Mexico Cuts 2017 Budget as Stagnant Oil, Exports Weigh on Rating

  • Finance Ministry estimates $10 billion spending cut next year
  • Economic growth seen at 2.6%-3.6% and crude at $35 per barrel

Mexico plans to cut spending next year in order to meet its zero deficit target as manufacturing exports slowed and lower oil prices weighed on revenue. 

After slashing 2016 spending by 132 billion pesos ($7.6 billion), Mexico estimates a 175 billion-peso reduction in outlays next year compared to this year’s budget, the Finance Ministry said in a report to congress. Latin America’s second-largest economy will grow 2.6 percent to 3.6 percent next year, down from the 3.5 percent to 4.5 percent range forecast in a September budget report, according to the document that lays out initial parameters for next year’s budget.

The measures come a day after Moody’s Investors Service cut state-owned Petroleos Mexicanos’ credit rating to the cusp of junk and reduced Mexico’s outlook to negative amid subdued growth and the possibility Pemex will need financial help from the government. Economic growth this year is expected to slow amid sluggish manufacturing exports, according to analyst surveys.

The budget cuts are necessary for Mexico to reduce its fiscal deficit to zero as a percentage of GDP, excluding investment in "high impact projects," Friday’s report states. Including those investments, 2017’s deficit will shrink to 2.5 percent of GDP from 3 percent this year. In addition, the largest measure of debt will begin contracting in 2017, the ministry said.

The report predicts an average export price of Mexican crude of $35 per barrel next year, up from $25 this year. Mexico’s government has hedges that give it the right to sell its 2016 crude exports at $49 per barrel, and Finance Minister Luis Videgaray has said he will seek price protection for next year.

The Mexican government expects oil output of 2.12 million barrels per day this year. Production will fall to 2.03 million barrels a day in 2017, according to the report.

Moody’s lowered Pemex two levels to Baa3 from Baa1, its lowest investment grade rating, as lower oil prices worsen the outlook for its credit outlook.

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