From the Economist Intelligence Unit ViewsWire
Less than two weeks into the New Year, Mexico’s oil export price has dipped below its budgeted level, raising the risk that the government might have to consider adjustments to the 2007 budget. While the finance minister, Agustín Carstens, says this is not yet needed, the price drop could give greater impetus to the administration’s planned fiscal reforms, designed largely to decrease the federal treasury’s dependence on volatile oil income.
Mexico’s budget for this year is based on an average price of US$42.80/barrel for the country’s particular mix of oil exports. Income from oil accounts for more than one-third of total federal fiscal revenues, a dependence that grew as oil prices rose in recent years. The US$42.80/barrel assumption might have been considered conservative last year, but the recent plunge in global oil prices has already resulted in a price drop for Mexico’s basket to a below-budget US$41.95/barrel as of January 11th.
The Economist Intelligence Unit does not expect the current slide in global prices—Brent crude is now at less than US$52/barrel, the lowest level since May 2005—to last. We anticipate a rebound from present levels, which have been the result of unusually warm winter weather and larger US inventories in recent months, among other factors. Still, we expect to modestly revise our forecast for the average Brent price this year down from the current US$65/barrel.
Our baseline forecast for Mexico’s average oil export price currently stands at US$52/barrel for 2007, and this too is likely to be adjusted shortly. Nevertheless, the average price over the course of the year is likely to stay comfortably above the budgeted US$42.80.
Still, the current oil price drop has triggered warning bells about the course of Mexico’s future fiscal revenue and spending. This is politically fortuitous for the government. The administration of President Felipe Calderón expects to begin discussing a package of tax reforms with legislators within the next several weeks. It is likely to include unpopular proposals to reduce the number of exemptions to the value-added tax, tackle tax evasion and eliminate some corporate tax loopholes. At present Mexico has the second-lowest rate (after Guatemala) of tax collection in Latin America, the result of widespread informality, a high rate of evasion and the complexity of the tax system.
A similar package of reforms was resisted and languished in Congress during the previous administration of President Vicente Fox. But a substantial reduction of fiscal revenues from oil would put greater pressure on lawmakers to accept the proposed changes.