production in Mexico

In the midst of a global pandemic and a once-in-a century recession, Mexico needs to do a better job of allocating spending and stimulating investment to help with the economic recovery, according to a new report by the International Monetary Fund (IMF).

Regarding energy, the IMF team was critical of state oil company Petróleos Mexicanos (Pemex) and its use of limited capital.

“Pemex’s business strategy is crowding out resources for essential spending,” the analysts said. “Given its widening losses, it is advisable to focus production only in profitable fields, sell noncore assets, curb plans to increase refining output at a loss, and postpone new refinery plans until it is profitable to do so.” 

The latter is a reference to the Dos Bocas refinery, which was a central part of President Andrés Manuel López Obrador’s campaign promise in 2018. Set for his home state, he has called it a key source of jobs and a way to achieve energy sovereignty through decreased dependence on fuel imports. 

The refinery is scheduled to be completed in 2024 at a total cost of $8 billion. Construction has faced setbacks, and critics suggest it will not stay on schedule or budget.

Still, the administration remains highly invested in the refining and petrochemicals segment.

Of the five energy sector projects announced as part of the government’s infrastructure plan earlier this week, four were in the downstream segment.

While the administration spends on its refineries, the Mexican government has been extremely austere during the pandemic.

Mexico has been slammed by the coronavirus, with more than 80,000 deaths to date. The share of the population in poverty has jumped to 48% from 36%, the IMF said, with the social and economic costs likely to persist. 

The IMF analysts expect the economy to shrink 9% this year, grow 3.5% in 2021, and climb close to 2% thereafter. 

“Based on these projections, employment, income, and poverty will take several years to return to pre-pandemic levels,” analysts said. “Not only are the gains of the past decade in these areas being set back, Mexico’s long-standing challenge of low growth appears set to worsen. 

“Amid high uncertainty over the pandemic, risks to the economic outlook are tilted to the downside, reflecting the possible resurgence of Covid-19 domestically, prolonged disruption in labor markets, renewed global financial volatility, lower oil prices, and adverse growth outcomes in key trading partners.”

The IMF team was also critical of López Obrador canceling oil and gas rounds, including farmouts. 

“Partnering with private firms would supply needed capital and know-how.” 

The suggestion echoes recent analysis by local think tank Instituto Mexicano para la Competitividad, aka IMCO, which said Pemex must stop bolstering the loss-making refining segment and instead invest more in exploration and production, the company’s most profitable activity.

The rounds held during the previous administration have so far generated about $11 billion of investment, the IMCO team said, citing figures from oil and gas trade association AMEXHI.

Finally, the IMF team suggested López Obrador’s steady dismantling of some of the reforms signed into law during the previous administration is detrimental to investment and will dent the economic recovery.

“Reform reversals create policy uncertainty that can impede the recovery,” the analysts said. The United States-Mexico-Canada-Agreement, or USMCA, “has reduced trade-related uncertainty.”

Citing the energy sector, the analyst said “domestic reform reversals that weighed on investment before the pandemic have continued,” and this could limit the gains from the USMCA, “including the onshoring of supply chains to North America.” 

The report follows a list of formal complaints and warnings this year regarding changes in energy policy that have impacted projects and investment. The U.S. State Department, Mexican business chamber Confederación Patronal de la República (Coparmex), the American Petroleum Institute, and the Canadian ambassador to Mexico have all been critical of these changes.