Expensive oil does not benefit public finances, warns Fitch

Oil surpluses could offset the cost of fiscal incentives for gasoline, as long as the price of a barrel of crude oil does not exceed, on average in the year, 100 dollars per barrel, stated the rating agency Fitch Ratings.

Carlos Morales, director of Sovereign Risk in Latin America for the agency, commented that it is possible to pay for fiscal stimuli as long as the price of oil does not exceed 100 dollars on average since, if that happens, it would put Mexico at a crossroads regarding the tax decisions you would have to make.

“If the price stays above $100, the fiscal stimulus would increase beyond the higher oil revenue, which would lead to fiscal decisions such as whether or not to maintain the fiscal stimulus, reduce other spending, or incur a larger fiscal deficit. . Or even use financial resources that the government has in the funds or in the Treasury to cover the possible fiscal gap, ”he said.

Since last February, given the high levels of oil prices that skyrocketed after Russia’s invasion of Ukraine, the government of Andrés Manuel López Obrador implemented a 100% fiscal stimulus to the Special Tax on Production and Services (IEPS), therefore which the public treasury has completely stopped collecting the tax on the gasoline that is sold.

The effects of this measure have already been observed in recent months. On the one hand, the collection of the IEPS for gasoline fell 79.4%, leaving only 20,241 million pesos in the government coffers in the first four months of the year.

“We do see that there has been a benefit (from the inflation stimuli) since the price of gasoline has not increased as in other countries. If it increases, it could increase the cost of goods and services due to an increase in transportation,” explained the Fitch Ratings analyst.

In this sense, he pointed out that the rating agency does observe risks that budget revenues are lower than estimated, as well as fiscal pressures that, as a whole, could reconfigure government spending.

PACIC is more of a welfare package

Regarding the Package Against Inflation and Scarcity (Pacic), which was presented by the government at the beginning of May and which contemplates the incentives for gasoline, Morales joined the market’s expectation that its effect on inflation will be limited.

“Yes, we have seen an impact of the fiscal stimulus on gasoline and that limits inflationary pressures, but the package that the government has announced will not necessarily, in our base scenario, improve the inflationary level or reduce pressures,” he told the media.

In this sense, he pointed out that the Pacic seems to be more of a social aid package for those Mexicans who are more vulnerable to inflation than a package that translates into a lower inflation level.

Inflation has been one of the red flags in several countries this year due to high price increases, which accelerated with Russia’s invasion of Ukraine, as well as due to the confinements in some countries –mainly the case of China– that generate disruptions in distribution chains.