Mexico Plans 3rd Round of Spending Cuts

The Mexican government on Wednesday announced its third round of spending cuts this year after determining that the global oil glut will cost it $1.1 billion more in lost crude revenue than earlier projected.

Finance Minister Jose Angel Gurria said the government will cut about $620 million in federal outlays, mainly from the exploration budget at state-owned oil company Petroleos Mexicanos, or Pemex. Other public sector projects will be axed, but programs for the poor will not be, he promised.

An oil revenue shortfall caused Mexico to slash its budget in January and March, erasing $2.73 billion in spending programs.

Analysts cheered Mexico’s action, saying other measures it could have taken, such as raising taxes or gasoline and electricity prices, might have rekindled inflation and endangered Mexico’s economic recovery. Mexico’s economy is still expected to grow more than 4% this year.

Investors were enthusiastic as Mexican stocks continued their recent rebound Wednesday. The main stock market index closed up 63 points, or 1.39%, at 4,573.28, although the peso finished slightly weaker against the dollar.

Wednesday’s announcement was the latest belt-tightening measure by Latin American countries dependent on natural resource revenue. Venezuela and Colombia have cut spending in response to lower oil revenue, and last month Chile cut hundreds of millions from its budget because copper sales have softened.

The commodities may be different, but analysts such as Jim Barrineau, chief Latin America equity strategist at Salomon Smith Barney, said the cause behind the actions is the same: the Asian financial crisis that has cut global demand for energy and raw materials.

At a news conference, Gurria said the budget cuts were imperative because of the global energy market’s impact on oil revenue, which supplies 38% of Mexico’s federal budget and 24% of all public sector spending.

Instead of an average $15.50 a barrel forecast at the beginning of the year, Mexican crude is likely to fetch $11.50 a barrel throughout the year, Energy Minister Luis Tellez said.

And after exporting an average of 1.87 million barrels a day of crude at the start of the year, Mexico is cutting output by 200,000 barrels to 1.67 million barrels daily through mid-1999, Tellez said.

Mexico agreed to the cuts in conjunction with a decision earlier this year by the Organization of Petroleum Exporting Countries to reduce global oil exports by 2.6 million barrels a day. The producers hope that by reducing supply, the price of crude will increase.