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Mexico faces falling oil revenues with no tax reform in sight

2020-09-12T02:07:47.965Z


The contribution of oil to the budget will be 3.5% of GDP this year, the lowest level in two decades due to the decline in production and the collapse of prices


A Pemex worker, in August at the Cadereyta refinery in Monterrey.Daniel Becerril / Reuters

The Mexican government with the least oil revenues in recent decades will be, paradoxically, the one that has promised to do the most to rescue the sector.

The fall in the price of crude oil, linked to the coronavirus pandemic, and the decline in production, which precedes it, will make the sector contribute 3.5% of GDP to the public coffers in 2020, the lowest level since 1999. Although the Executive expects a gradual increase for the rest of the six-year term, this remains in question;

it will depend on the still uncertain duration of the economic crisis and a significant increase in production.

It is time, experts point out, to look elsewhere for the money, but the Government rejects changes in the fiscal model for now.

The six-year term began with the commitment to “rescue” Pemex, the world's most indebted oil company: a goal of 2.4 million barrels per day by the end of the Administration and the construction of the first refinery in four decades.

But the turbulence in the market and the continuing problems of the parastatal company have lowered expectations.

“Over the years, resources have depended heavily on oil tankers, but while oil has been extremely generous to our country, it is also a very capricious asset.

The same was quoted two years ago at 76 dollars per barrel than it did two months at negative prices ”, the Secretary of the Treasury, Arturo Herrera, acknowledged this week during the presentation of the Economic Package for 2021.

Although tax collection has risen this year, partly thanks to the heavy hand of the Treasury against large companies, revenues from crude oil have fallen.

In 2020, they will be 16% lower than in 2019, almost 150,000 million pesos that the public coffers will stop entering if the forecasts are confirmed, about 7,000 million dollars at today's exchange rate.

They will total 3.5% of GDP, far from the peak of 10.3% achieved in 2008 during Felipe Calderón's mandate and the 8.3% achieved at the beginning of Enrique Peña Nieto's administration.

Since then, the oil contribution has been losing weight.

The recent collapse in prices and the consequent reduction of 100,000 barrels per day agreed with OPEC has underpinned the fall.

By 2021, the Treasury has predicted that oil revenues will rebound to 3.7% of GDP.

The projected collection represents an increase of 17% compared to what is estimated for 2020. However, the volume remains below the two previous years and is based on two assumptions that most analysts consider optimistic: a price of 42 dollars per barrel and a production of 1.85 million barrels per day.

This second premise implies not only stopping a decline for years but also significantly increasing production.

2019, before the hit of the pandemic, already closed with the production of 1.67 million barrels per day, below the expectations set by Pemex.

In the first seven months of 2020, the parastatal extracted an average of 1.7 million barrels, but in July it fell to 1.5 million, the lowest monthly production since the late 1970s.

Where do the additional barrels available to Hacienda for 2021 come from?

The consultant Pablo Zárate does not see it clearly.

"The government had said that production growth was going to come from priority fields, but today they are not even close to giving the results we imagined," he says.

The production of these fields closed the first quarter of the year with only 31% compliance with what was initially projected, according to a report by the National Hydrocarbons Commission.

Pemex has been with budget increases for two years - in 2021 one of 4% is expected - but Zárate considers that the needs of the parastatal go beyond money.

“To believe that it is a capital investment problem is to ignore the organizational, efficiency and access to technology problems.

That cannot be fixed with a big ticket ”.

Herrera highlighted this week the growth of private production, which reached 56,744 barrels a day in July, an increase of 45% compared to the same month last year, according to data from the National Hydrocarbons Commission.

Even with that help, analyst Fluvio Ruiz, a former Pemex director, does not believe that this increase is enough to offset the drop.

Even considering that of the private sector, it is an optimistic assumption because it will depend on the recovery of the economy and private production will not yet reach significant levels.

It will rest mainly in Pemex ”, he assures.

In addition, the oil rounds, the mechanism for bidding deposits to private companies, have been paralyzed since the change of Government.

That is a plug.

Waiting for a tax reform

Not coming in as much as planned could create a hole in federal funding next year, which is 17% dependent on crude.

The Mexico Evalúa association calculated in March 2020 that for every 50,000 barrels per day that Pemex did not produce on average during a year, the Treasury stopped earning 16.3 billion pesos, about 760 million dollars at today's exchange rate.

If the projection fails, analyst Mariana Campos points to two alternatives: "The government can request more debt or cut expenses, because the trusts and reserve funds have already been exhausted."

The economist Carlos Brown considers that the Executive has put on a “straitjacket”.

“The budget should have considered other sources of income.

The Government has foreseen a zero primary deficit that is accompanied by no increase in taxes or debt.

The only way out is if we see an extraordinary increase in oil revenues and everything indicates that it will not happen, "he says.

There is a third way: a tax reform that increases tax revenues.

Fluvio Ruiz sees there an opportunity to follow the path of countries such as Norway, where the oil contribution was around 10% of the total income of the public sector in 2019: “We are facing the exhaustion of the fiscal model based fundamentally on oil.

It is positive that the country aspires, despite having oil revenues, not to make its fiscal structure depend on hydrocarbons, but hopefully that was the consequence of an expansion of the fiscal base and not of the drop in production.

Currently, Mexico is at the bottom of the OECD, with a collection of around 16% of GDP compared to an average of 34%.

But President Andrés Manuel López Obrador has repeatedly ruled out the tax hike.

The same Secretary of the Treasury insisted this week that "it was not the moment", although it opened the door to changes in the medium term.

"There are elements of the tax structure that can be strengthened, but it is not the time to change or expand taxes, not when large sectors of the population economy have seen their income diminished," Herrera declared.

Faced with this refusal, experts point out that now is precisely when it is most needed.

“We should think about the fiscal recipe;

which taxes to increase and which to lighten to encourage job creation.

In the crisis of 1995 and 2009, the VAT rose, but this Government does not want to face the political cost ”, says Mariana Campos.

Analyst Carlos Brown points to the potential for untapped local taxes to reduce dependence on federal transfers.

“There is a lack of capacities of local and state authorities to collect what they should collect.

With the property tax, the potential is 2 percentage points of GDP ”.

Source: elparis

All news articles on 2020-09-12

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