Mexico Plans to Use $6.4 Billion of Oil Fund to Avoid Budget Cut

(Bloomberg) -- Mexico announced plans to use almost half of the money in its rainy day oil fund to avoid spending cuts amid economic stagnation, days after President Andres Manuel Lopez Obrador downplayed the possibility.

The nation probably will take 121 billion pesos ($6.4 billion) from the 296 billion pesos in the fund, known as FEIP, to make up for a revenue shortfall, Finance Ministry chief economist Alejandro Gaytan told reporters Wednesday in Mexico City. The final amount will depend on the gap toward year-end after a 68-billion-peso deficit through the second quarter, Gaytan said.

On Monday, AMLO, as the president is know, said in an interview that he didn't want to use the funds to support state-owned oil company Petroleos Mexicanos following a drop in production because it could give the perception of a crisis. He said nothing about the broader budget.

Read AMLO's comments about the rainy day fund

But disappointing oil revenue was the cause of the broader income deficit, bringing in 108 billion pesos less than estimated in the first half of the year. Non-oil revenues were 39 billion pesos more than forecast.

Gaytan reiterated that Mexico plans to meet its fiscal target of a primary budget surplus equivalent to 1% of gross domestic product. That would be the highest level in a decade when excluding transfers from the central bank and a goal that the government says it needs to meet to stabilize the debt-to-GDP ratio and safeguard the nation's credit rating.

“They are probably playing it safe, since the mandate is to meet the fiscal goal,” Marco Oviedo, chief Latin America economist for Barclays Plc, said in an e-mail. Given that the law allows the funds to be used to make up for revenue shortfalls, “rating agencies are likely not to react to such action,” he said.

New Finance Minister Arturo Herrera publicly floated the idea of using the oil rainy day fund to help Pemex, as the company is known, in March. Herrera, who at that time was the undersecretary, was promoted to the top job after Carlos Urzua resigned earlier this month.

To contact the reporter on this story: Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Carlos Manuel Rodriguez at carlosmr@bloomberg.net, Robert Jameson