Mexico’s state-owned oil company Petróleos Mexicanos (Pemex) could hamper the country’s prospects for economic recovery if the government does not change course, according to new analysis from Rice University’s Baker Institute for Public Policy.
In a note published Friday, authors Tony Payan and José Iván Rodríguez-Sanchez argued that four pillars support the Mexican economy: manufacturing, remittances, tourism and oil/Pemex. Payan directs the Institute’s Center for the United States and Mexico, where Rodríguez-Sanchez is a researcher.
While each pillar relies to a large extent on the health of the global economy, national policies also have a major impact, particularly on Pemex, the authors said.
“In recent years, Pemex has had a negative impact on the Mexican economy,” the authors said. “For decades, the state oil company funded the federal government instead of reinvesting the resources it generated, but those days are over.”
Yet President Andrés Manuel López Obrador “counted on the company to generate economic growth assuming that oil production could increase. It was not the case.”
Pemex’s oil and natural gas production continued to fall under López Obrador, and its financial losses widened. Pemex recorded a staggering loss of $23 billion for 2020, compared to a loss of $19 billion in 2019.
“If we add the fact that the federal government has heavily subsidized Pemex so that it can continue to operate as it has been, without plans for investment or development of new technologies, the results are catastrophic,” Payan said. and Rodriguez-Sanchez. .
They also noted that Mexico’s economy has shrunk by around 9% since López Obrador took office in 2018, “the biggest economic decline since 1932”.
The authors said: “This collapse is primarily due to the government’s inadequate public health strategy to deal with Covid-19 and the lack of an economic stimulus response to deal with the effects of the pandemic on the product gross domestic (GDP) of the country”.
They said Mexico’s economic rescue package from the pandemic was one of the smallest in Latin America, at around 1.1% of GDP.
By comparison, federal support measures for Pemex could cost around 1.4% of GDP in 2021.
In other words, “the recovery of the Mexican economy in 2021 largely depends on the fate of this business,” Payan and Rodríguez-Sanchez said. “If the federal government continues to financially support Pemex, it will seriously affect both the national economy and its fiscal strength.
“Injecting resources into Pemex is an inefficient use of money with no positive effects on the economy, as there is no plan to restructure it financially.”
The Mexican government announced in February a 73.3 billion peso ($3.64 billion) incentive for Pemex to fulfill its production sharing rights, known as DUC by the Spanish acronym . This was in addition to reductions in the UCR rate from 65% of production to 58% in 2020 and 54% in 2021.
“If these resources were used to support businesses and people affected by the pandemic, the positive impact on the economy would be greater,” the Baker Institute researchers said.
“Thinking optimistically,” they wrote, “Pemex could become an important input to the economy if oil prices rise dramatically, but that would also depend on the global recovery. For now, however, c is a drag on the country’s GDP.
Energy-intensive manufacturing, meanwhile, remained relatively resilient and looks set for a strong year in 2021, the authors said.
“Despite the pandemic and the collapse of the US economy (the main market for Mexican exports), the manufacturing sector only lost strength in March and April 2020, recovering in the following months”, have– they stated. “As the U.S. economy recovers this year, Mexican exports are expected to rise again, to levels above those seen in 2019.”
Pipeline natural gas flows from the United States to Mexico also continued to increase during the pandemic, amid stagnant production from Pemex and resilient demand from the industrial and power generation segments.