A New Crisis Kicks off in Mexico

Even auto exports to the US plunge.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Pemex, Mexico’s over-indebted, money-losing state-owned oil giant, appears to be in a state of terminal decline. To survive, it needs some last-minute reprieve or miracle. Instead, what Pemex gets are tragic industrial accidents — the body count of the last accident alone was 32 — hemorrhaging losses, and an ever worsening balance sheet.

The latest point of consternation is the catastrophic performance of the company’s exports. Even by recent standards, the numbers make for dismal reading. In the first quarter of 2016, Mexico’s oil exports totaled $2.67 billion, compared to $5 billion in the same period last year — almost a 45% drop! It’s the company’s worst export performance since the first quarter of 2002.

This is a function of the oil price plunge and the deteriorating oil production in Mexico. At this rate, Pemex won’t have an export market left to speak of, especially with U.S. demand for Mexican oil slipping 18% in January and February alone.

If you step back a little further in time, you get an even starker picture of the sheer scale of the carnage. In 2011, when the price of Brent crude averaged over $100, Pemex’s export revenues hit a historic peak of $49 billion, working out at a monthly average of $4.11 billion. In the first quarter of 2016 the monthly average was just $893 million. That’s a plunge of 78.2%.

To make even matters worse, as Pemex’s exports dwindle, Mexico’s imports of oil and gas continue to grow. Mexico imports more gasoline, diesel, and natural gas than it exports in crude oil. Petroleum accounted for two-thirds of last year’s $14.5 billion trade deficit, which was the widest since 2008.

For the broader Mexican economy, Pemex’s woes are just part of the problem. With the overseas market for Pemex’s oil shrinking at such a fast rate while the company’s production continues to crumble, Mexico will depend even more on its manufacturing sector. But that, too, is showing serious signs of strain.

Exports of manufactured goods, which account for 90% of Mexico’s total exports, fell 6.5% in March from the year-earlier month, according to the government statistics institute. Despite a 3.8% drop in imports, Mexico’s balance of payments deficit soared to $4.11 billion between January and March. It’s the highest first-quarter deficit since 1994, the year of Mexico’s Tequila Crisis, which unleashed a wave of economic instability throughout Latin America and triggered an unprecedented bailout of Mexico’s financial sector, although much of the money ended up saving Wall Street investment banks, including Goldman Sachs.

Today, Mexico’s problems are of a quite different nature. Its most important export sector, the automotive industry, appears to be suffering the consequences of gradually tightening demand, particularly in the U.S., where consumer optimism about the economy is on the wane.

In the first quarter of 2016, Mexican automotive exports witnessed a 10.4% year-on-year contraction, its worst performance since August 2009, when the global economy was struggling to stay afloat after the near-collapse of the U.S. financial sector. In the first three months of this year Mexican exports to the U.S. shrank by 7.8%, while exports to other markets fell by a startling 24%.

Naturally, none of this should be happening — at least not according to most economists. After all, despite staging a recent recovery, the Mexican peso has weakened considerably since mid-2014, which should have made the country’s exports more competitive. The problem is that a big chunk of Mexico’s exports — as much as two-thirds, according to London-based research firm Capital Economics — are intermediate goods that don’t get an immediate boost from a weaker peso, unlike final goods such as cars or TV sets bought by U.S. consumers.

On the contrary, because most of these intermediate goods eventually end up in US-produced consumer products, the general appreciation of the dollar and its negative impact on US exports appear to have had a commensurate effect on Mexican exports to the US. In other words, Mexico has suffered the double whammy of higher prices at home and weaker exports abroad.

Even more pain could be in store for Mexican exporters if the U.S. economy continues to slow, or God forbid, enters a recession. Despite Mexico’s free-trade agreements with 46 countries, including the European Union and Japan, about 80% of its $380 billion annual exports go to the US. Whither goeth the US, so goeth Mexico. For the last few years, this has been a significant boon, as the US economy outperformed most of its peers – one of the cleanest dirty shirts, so to speak – but that could all be set to change. By Don Quijones, Raging Bull-Shit

How the mighty are fallen! Pemex is now dependent on state aid to meet its day-to-day needs. The bailout has already started. But it will only feed a new round of plunder. Read…  Big-Oil Sinkhole of Debt & Corruption Gets Taxpayer Bailout. Wall Street Thrilled

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  19 comments for “A New Crisis Kicks off in Mexico

  1. Bruce Adlam says:

    The global economy including the US has become less and less democratic and more and more manipulated the result can only be bad.
    The Fed and the Obama admin stuffed up before 2007 creating the GFC crisis and now we are all going to pay

  2. walter map says:

    Look at the bright side. A year of this and the banksters should be able to get Mexico to sell off Pemex cheap. And the pending fire sale on imported Mexican workers should be excellent.

    Good thing their consumer markets can’t really crash much more than they already have or they’d be in real trouble.

  3. CENTURION says:

    I understand the Mexican Government has printed booklets to show the people how to get to Yankee America and how to make the most of it when you get there.

    If they print one for each Mexican and hire enough buses, they can all be shipped to the border BEFORE the elections. If 40 or 50 Million unemployed Mexicans can get into racist Yankee Gringo Land, then they can avoid a huge problem in Mexico for the ruling elite.

    If President Trump attempts to send them back, all they have to do is scream RACIST. Then, they can stay and vote Democratic and increase the government handouts.

    WIN WIN for everybody except one group, but that group doesn’t count.

    • Wolf Richter says:

      Thing is, there has been net out-migration of Mexicans from the US for years now.

      • Gian says:

        Visit Los Angeles or virtually any city in CA, hard to believe they are going home when they have become the majority in that state. More Obama spin I suspect.

        • Wolf Richter says:

          California used to belong to Mexico (and to Spain) and many of the cities, including LA, were founded when they were part of Mexico. So sure, there are a lot of Mexicans here. Many of them are US citizens who can vote, and who will vote when they’re energized about an issue, though their participation rates are relatively low in normal times. There are also many newcomers, legal and illegal.

          But don’t confuse “Mexicans” with people from Latin America. There is net out-migration of Mexicans (mostly for economic reasons), but there is large influx from other Latin American countries, such as Honduras, El Salvador, and the like.

      • Faithful Reader says:

        That’s what I see on my road, in New Mexico. They have left….are leaving. They don’t stay for no work.

  4. Nicko says:

    Tap Carlos Slim, he’s good for it.

  5. OutLookingIn says:

    “free trade agreements with 46 countries”

    One of those agreements has turned into a “Trojan Horse” not only for Mexico, but Canada and the USA. NAFTA.
    When this agreement was enacted, corporate manufacturing started to move south of the borders. This trickle became a flood, putting thousands of good jobs north of the borders on the chopping block.

    As wage and working condition demands began to cut into corporate profits in Mexico, the fickle multi-national corporate’s up and moved to China. Now they are on the move once again, to even cheaper labor markets – Vietnam, Myanmar, India and Bangladesh, to name just a few.

    Mexico’s populace has always suffered an oligarchic elite controlling the majority poor remainder. They have the mental and physical tools to deal with poverty and serfdom. It will be a rude awakening for Canadian’s and American’s.

    • walter map says:

      “They have the mental and physical tools to deal with poverty and serfdom.”

      Humanity has had the means to create a stable, sustainable, and equitable civilization for over two hundred years, enlightened and noble, but it will squander and revile all its chances and choose the most dismal destiny instead, more’s the pity. Sort of like Game of Thrones with but with weaker drones, fake heroes, terminal bloat, abandoned hope, and really crappy plot lines.

      Bleep it. I’ll just watch from over here, thanks.

  6. Petunia says:

    My theory is that if you gave Latin America the highest GDP in the world, it would still be a mess. It is not about the money, it is about the culture. Japan has been stagnate for two decades and nobody is leaving. The people take responsibility for their country and their problems.

    • d says:

      “My theory is that if you gave Latin America the highest GDP in the world, it would still be a mess. It is not about the money, it is about the culture. ”

      Rome, ripped apart by Corruption and Cronyism, after it became Christian.

      Italy, Porugal, and Spain, continually ripped apart and impoverished by corruption and cronyism.

      Central and South America, along with the Philippines, continually ripped apart and impoverished by corruption and cronyism.

      Yes there is a pattern, yes it is cultural.

      The organizational culture, of 1 presiding entity is responsible for all of this. That entity called the shots over Spain Portugal and Italy until they lost their American and Asian colony’s.

      Thats what the “Protestant Reformation” was all about.

      Those states with a large or majority Protestant Population, do not have this issue at the level of the others listed.

      The criminal entity in question formed and still dictates so much of then Culture.

      The Mafia copies the organizational structure and revenue gathering structure of that entity and frequently refers to the boss of Bosses as “The Pope”.

      Europe warred over religion and separation of Church and State with Church finally being subservient to State in the north for Century’s.

      Catholic Priest go into the streets in Manila, and tell homeless women with to many children, it is their duty to have more Faithful Children.

      The vast majority of the problems in south and central America ultimatly come from the same places as the vast majority of problems in the Muslim ME.

      Religious entity’s. Cynically and criminally manipulating the people for their own gain.

      An evil man wrote something frequently miss translated as “Organized Religion is poison to the people” and miss understood.

      European translators also have Agendas

      “Religious organizations, are poison to the people.”

      Is an alternative translation, a much more accurate Accuratye truism. And a lot easier to understand.

      Mao was like Ghengis Khan, Loyalty to State/ Before religion, Neither cared what religion you practiced as long as you had your loyalty Priority’s in order.

      Rome still wont stay out of politics, in far to many places.

      The result is the Chaos in central and South America the Philippines and parts of Africa.

      Yes its cultural.

      look at the root of the culture, and see where the cure for its problems, has to start.

      • d'Cynic says:

        I would put yet another way. There is a sort of culture where your family is the king, your close relatives are the nobility, and the state is the enemy. In this mindset whenever you can cheat the state that favors your close relatives, or even cheat for cheating’s sake, you feel a winner. Thus the country of such citizenry have a lot of small and big winners, but the country itself shrivels.

        • d says:

          Exactly, Self/Church before all else with state (Which everybody expects to provide everything for FREE in these society’s) far down the line.

          In the modern world that runs on cheap credit a recipe for disaster.

          And the impatient leftist more for free now, the right is the root of all evil and must sole all problems instantly. Are already making trouble. http://uk.reuters.com/article/uk-argentina-protests-idUKKCN0XQ25Z?il=0

        • Faithful Reader says:

          The economies are all shriveling due to OVER-REGULATION and over taxation. No one can get anywhere. In my town, everyone is deciding to do “micro-business” instead of small business. Why? Regulation & taxation. They can’t have it both ways. The governments gave corporations human rights, then let the corporations support the governments. I have no sympathy for government. They get what they deserve. The corporations cheat their way out of taxes, with government approval, so now there will be no “consumers.”
          Also, I’m laughing at the “American taxpayer will pay for the bailouts” thing; NOT- we have no money. ha, ha, joke’s on them.

    • CENTURION says:

      Ah, you can SEE. Good for you.

      I ask people to play a “mind experiment”. Here it is.

      Take the population of Tokyo and move it to Detroit. Take the population of Detroit and move it to Tokyo (or ANY Japanese city of the same population size)

      Now, come back in 10 years. Tell me what you SEE

      • d says:

        Take the population of Detroit and move it to Tokyo

        come back in ten years they would all be in jail.

        Take the population of Tokyo and move it to Detroit.

        The place would be way tidier way cleaner and considerably more prosperous. 10 years on

  7. Paulo says:

    The last time I was in Mexico was at least 20 years ago. We were down in Melaque, where just about every Vancouver Islander seemed to go. Very nice…wonderful people….great time. I remember seeing two trucks that stuck in my consciousness. One was a garbage truck…it was an open flatbed with two or three little kids in the back. When a worker tossed up the bag of garbage a little kid would tamp it down with their feet in order to get more bags on. The other was also a big flatbed, but this one was full of soldiers with auto-matic weapons and shotguns. It pulled up in front of the bank and stood on guard while the deposit of cash was transferred. Random road blocks manned by soldiers, hotel room tossed/creeped by employees….you had to take your wallet and passport to the beach for God’s sake and take turns swimming.

    No thanks.

    I guess the road blocks look different up here in both the US and Canada, but where I live we don’t even lock our doors and my shop is always wide open.

  8. Yoshua says:

    The oil reserves in Mexico have declined from 60 billion barrels to 10 billion barrels and the production has declined from 3.5 million barrels per day to 2.5 million barrels per day.

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