Mexican finance minister Agustin Carstens said yesterday that economic growth is this year expected to hold up at the government’s projected rate of 3.6%, bolstered by an expansion of domestic demand and credit.
But a shadow was thrown across the economy by Pemex, the national oil monopoly, which announced a drop of 5.8% in proven oil and gas reserves from last year.
Its director general called Pemex’s overall situation “critical”: reserves have dropped by half since 2002, investment plans are unclear and analysts expect production may fall steeply.
Economists and financial analysts may soon revise Mexico ’s growth forecast downward. But Carstens told Emerging Markets yesterday that the government will “not yet” alter its own projections.
Carstens emphasized that 3.6% growth is “still expected” for the year. “It is a fact that the Mexican economy has obtained more resilience,” he told the Institute of International Finance forum.
Domestic demand and an expansion of bank financing are fueling the housing and construction industries and generating jobs, making for “a reduced degree of impact by the US economy on the Mexican economy,” Carstens said. Growth can increase as the banking system deepens its outreach, he said.
But the difficulties at Pemex, the largest contributor to Mexico ’s budget, will not help matters. “Pemex can’t continue like this”, its director general Jesus Reyes Heroles said at yesterday’s ceremony marking the 69th anniversary of the oil nationalization.
The drop in oil and gas reserves, by 1 billion barrels to 15.5 billion barrels, is accompanied by falling production. At this rate, Pemex’s reserves will last for just over nine years, and much more investment is needed for exploration and production.
Reyes Heroles said that Pemex requires “a new management model”, to reduce its federal tax burden, improve efficiency of operations, combat corruption, create more flexible labour relations with the powerful oil workers’ union and allow for strategic alliances, the Pemex director said.
George Baker, president of energia.com, an oil analysis firm, told Emerging Markets: “The worrisome point is that Pemex has vast reserves of oil equivalent in deep waters of the Gulf of Mexico and no bankable plan to develop production.”
Pemex can not fund its own investment and contribute to the budget at the current rate. Its tax contributions are one-third of the total take, and last year were more than two-thirds of its own $100 billion earnings.
Carstens said yesterday in Guatemala City : “We want to address fiscal vulnerabilities, and one vulnerability is dependence on oil revenues.” He said he is working with the Mexican congress on a fiscal reform “that would establish a very solid tax system free of distortions”. A proposal is expected to be presented in congress later in the year.
The Pemex reserves, the narrow tax base and social security reform are the three key fiscal issues for Mexico , Paulo Leme, chief of emerging markets research for Goldman Sachs, told Emerging Markets.
A pension reform proposal has received support in committee from two of the largest national political parties plus two smaller parties in congress in the past week, fueling optimism among financial analysts about its eventual approval.
The initial favourable reception of the reform sets a “positive” precedent for the government’s overall reform agenda, said John Welch, head of emerging markets research at Lehman Brothers.