Oil Volatility Forces Mexico to Again Slash Its Spending

Responding to continued volatility in world oil prices, the Mexican government on Tuesday slashed federal spending for the second time this year to keep the budget deficit from surging beyond projected levels.

Finance Minister Jose Angel Gurria said the government would cut $1.1 billion from the budget to offset lower expected revenue from the oil industry, which provides about 38% of government income.

The harsh spending cut underscored Mexico’s sudden mood swing from virtual economic euphoria at the end of 1997 to a much more nervous and uncertain outlook this year.

Just when Mexico had appeared to shrug off the effects of the Asian economic crisis, the oil price plunge not only threw the government budget into disarray but also contributed to a worsening trade deficit.

The government announced Monday that preliminary trade figures for February showed a deficit of $635 million, higher than expected and aggravated by a $248-million decline in revenue from oil exports from the previous month.

The fall in oil income more than offset a continued improvement in Mexico’s manufacturing exports, which have been the engine for the country’s broad recovery from the 1994 peso crisis and brutal recession that followed in 1995.

Adding to the uncertainty, the weakening of the peso by 5.5% so far this year helped push up inflation during the first two weeks of March by 0.69%, slightly ahead of the same period last year, the government said Tuesday.

That raised doubts whether inflation would continue its downward trend from last year’s 15.7%. Inflation is projected to rise just under 14% this year, but the weaker peso makes imports more expensive.

The latest budget cut, following a $1.8-billion reduction in January, came despite Mexico’s success in helping broker an agreement this week among several oil-producing countries to reduce production.

That accord pushed oil prices up sharply Monday, although the rebound stalled on Tuesday amid uncertainty whether the producing countries would stick to the deal.

Javier Maldonado, senior Latin American economist for the Bank of Montreal, said another budget cut had been anticipated but that he had expected the government to wait to see how oil prices evolved following the production-cut agreement.

“It shows that the government is being proactive and realistic about its market expectations,” Maldonado said.

Mexico’s continued recovery, Gurria said, depends on keeping the public sector budget sound. The government has said the budget deficit will remain below 1.25% of gross domestic product.

He said that in contrast to the last two years, this year’s projected growth of about 5% would be built largely on domestic consumption, which experienced a healthy rebound in the second half of 1997, just when the Asian crisis began to threaten Mexico’s export boom.

The strength of the recovery has been a factor in the surging trade deficit as imports rise faster than exports.

The Organization for Economic Development said this month that sustained imports were likely to translate into a widening of the current account deficit from $6.5 billion in 1997 to just over $12 billion this year. That is about 2.5% of gross domestic product, which is regarded as sustainable.

Times Mexico City bureau researcher Robert Randolph contributed to this report.