Maybe I should be more specific in my choice of headline: the federal government is coping remarkably well. This is what you would expect, of course, if you had read this excellent Brookings report from 2014.
Why has the oil price crash not been a disaster? Simply put, Mexico is hedged. So while the price of the Mexican mix has crashed to $26 per barrel (last week it flirted with $18) the Mexican government is actually earning $79. Insurance well bought! In fact, $79 is barely below the $86 that the Mexican mix fetched in 2014.
Still, the headlines are full of portents of doom, caused mostly by the fact that the peso has been falling fast. The government aggravated these fears when it announced 124 billion pesos in budget cuts for 2016. Oh noes!
But what really are we talking about? Of the cuts, fully half come from Pemex. Now, spending is spending so the cuts are still contractionary, but they won’t immediately affect the general public. Another 10% of the cuts are to Mexico’s national electric utility, the Comisión Federal de Electricidad (CFE). Those will also be contractionary (and CFE certainly needs investment) but they won’t have an immediate impact.
Moreover, in absolute terms, we are talking about 0.7% of GDP. Last year the country’s GDP deflator rose by about 4.3%. Assuming that figure holds for 2016, then the real size of the cuts is about 1.8% of GDP. (Counterfactual 1 in the figure.) If you add projected real growth from the OECD to that, then the size of the cuts expands to 2.4% of GDP. (Counterfactual 2.)
That is not nothing, but extreme austerity it is not.
To be honest, I suspect that Mexico could probably borrow an additional 1.9%-2.4% of GDP without any adverse financial market impact. It seems to me that Los Pinos is chasing the confidence fairy rather than responding to an inescapable economic reality. But either way, given the incredible collapse in oil income, the federal government is coping remarkably well so far.
Another year of $30 oil, though, maybe not such ...