The petroleum coverage acquired by the federal government with the purpose of “shielding” the public finances-as said the Secretary of Finance and Public Credit Luis Videgaray; the Undersecretaries Fernando Aportela and Miguel Messmacher, and the head of the Public Debt Office, Alejandro Díaz- before the destabilizing effects of the collapse of international prices of crude oil, are no more than big myth.
They are a fiction, whose terms of contract, brokered within the speculative financial markets of derivatives, those of the “irrational exuberance” –as Alan Greenspan would qualify them back in 1996- that contributed to the systemic collapse of neoliberalism in 2008-2009, while not being exactly an example of transparency.
It is known that the Secretariat of Finance (SHCP) decides and justifies the purchase of insurance coverages; that two committees determine and assess the conditions of the petroleum and the strategy to purchase them (the volume of barrels and the price level covered); that the amount of the primes of the insurance coverage is determined by the conditions in the market, among them that of commodities and the financial aspect (the duration of the contract, the tendency of the price of crude oil, the supply and demand, the interest rate); that the Central Bank is the financial agent in charge of purchasing them.
What remains unknown, and is unlikely to be revealed, is if the previous assessments and strategies chosen for the purchase of the insurance coverages, the fixation of volumes and the tariffs of petroleum covered, or the price of the commodities obtained, were the best. As the institutions involved, the SHCP and the Bank of Mexico (BM) don’t appreciate that their activities are scrutinized, as would happen normally in any democratic society, in addition to the fact that they are not held accountable to anyone, except the executive branch, its head (allegedly), nor to the Union Congress- that, likewise, don’t demand the relevant information- nor towards the society. Neither is it known which ones were the criteria used to choose the financial groups in charge of the brokering of the insurance coverages (Citigroup, JP Morgan Chase or BNP Parisbas, of doubtful reputation), nor the commissions charged for their services, nor if the best offers were contracted.
The projections of these organisms of the evolution of the international prices of petrol that are used annually for the drafting of the income and expenses of the State, as well as the objectives of the economic policy, give ground to call into question the proficiency in the art of planning in normal and contingent conditions.
Their disastrous estimates during the three years of the Peña administration have led to a government of dried fruits…for the majority, of course not the corporations such as OHL, whose fortune is nourished with blackberries as they are sheltered in the fertile shadow of the tree of morality of a kleptocratic state.
The virtues of the petrol insurance coverages are a technical fairy tales exclusively for politicians dressed as technocrats.
The terms of contract have shown their uselessness.
On the 13th of November 2014 Luis Videgaray said that “regardless of where the prices of petroleum may end, the public finances are protected. The revenues that the federal government will have are 100% protected to the level that is established by the Federal Income Act at 79 dollars”. This is thanks to the insurance coverages.
By the end of January 2015 Videgaray had to recognize the messed up reality and announced a cut in public spending by 124.3 billion pesos, because of the massive loss of petroleum fiscal revenue accumulated during the year.
For their luck, despite the fact that the storm has swayed the fiscal seat and is stiring up from one side to the other, it has not managed to throw it away from where it is for now.
The austerity has become a vice. On April Videgaray said “the Mexicans have to adjust themselves to the new reality. If we are talking about preserving the economic stability, we have to react to this phenomenon, before this event, with responsibility, and understanding that we are not confronting a temporary situation, but of something of enduring characteristics; hence responding the way it has to be done before a permanent income choc: by reducing the expenditures”.
The collapse of prices of crude oil started in July 2014 and Videgaray, ten months later, saw himself forced to acknowledge that Mexico is not before a “temporary situation, but [before] something of enduring characteristics”.
In 2015, and possibly in 2016 the expected growth has given in before stability, throughout the recessive adjustments of public spending.
The economist Nouriel Roubini pointed out: “The economic virtues have turned into a vice: the disposition to save has become a burden for investment; the fiscal probity in a path towards stagnation […]. To cut drastically public spending when the there is a depressed economy is a bad idea: not only for the immediate cost that in incurs in losses of workplaces, but also because it increases the risk of being stuck in a deflationary trap”. Notwithstanding the return of austerity in public spending has shown that the former situation was not more than a longing with no real earthly hold.
The petrol insurance coverage is a kind of “white lie”. It is a veil that wraps the painful reality.
Videgaray says that with it the revenues of the state are fully protected. Alejandro Díaz, head of the Public Debt Office, adds that “the policy was purchased and it covers it all. It is like a car insurance that covers you for the whole year”.
In this sense however, it does not cover it all. Díaz downplays the issue: it only covers “the net exposure of the federal government. [To] cover 100% costs a lot more. If we export crude oil and we cover all the platform of crude, we would be overpaying the insurance. We have a kind of natural protection because you import a part of the derivatives of petroleum”.
What is the difference between “all” and “net”? The price of crude oil is insured by the coverage, 76.7 dollars for each barrel (dollar per barrels), it will compensate the differential registered between this and the average reached between the 1st of December 2014 and the 30th of November 2015.The last month of the year and 2016 will be taken care of by the new coverage contracted and whose purchase has been announced by the SHCP. That price is 2.6 dollars lesser than the budgeted one for the current year, 79 dollars.
Between January and May the average price of the Mexican blend for export was of 48.51 dollars for each barrel (db). The differential is of 27 db, equal to 64% of the coverage cost, or of 30db and 61% of the budgeted amount.
The average annual blend in 2015 could reach 52db, with no big changes in 2016.
This is due to the continuity of oil in the international market of almost 2 million barrels a day, to the extension of the supply of Arab Gulf States such as Saudi Arabia (in April it reached a maximum of 10,3 million barrels a day), the United Arab Emirates (UAE) and Kuwait, or of Iran and Iraq, the expansion of the production of other nations not adherent to the Organization of the Petroleum Exporting Countries (OPEC), such as the case of Brazil, the unlikeliness of the OPEC to reduce its output, the expansion of the investments of the Gulf countries that aim at increasing their market share by 20% before the prices recover. The amount of platforms used by the drilling companies in Saudi Arabia, UAE and Kuwait has increased by a third inter-annually, reaching the highest level in 20 years, by last March, according to the petroleum service group Baker Hughes, the fall of the US platforms by 50%, in accord with the International Energy Agency (IEA), that it has not helped much to adjust the supply and demand of crude oil. The same organism adds that the number of US wells is dropping by 60% and they are concentrated in non-conventional fields; that the investments have significantly dropped and that 100 thousand workers have been dismissed.
Thus the IEA estimates that the price of the West Texas Intermediate in 54.32 db in 2015 and in 65.57 db for 2016. For the Brent it is projected to be at 60.79 db and 70.49 db respectively.
Considering the average spread between the prices of the Mexican blend and those referred crude oil, it would not be impossible that the Mexican one was at around 50 db and 55 db in the referred years.
In this sense the coverage represents a relief. But only partially, if you take into account some details. A fool’s consolation would be the best description.
Foremost it is necessary to clarify that according to Alejandro Díaz, despite the collapse of prices of the exported blend and the reduction of the volume of production and export, the insurance coverage will not be effective until its expiration.
The way the coverage works is simple. As says Díaz, the variable that determines if the coverage is activated or not is the average of 12 months in the price of the oil blend, and the period expires on the 30th of November 2015. “In order to exert the petrol insurance coverage, the [average] price should be below 70 dollars per barrel; until the ups and downs are not materialized, it can be exerted”.
Obviously if the average price exceeds the 79 db the bonus will not be collected and the 773 millions of dollars (10,467,000 pesos) that were paid for it will be summed up to those contracted between 2011 and 2014, for an amount of 3,424,000 dollars, and that remained without being claimed.
Anyhow, whether they are claimed or not, it will be after the events happened.
The loss of public revenue of petroleum, as well as the enforced expenses-including those to come additionally for the rest of the year-, the slow economic growth, to harm the population by the current administration are very present.
When the government says that the whole of the revenues are protected by the insurance coverage, it is only referring to the income of the federal government. Here are not included the ones of Petroleos de México (Pemex), nor the budget entries provided to the states and municipalities.
The aforementioned entity will have to assume the losses and compensate with budget cuts, to contract loans, or increase the local tax burden, or however else they might proceed, given its dependency to the federal budget.
The petroleum revenues of Pemex fall by 90.6 billion to 74.7 billion pesos in the first trimester of 2014 and 2015. The loss of 15.8 billion pesos represents 20% in real terms. In its balance sheet broadens its deficit in 41 billion pesos, going from70 billion to 112 billion pesos. It has risen by 42% in real terms.
Furthermore Pemex has to add a cut of 62 billion pesos that correspond to the fiscal adjustment by 124.3 billion pesos, equivalent to around 17% of the assigned budget.
In this context the former parastatal company stands as a meek lamb before the transnational wolfs that will compete for the petrol industry.
At the same time the shares of federal entities and municipalities dropped by 1,816,000 pesos, going from 158 billion pesos to 156 billion pesos, falling by 4.2% in real terms.
Oddly enough the most affected entities are those where the petrol industry are of major importance. Eight out of nine states are concerned: Campeche, Tabasco, Chiapas, Veracruz, San Luis Potosí, Puebla, Nuevo León and Coahuila.
The population is already complying with the burden, in a forced way, with their share, directly or indirectly, throughout the price of fuel (Magna, Premium, Diesel) that was raised 3% this year.
The insurance coverage has not avoided the collapse of the budgetary revenues of the public sector and of the federal government. In the first case the collection of petroleum revenue went from 293.7 billion pesos to 137 billion pesos, the real drop being of 43% or 120 billion pesos. In the second case it drops by 203 billion to 99 billion pesos; with a drop of 53% or 104 billion pesos.
The decay has been compensated in two ways: the increase of non-petrol revenues and cuts in public expenditure. This however has not prevented the exponential growth of the global deficit that went from 62 billion pesos to 100 billion pesos and the budgetary deficit of 66 billion to 102 billion pesos. In any case there is a rise of 57% and 49% in real terms.
The need to finance the public deficit obliges to extend the borrowing, which went from 49 billion pesos to 100 billion pesos, a real increase of 97%.
The high degree of vulnerability of the public finance is due to the fiscal dependency of petroleum. In the first year of the current administration the petrol revenue was equivalent to 36% of the total revenue. In 2013 they dropped to 31% and in the first trimester of 2015 it further dropped to 16%, according to statistics of the SHCP (see graphs 1 and 2).
In the coming months the economic slow-down will affect the non-petrol income and will further imbalance the State finances.
There will be an explosive cocktail that will prevent these goals of programmed public revenues for 2015 from being reached (4.7 trillion pesos of the public sector and 2.9 trillion pesos of the federal government).
Fernando Ramones, member of the Center for Economic and Budgetary Research estimated that by the midst of December 2014 the current petroleum prices and the government coverage hardly could collect 37% of the petrol revenues estimated by the Federal Revenue Act, i.e. around 440 billion pesos out of 1.2 trillion pesos).
The petroleum insurance coverage is by itself, limited.
Without actually using them, between 2011 and 2014 3,424,000 pesos were paid for the coverages.
For the coverage of 2015 a premium corresponding to 773 million dollars were paid, equal to 10,467,000 pesos. It assures 228 million barrels at a price of 76.4 db.
The difference between this price and the 79 db was covered with 7,944,000 pesos obtained through the section called “Coverage Complement 2015”, creating the Budgetary Revenue Stabilization Fund. In this account additional 33,641,000 pesos are available in order to “protect the solidity of the public finances”.
The insured volume in 2015 is equal to 633 thousand barrels on a daily basis, as the programmed production and export ascend to 2.4 million and 1,090,000 barrels.
This means that 39% of the production and 72% of the external sales remain uninsured, i.e. 457 thousand barrels a day and 1,767 thousand barrels respectively.
In terms of the value of the exports of 2015 the annual protection will reach17 billion dollars or 233 billion pesos. The exports will generate 31 billion dollars or 415 billion pesos.
Considering the parity of 79 db and the platform of exports of 1,090 thousand barrels the generated currency will be of 31 billion dollars or 415 billion pesos.
The difference between the estimations of the two aforementioned paragraphs puts into evidence that the insured part is almost marginal in relation with the volumes and the value of the production and export (see box 1).
Furthermore the loss of currencies and petrol revenues, the vulnerability and destabilization of public finances will be permanent, hence the next reduction of public spending will not be strange, nor its strong disorders, and even the fiscal crisis of the state.
The insurance coverage is a painkiller that seeks to hide the fundamental problem of public finances historically abandoned: the comprehensive fiscal reform, which by definition has to be progressive, should collect more taxes to companies and sectors of high income.
*Economist
(Translated by: Axel Plasa)
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