Oil Rebound Means Mexico’s Revenues Could Offset Fall in Tax Collection

The country’s Treasury had forecast prices of $55.10 per barrel for 2022, but crude has already easily surpassed that level

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Mexico City — The rebound in global oil prices during the last few weeks as a result of the tensions in Ukraine will bring Mexico higher oil revenues, and which will serve to offset the drop in tax collection, which has a downward outlook due to the cut in growth forecasts, according to two public finance experts.

The country’s Congress-approved 2022 income forecast had established an average price for Mexican crude of $55.10 per barrel, but so far this year crude has climbed to a much higher price.

Oil started the year at $70, but on February 14, the Mexican mix reached $89.10, 61% higher than the price approved in the country’s budget.

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For 2022, Mexico’s Treasury estimates oil revenues of 1.08 trillion pesos ($53.1 billion), almost 12% more than the amount taken into account for the 2021 budget, a projection made with a price-per-barrel forecast of $55.10.

If global oil prices remain high, the country would receive surplus income that, according to experts, would be useful to compensate for the expected shortfall in tax collection in the face of lower economic growth.

The Treasury forecasts that an additional dollar on the price of oil would bring government coffers additional income of 13,588 pesos, implying that, if the Mexican crude mix were to remain at levels of around $89, surplus income would amount to more than 400 billion pesos ($19.6 billion) by the end of 2022.

Read More: Private Oil Companies in Mexico Still Far Short of Target Despite Record Output

The projected tax revenues for 2022 were 3.94 trillion pesos ($193.9 billion), 7.7% more compared to the tax revenues of 2021, but slower economic growth throws into doubt whether the tax authority (SAT) will reach its revenue target this year.

In addition to the economic impact on revenue collection, the Treasury is no longer collecting resources from the special tax on fuel production and services (IEPS), in a move to keep gasoline prices lower for consumers in amid the high oil prices.

Mariana Campos, coordinator of the public expenditure and accountability program at the think tank México Evalúa, said that the current rebound in oil prices is having a positive effect on the government’s revenues, and which could compensate to a certain extent the fall in other revenues such as taxes.

“Yes, they will compensate, but we do not know if they will compensate completely, we will have to see how the economy performs during the year, I rather believe that there will be these two opposing forces amid an economy that will be weaker, with less revenue collection, and less growth than we thought when the budget was approved, and less oil production.”

Mariana Campos, México Evalúa

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Manuel Guadarrama, coordinator of public finance coordinator at the Mexican Institute for Competitiveness (IMCO), said the country’s Treasury is sacrificing revenue in the short term by granting fiscal stimuli to gasoline through the reduction of the IEPS, and therefore it will be necessary to monitor whether at the end of the year this drop in tax revenue is compensated by oil revenues.

“The IEPS ends up costing the Treasury additional resources in order to grant the stimulus and control prices. There will be tremendous pressure on oil revenues, and we will have to see how much is transferred to Pemex.”.

Manuel Guadarrama, coordinator of public finance coordinator at the Mexican Institute for Competitiveness (IMCO)

Translated from the Spanish by Adam Critchley

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