The Mexican economy is highly reliant on two sources of income which have taken a hit in the last several months. The first income source, largely flowing directly to households, is remittance income from migrants working in the United States. The economic slowdown in the U.S. has led many Mexicans working north of the border to pack their bags and head south. Some leaders have argued that the Mexican government should step in to provide a cash infusion, in order to replace lost remittances and stabilize remittance-dependent communities.
It is unclear where the money for such largesse would come from. One place it will not come from is the government's oil revenues. The second major source of income upon which the economy relies, and the most important source of government revenue, is that derived from Mexico's oil industry. However, PEMEX, the national oil company, has been bowled over by the decline in oil prices in recent weeks. New estimates (reported in El Universal today) suggest that the budget approved by the Mexican Congress was based on a price per barrel that was more than 18 dollars too optimistic. This means that the government's oil revenue this year could be less than 75 percent of what was expected. Add to this inflationary fears and the precipitous decline in the value of the peso relative to the dollar in recent months (off about 24 percent since September), and the country's economic outlook is gloomy.
PEMEX is also going to be an even less reliable source of income in the future. Although the recently approved energy reform was meek by comparison with what the President originally envisioned, it does prescribe a degree of budgetary autonomy for PEMEX in the future. It is unclear exactly how this will work out in practice, but while budgetary autonomy is probably good for PEMEX (it will allow the company to make rational investment decisions using its own revenues), it will leave the Mexican Congress scrambling to find money to finance government programs. Currently, the government pilfers PEMEX liberally for this purpose. Mexico has an extremely low reliance on taxation, for which oil revenues are an easy substitute. Unless the country increases its tax yield, budgetary autonomy for PEMEX will savage the budget, further weakening the overall economic picture.
But don't lose faith. There is one glimmer of hope on an otherwise bleak economic horizon: a small party in Mexico, the Social Democratic Party (PSD), has mounted a campaign to legalize marijuana. Perhaps if it succeeds, the country could reduce its budget for military and police enforcement in the war on drugs, and increase its tax take by slapping a new tax on marijuana. To my knowledge, the PSD isn't advertising the fiscal advantages of their proposal. Perhaps a political entrepreneur should do so. Now that AMLO (Mexico's most visible opposition leader) has lost the fight over energy reform, this seems like just the kind of issue a “legitimate president” ought to take on.
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