Economics: Oil spike adds to pressure on peso for 2022 and public finance perspectives

MEXICO - Report 14 Mar 2022 by Mauricio González and Francisco González

The considerable rise in the price of oil arising in response to the war in Ukraine and its broader geopolitical ramifications has been the source of intense discussion among analysts and authorities regarding its potential impact on Mexico. It is important to consider the diversity of such effects and that their impacts can lead in contradictory directions. For example, higher prices will expand Mexico’s revenues from crude exports, but they also mean the country will have to pay considerably more for the imported gasoline that is so essential to meet domestic demand.

Given that private interests are also involved in the country’s imports of petrochemicals and petroleum derivative products, the current context’s repercussions will include heightened exchange rate pressures this year. And the rise in the cost of energy presents the government with a major challenge. It is now faced with the challenge of keeping gasoline prices from rising significantly as it has committed itself to making sure to keep them from outpacing headline inflation. But it must also keep that commitment from further eroding public finances in a context of heightened uncertainty, weakened revenues and mounting spending pressures. This underscores the extent to which the multiple impacts from higher oil prices will generate greater exchange rate pressures this year, and also potentially further undermine public finances given the current absence of gasoline excise tax revenues, or even worse, should that tax be transformed into a price subsidy.

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