Tuesday, 24 February 2009

Morgan Stanley Says Mexico Won't Suffer With Falling Oil Revenues

In an article called ''Mexico: No Oil, No Problem?´´ Morgan Stanley economists Luis Arcentales and Daniel Volberg make a very interesting counter-intuitive exercise. They say oil proceeds are responsible for nearly 40 percent of Mexico’s fiscal receipts and ask themselves whether if the current slump in oil prices continues Mexico will have a fiscal dilemma in 2010 when the current hedge runs out. ''Right? Wrong,´´ answered the economists. They argued ''the interplay with domestic controlled oil product prices and a weaker peso should help produce a modest revenue shortfall easily manageable even after the recent years of a rapidly growing budget.´´

Both Arcentales and Volberg conclude that, ultimately, Mexico would benefit it were to reduce its oil dependency as its single largest revenue source. Mexico’s fiscal oil addiction ''conspires to make fiscal policy even more pro-cyclical as oil revenue shortfalls loom precisely when non-oil sources of revenue come under the greatest stress.´´ The current stabilization funds are too modest in scope and have not prevented Mexico’s fiscal stimulus to grow in recent years precisely when greater savings would have been in order. ''Nonetheless, while Mexico’s current oil policy mix is no substitution for the task of strengthening non-oil revenues, the authorities should have little difficulties resolving any fiscal shortfalls in 2010 even if oil prices remain unchanged from current levels,´´ the economists wrote.

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