Mexico Crisis at the Boiling Point Over Price of Oil

President Ernesto Zedillo’s economic team has managed to annoy just about every interest group in Mexico, from business to labor and left to right, over the government’s tightfisted, tax-heavy 1999 budget proposal.

And now, even world oil prices are conspiring against Zedillo and his ruling Institutional Revolutionary Party. Mexico’s export crude mix fell to its lowest level in history Thursday--further undermining the government’s main source of income and making concessions on the budget harder to afford.

For the second straight year since opposition parties won a majority in the lower Chamber of Deputies in July 1997, the end-of-year budget debate has become a ferocious verbal arena unknown in Mexico during nearly seven decades of absolute PRI control. Most analysts still expect a compromise deal to be struck by the Dec. 15 deadline, if only because global market constraints no longer tolerate wayward, spendthrift governments.

The budget crisis confronting Mexico is just one of many effects of the free fall in world oil prices, along with the Exxon-Mobil megamerger. Mexico already has had to slash its budget three times during 1997 because of falling oil revenues.

Tempers ran so high in Congress that shoving matches broke out on the floor Thursday while Finance Secretary Jose Angel Gurria was grilled for four hours on the budget. He scoffed at calls for his resignation and impeachment, and angrily waved his finger at the legislators, declaring, “This matter is too important to try to create a circus!” At that point, the opposition members walked out en masse.

The PRI has failed to get the opposition parties to agree on a plan to pay for a scandal-ridden banking system rescue, which Gurria grudgingly admitted yesterday has grown to a cost of $61 billion--up 10% from the previous total.

As if the array of political forces lining up against the budget weren’t daunting enough, OPEC’s failure to agree on new production cuts Thursday pushed Mexico’s export-mix crude down to $7.91 per barrel before a slight recovery Friday, well below the lowest point in the last such crisis in 1986.

While Mexico has reduced its dependence on oil as a source of export revenue thanks to booming manufacturing exports in the last decade, taxes and fees on petroleum products still account for about 38% of the Mexican government’s revenue.

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The 1999 budget calls for the tightest spending plan in modern history as well as unpopular tax hikes such as a 15% surcharge on all phone bills. Gasoline prices already were raised 15% earlier this month by executive decree to keep government revenue from tumbling.

Some political columnists have wondered whether the budget fight could be pivotal in determining the PRI’s chances of extending its domination of Mexican politics in the 2000 ballot. But most commentators expect a compromise at the last minute, as occurred in 1997.

A critical difference from similar crises in the 1970s and early 1980s, noted economist Carlos Elizondo Mayer-Serra, is that this time the government is unwilling simply to increase Mexico’s debt, which was as much as 16% of gross domestic product in 1982. The government now is extremely concerned about unleashing inflation and balance-of-payment problems. The government’s budget deficit target for 1999 is just 1.25% of GDP, a fraction of the 7%-plus deficit of Brazil.

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Political scientist Federico Estevez of the Autonomous Technical Institute of Mexico said the government is now paying the price for failing to diversify its revenue sources away from petroleum. “Why did they never de-link from the oil market?” he asked.

The government acknowledges that low tax revenue has made the government overdependent on fees on gasoline sales and extremely vulnerable to shifts in oil prices.

Government revenue from Pemex, the state-owned oil company, are projected to plunge 21.9% this year on lower oil prices.

Finance Secretary Gurria has stressed that Mexico still expects economic growth this year of 4.6%, and about 3% in 1999 when other emerging markets are flat or shrinking--growth that he attributes to the strict fiscal discipline that has helped make him so unpopular lately.