Oil Prices And The Mexico Economy
Oil Prices and The Mexico Economy have been harped in international press headlines. Oil prices recently took a dive, a situation many predicted would cause drastic harm to the Mexican economy, which has always relied heavily on oil. But the Latin American country is doing surprisingly well in spite of this and several other negative factors impacting the global and local economies.
Mexican Economic Challenges
The world at large and Mexico in particular are facing challenges to sustained economic growth. While Mexico is still the fastest growing country in Latin America, it must still overcome:
- A depreciating currency
- Normalizing monetary policy in the US
- Declining oil prices in the past two years
The decline in oil prices is certainly the most substantial challenge Mexico is currently facing economically. The Mexican economy has relied to a large extent upon foreign investment in domestic energy resources and selling crude on the global markets.
Mexico Becoming More Independent of Oil
Fortunately, while oil sales have typically accounted for an average of 30% of federal revenues in Mexico, that number dropped in the past two years to just under 20% this year. The reduction of dependency on oil has come primarily from aggressive governmental measures to increase federal revenues from other sources, such as:
- Increasing the maximum income tax to 35%
- Raising sales taxes along the US border
- Applying an 8% tax on junk food
The Mexican economy has grown increasingly independent of oil due to these and other factors, and non-oil revenue growth outpaced oil revenue by 4% of total revenue this year. Last year, non-oil revenue grew 27%. This was double the speed of the fastest non-oil revenue growth since 2003.
Factors Benefiting Mexican Economy
Mexico is currently experiencing growth faster than any other major economy in Latin America. As Latin America’s second largest economy, the country has more going for it than just tax increases during this decline in oil prices.
In recent years, Mexico enacted sweeping reforms to modernize transportation, offer businesses stronger intellectual property (IP) protections, improve telecommunications, and privatize their energy sector. The result is a country far stronger and more attractive to foreign investment. Additionally, the country has seen marked growth in non-oil sectors such as the booming automotive manufacturing sector. Mexico has strong alliances and free trade agreements with dozens of countries across the world. The combined effect of these factors affords notable stability and resilience during a downturn period.
Mexico faces a myriad of challenges, and will certainly experience reduced growth like most economies during this period. But Mexico is making the most of the situation. In spite of the declining peso, normalizing monetary policy in the US, and a global economic downturn, the Mexican economy is on solid footing. The country will continue their growth trend in spite of the obstacles.
