Mexico, which depends largely on oil revenue, cuts public spending

The decline in global oil prices forced Mexico to announce large cuts in public spending

The collapse in global oil prices forced Mexico on Friday to announce large cuts in public spending, threatening several major projects, including the government’s showcase but controversial bullet train out of Mexico City.

Finance Minister Luis Videgaray announced cuts of about $8.5 billion, about 0.7% of Mexico’s gross domestic product. About a third of the Mexican government’s budget comes from oil revenue, and the price-per-barrel of Mexican crude has fallen in recent months from about $100 to $38.

Videgaray said the “adjustments” were preventive and responsible and aimed at “protecting stability and the economy of Mexican families.”

In addition to oil prices, he cited an overall international financial slowdown and an anticipated increase in U.S. interest rates.

Analysts said the austerity plan was acknowledgment that Mexico’s growth is likely to be at least one percentage point lower than government projections, or 3% of GDP instead of 4%. The government of President Enrique Peña Nieto has repeatedly scaled back its growth projections since taking office a little more than two years ago.

“This is recognition that we are going to have a much weaker, more flaccid economy than what the government had been talking about,” economist Raul Feliz told Radio Formula news. “It means fewer opportunities for employment, and more projects like the trains will be put aside.”

He predicted an even larger budget cut for 2016.

Rodrigo Aguilera, Mexico analyst for the Economist Intelligence Unit, said the cuts were larger than he had expected and would give the government a spending buffer. But, Aguilera said, “it is disconcerting that a third of the cuts will fall on capital spending” such as transportation projects. “For a government that has emphasized the need for greater public investment, this is a step backward.”

The bullet train, which would have been Mexico’s first, had already run into trouble.

A $4-billion contract to build the railway from Mexico City to the industrial hub of Queretaro was granted to a consortium of Mexican and Chinese firms last fall. Then, amid allegations of impropriety and favoritism, the government abruptly canceled the award.

Two days later, local media revealed that the Mexican firm that won the contract had built a mansion for Peña Nieto’s wife under favorable terms and had received millions of dollars in other contracts from the leader’s government, in both his roles as president and, earlier, governor of the state of Mexico.

In canceling the contract, the government said it would hold a new bidding process this year. But on Friday, Videgaray said the project was “indefinitely suspended.” Another train, planned for the Yucatan, was canceled.

Other sectors taking hits were the mammoth state oil and gas company, Petroleos Mexicanos, to the tune of $4.1 billion, and the unwieldy education ministry. Videgaray said subsidies on housing and seasonal agricultural work would not be affected, although pensions for the elderly would be reduced.

Many in the business community welcomed the cuts as necessary and timely.

“The important thing now, in addition to this austerity program, is to enact parallel public policies to give incentive to sustainable economic growth,” the Business Coordinating Council, an umbrella group of entrepreneurs, said in a statement. “It is urgent to find actions that help strengthen consumption, savings, investment and the generation of more and better jobs.”

Mexicans had already been feeling the pinch. Gasoline prices at the pump jumped in January, and the weakened peso against the U.S. dollar is also raising the prices of numerous products.

News assistant Cecilia Sanchez of The Times' Mexico City bureau contributed to this report.

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