Declining Oil Revenues Require New Strategy: IMCO

The Mexican Institute for Competitiveness (IMCO) raised concerns about Mexico's public finances, warning of the lack of a plan to replace declining oil revenues. According to IMCO, oil income accounted for only 15% of total government revenue in 2023, marking a rapid decline in public finances, with a cumulative 14.5% decrease since the start of the current administration, equivalent to MX$183 billion (US$10.7 billion).

Valeria Moy, Director General, IMCO, highlighted the accelerated "de-petrolization" of public finances, underscoring the impact of reduced oil revenues on government budgets. The drop in revenues has forced the government to postpone the collection of the Right of Shared Profit (DUC) from PEMEX, further weakening oil income.

Moy pointed out that the country's tax revenues, while increased, have not been sufficient to offset the decline in oil revenues. "Tax revenues increased by 12%, but they were insufficient to compensate for the low oil revenues, and they were also lower than planned," she said. Moy explained that by the end of 2023, tax revenues totaled MX$4.5 trillion, the highest amount ever recorded, with an annual growth of 12.4%, MX$497 billion, the highest since 2015.

Tax relief measures aimed at supporting PEMEX also signal financial strain. Jesus Carrillo, IMCO's Director of Economics, emphasized that the state-owned company's operational and financial woes pose significant risks to Mexico's economy. Despite government injections of approximately MX$1.5 trillion into PEMEX since January 2019, the company's production remains stagnant, contributing to losses and increasing its debt burden.

Carrillo warned that investment funds holding PEMEX bonds could vanish once the company reaches a certain risk level, which would increase the oil company's debt costs by making it harder for PEMEX to obtain money in the capital market. This occurs in an economic environment marked by high interest rates, further increasing PEMEX's costs when acquiring debt in the capital markets. Carrillo expressed that PEMEX's financial conditions are very delicate. "It seems that the company cannot take care of itself and needs the government to inject resources," he pointed out.

However, Carrillo emphasized that the expected results have not been achieved as hydrocarbon production is stagnant, and much of the refining production is fuel oil, representing losses for the state-owned company. He added that federal government oil revenues were 31% below expectations.

Carrillo stressed the need for fundamental restructuring of PEMEX to ensure long-term viability, citing deteriorating operational conditions and missed revenue targets. The situation, exacerbated by declining oil revenues and financial instability, underscores the urgency for comprehensive reform to safeguard Mexico's fiscal health.

Bank of America also recently warned about the fiscal risk that PEMEX poses for Mexico. Carlos Capistrán, Chief Economist for Mexico and Canada, Bank of America (BofA), said that efforts to rescue the heavily indebted state-owned company will pose the primary fiscal risk for Mexico's government in the upcoming years. This initiative could further worsen the country's deficit, which reached its highest level in 30 years with the approval of the 2024 budget by the Mexican Congress, he added.

Although official data reports a 3.1% GDP increase in 2023, surpassing expectations, BofA's estimates offer a more conservative 3% growth projection for the current year. Nonetheless, challenges persist within PEMEX, including unresolved fuel theft issues and declining production platforms since 2018.