Mexico’s Strong Peso Creates Fiscal Challenges for Treasury

Mexico City — The exchange rate at the start of the year is nearly one and a half units below what was estimated by the Ministry of Finance and Public Credit, a level that according to the department would generate more losses for public finances than gains; particularly due to the loss of income from oil sales, which would not compensate for a reduction in the cost of debt service.

In the balance, an appreciation of 20 centavos in the average exchange rate throughout the year would imply a cut of 4.9 billion pesos in income. In the days so far this year, the exchange rate has moved to an average of 17.8 units per dollar, below the 19.3 projected by the department in the General Criteria of Economic Policy.

The Treasury’s forecasts are based on assumptions about how public finances will be affected by the movement of certain indicators. The exchange rate and the price of the Mexican mix are just a couple of these.

In the case of the exchange rate, the Treasury estimates that throughout the year it will move at an average of 19.3 pesos per dollar. An appreciation of 20 centavos in the exchange rate above that parameter would subtract 8.3 billion pesos in oil revenues, while allowing savings of 3.4 billion pesos in debt service.

“An appreciation of the peso against the dollar reduces oil revenues because a high proportion of them is associated with crude oil exports. On the other hand, it reduces the financial cost due to the decrease in the peso value of debt denominated in foreign currency,” it notes.

The fluctuation in oil prices also affects the balance projected by the Treasury.

Each additional dollar in the price of oil would imply an increase of 11.6 billion pesos in oil revenues, the Treasury points out. Although this indicator had its first sessions on a downward trend, it has been appreciating and the Mexican mix is selling at an average of 54.7 dollars per barrel, while the average reference projected by the Treasury is 54.9 dollars.