reached a low of MX$16.6 in July, the lowest since December 2015. Throughout the year, the Mexican currency appreciated by over 14% against the US dollar, making it the best-performing currency among the Top 20 most traded currencies globally.

The report highlighted underperformance in tax and petroleum revenues. Tax revenues reached MX$4.5 trillion, marking a 12.4% annual increase but falling short of the LIF approval by MX$102.9 billion. Petroleum revenues amounted to MX$1.07 trillion, showing a 31% annual decline, and falling MX$238.6 billion below the approved figures.

Last year, the average cost of Mexican oil stood at US$66.26 per barrel, while the SHCP had budgeted a higher figure of US$68.7 per barrel for the Mexican crude blend. The market's lower price for Mexican crude, in comparison to the budgeted amount, does not directly impact the revenue of the oil company, clarified Ramsés Pech, an advisor in energy and economics. He noted that PEMEX had adopted hedging strategies to offset such risks. 

Income Tax (ISR) collection, the primary revenue source, increased by 4.6% in real terms to MX$2.5 trillion, attributed to economic growth and fiscal policy adjustments. IVA revenues grew by 6.0% to MX$1.36 trillion, while the Special Tax on Production and Services (IEPS) saw a 258.9% annual increase, totaling MX$445.1 billion, primarily due to reduced fuel subsidies from 2022.

The Mexican economy exceeded growth expectations in 2023, expanding by 3.1%, surpassing historical averages for the third consecutive year. However, budgetary revenues fell short of targets due to lower petroleum income caused by peso appreciation and fluctuations in international oil prices.

Tax collections accounted for nearly 64% of all public revenues, exceeding MX$4.51 trillion in 2023. Looking ahead to 2024, economic growth projections range between 2.5% and 3.5%.

The country attracted US$33 billion in foreign direct investment by the end of the third quarter of 2023, while banking portfolios expanded by 6%, maintaining a 2.1% delinquency rate. Despite economic growth, Mexico experienced an inflation decrease of 4.66% and a 14.9% annual appreciation of the peso against the dollar.