Mexico’s Economy Is Being Plundered Dry

Debt is suffocating the economy, but where did the money go? 

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

The government of Mexico has a new problem on its hands: what to do with the burgeoning ranks of state governors, current or former, that are facing prosecution for fraud or corruption. It’s a particularly sensitive problem given that most of the suspects belong to the governing political party, the Institutional Revolutionary Party (PRI), which ruled Mexico uninterruptedly from 1929 to 2000. It returned to power in December 2012 with the election of Enrique Peña Nieto. And it clearly hasn’t changed its ways.

Some of the accused governors were so compromised they went on the run. In the last few weeks, two of them, Tomás Yarrington, former state governor of Tamaulipas, and Javier Duarte, former governor of Veracruz, were tracked down. Yarrington, accused of laundering proceeds from drug trafficking as well as helping Mexico’s Gulf Cartel export “large quantities” of cocaine to the United States, was ensnared by Italian Police in the Tuscan city of Florence. He faces possible extradition to the United States.

Yarrington’s successor as governor of Tamaulipas, Eugenio Hernández, a fellow PRI member who is also accused of close ties with narcotraficantes and money laundering, has not been seen in public since last June.

As for Duarte, he was caught this week by police in Guatemala. Like Yarrington, he wasn’t exactly laying low. Among the accusations he faces is that of buying fake chemotherapy drugs, which were then unknowingly administered by state-run hospitals to children suffering from cancer. He and his cohorts purportedly pocketed the difference. He is also alleged to have set up 34 shell companies with the intention of diverting 35 billion pesos (roughly $2 billion) of public funds into his and his friends’ deep pockets.

In just about any jurisdiction on earth, $2 billion is a substantial amount of money, even by today’s inflated standards. But in Mexico, where neither the super rich (accounting for a very large chunk of the country’s wealth) nor the super poor (accounting for roughly half of the population) pay direct taxes of any kind, it’s a veritable fortune.

And when the country’s public debt is already growing at an unprecedented pace, rampant corruption becomes a serious problem.

In the year 2000, Mexico had a perfectly manageable debt load of roughly 20% of GDP. Today, it is almost two and a half times that size. Last year alone the Mexican state issued a grand total of $20.31 billion in new debt, the largest amount since 1995, the year immediately after the Tequila Crisis when the country received an international bailout to rescue its entire banking system from collapse and to make whole the Wall Street investment banks that had gone all in on Mexican assets.

To make matters worse, much of Mexico’s new debt is in foreign-denominated currencies. Between 2015 and 2016 alone, the total amount of euro and dollar-denominated debt it issued rose by 46%. Unlike debt issued in pesos, Mexico’s central bank cannot just print dollars and euros to bail out bond holders or inflate away the debt. This debt must be serviced the hard way.

In recent years, Mexico’s public debt has mushroomed in order to make up for lackluster growth, a weakening peso, much lower global oil prices, and the dwindling contribution to government coffers of the country’s erstwhile sugar daddy, Pemex. The state-owned oil giant has itself been systematically plundered dry by its burgeoning ranks of senior managers and administrators, the untouchable, unsackable leaders of the oil workers’ union, all closely aligned to PRI, and legions of Pemex contractors.

Between 2008 and 2016 Pemex’s contribution to the government’s tax revenues shrank from 40% to 13%. During roughly the same period (2009-2016) its debt grew 187%, to nearly $100 billion. Its pension liabilities amount to 1.8 trillion pesos (roughly $90 billion). The losses and debt keep growing in tandem, while its production and reserves are shrinking. The company was already bailed out once last year.

The more Pemex’s financial health declines, the larger the shortfall in public finances and the faster Mexico’s public debt will grow.

The really twisted part? The more the debt grows, the more opportunities the country’s corrupt politicians will get to feather their nests. It’s not like there’s much deterrent. In recent years only 17 of 42 serving or former governors suspected of corruption have been investigated, according to a study by María Amparo Casar, executive president of the advocacy group Mexicans Against Corruption and Impunity. Before the latest rash of detentions, only three of them ended up in prison.

“The decades of impunity have generated a level of shamelessness we’ve never seen before in Mexico,” Max Kaiser, anti-corruption director for the Mexican Institute of Competitiveness (IMCO), told the New York Times. The excesses are more public than ever and have brought Mexicans to the verge of bankruptcy.

Mexico’s debt continues to grow at a much faster pace than its economy, whose growth is forecast to slow this year to 1.5%, compared to last year’s 2.4%. In February Mexico’s top auditor, the Federal Audit Office (ASF), warned that Mexico’s debt situation was just a step away from becoming unsustainable. A number of states are already facing bankruptcy, including Duarte’s Veracruz.

Last August, Standard & Poor’s lowered the outlook for Mexico’s sovereign bonds from stable to negative and saw “an at least one-in-three possibility of a downgrade over the next 24 months.” Mexico’s foreign currency sovereign credit rating, which is what matters with bonds denominated in a foreign currency, at BBB+, is just three notches above junk. A downgrade would raise the cost of borrowing, pushing Mexico’s finances even closer to the brink. In the meantime, the plunder must go on. By Don Quijones.

When it comes to debt, everything is relative, especially if you don’t have a reserve-currency-denominated printing press. Read…  Is Mexico Facing “Liquidity Problems?”

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  23 comments for “Mexico’s Economy Is Being Plundered Dry


    great that you took the time to notice that mexico is a ring of hell.

    has been for decades.

    since the time of porfirio diaz, it has been an official gangster state.

    much like its neighbors to the north.

    nothing will change until there is a revolution.

    the pan was thought to be the palliative for the pri. no, the pan was just another adjunct of the mexican gangster class.

    will there ever be another juarez, a zapata, commandante zero?

    i am not holding my breath.

    • Wolf Richter says:

      “great that you took the time to notice that mexico is a ring of hell.”

      DQ has been writing about corruption in Mexico for long as he has been writing about Mexico.


      • Jerry Bear says:

        The Mexican government is a kleptocracy, a hierarchy of thieves. The ones at the lower level take from the masses, the middle level from the lower level and the people at the top take from everybody.

        • Redhawk says:

          The word Government and Kleptocracy are redundant. And not just in Mexico but the USA is right there with them.

      • ENM says:

        I caught a lecture from the CFO of PEMEX about a month ago and it may be even worse than it looks. PEMEX was very mismanaged before the recent reforms (I’m sure some of you guys might argue it still is). PEMEX’s current business plan is to ‘return to profitability within 5 years.’ Previous mismanagement resulted in a lack of adequate maintenance and investment in oil infrastructure. Specifically, investment in PEMEX’s refineries has been lacking and these refineries are ancient. The last new refinery built in Mexico was 1970. Only two of Mexico’s refineries are in port cities. The rest are inland. This means that as Mexico shifts from an oil exporter to importer, its refineries are not economically or strategically located. The cost to modernize is going to be huge. Furthermore, there is no redundancy in the infrastructure. The EIA says if the refineries go offline then Mexico has 2 days of oil inventories before it runs out of oil. You read that right, 2 days of redundancy (I think the US has something like 80?). This recently almost happened because of a strike from the refinery unions. That includes jet fuel. No fuel = no economy. That sort of gray swan might wake the debt markets up to the real riskiness of modern day tesobonos. If nothing else, it gives the refinery unions huge leverage to drive up labor costs. PEMEX has also been facing pipeline oil theft problems. This is doubly bad because PEMEX takes a hit two ways. First on the stolen oil and then secondly (often the larger cost) by environmental fines and environmentalist lawsuits as the oil continues to spill from the janky tapping of the pipeline. Mexico without refinery products would be a whole new kind of ring of hell.

    • mvojy says:

      Well it’s a good thing that the corrupt Mexican government knows the name and address of every civilian that is armed with a small caliber pistol so they can squash any hope the people might have for revolting.

      “The Mexican constitution allows for legal possession of one small-caliber firearm with several important caveats: the owner must be a Mexican citizen, or a foreigner with legal residency status; the firearm must be of small caliber as specifically cited by the regulations; it must be registered with the army and; critically, the firearm is not to be carried in the street. The purpose of the law is to provide for self-defense within the confine of one’s own home.”

      • Robert says:

        The enraged women- women!- of Paris needed no firearms, only cudgels and pikes, to storm the Tuileries Palace and rout the Swiss Guards at the outbreak of the French Revolution in August 1792. Mexican men are brave enough, as are the Venezuelans, but perhaps if they can round up a few French women they will carry the barricades.

  2. Andrew says:

    So much for NAFTA, our free trade agreement, which was to benefit north and south alike. I feel sorrow for all the indigenous peoples, particularly in the south.
    I didn’t realise Max Kaiser was director of a Mexican anti-corruption group. Good on him.

  3. Hiho says:

    A sovereign country that has its own currency and does not run a huge trade deficit does not need to borrow from private creditors. But I guess that it is another form of corruption..

    On top of that, I wonder if the give-away of former public monopolies (Slim) has made matters worse.

  4. SW Reader says:

    I love Don’s articles.
    The US is as badly corrupt, once it all comes out. Look at the Georgia governor, now in prison. US corruption is just hidden extremely well and protected by agencies and corporations. It serves the US well to publish articles on Mexican corruption since that keeps Americans here with their dollars. But in my area, many people are leaving. And I am finally leaving too.

    Incidental story: an organic farmer in our area tried to use local horse manure. But due to the sprays used on the hay crops and the horse medications, all the plants came up deformed. What does that say about our food system???????

  5. R Davis says:

    Does Mexico have a death penalty ?
    If not, why not.
    A strong message needs to be sent .. n’est pas.

    • Jerry Bear says:

      No they don’t and in a society that corrupt they don’t want one. I don’t think they even have a life sentence.

  6. R Davis says:

    You’re not squeamish .. are you ?
    Military style policing & operational Swat Teams 24/7.

  7. anthony hall says:

    It`s Supply and Demand Yo . If American hadn`t got such Big Hoovering Sniffing Nostrils for Cocaine. Mexico wouldn`t be a Narco State.

  8. sid weiner says:

    Mexico,Latin America & the rest of the 3rd world are doomed.
    The corruption & thievery are just the symptoms & not the cause of that doom.
    The underlying problem is massive overpopulation in archaic social & political systems that can’t cope with populations this size.
    When Spain conquered Mexico,hundreds of years ago,it instituted a feudal system like Spain’s.
    The society stayed exclusively white European at it’s small core & the Indians were kept out of that core.
    Because of this,the Native Indians who vastly outnumbered the pure white population, were kept illiterate & out of the circles of power.The Mestizo’s were treated little better.
    One problem is that Indians & Mestizos,being Illiterate & largely ignorant are also evermore unproductive in a modern setting where raw labor is giving way to technology,…these Indian/Mestizo people are not productive enough to pay their own way in a modern society,the same applies to the rest of the 3rd world.
    In the feudal agrarian societies of the past this was not a major issue,there were not that many people drawing on the basic resources of the land.
    Today this is not the case!
    In the year 1900 the world’s population was about 1.6 billion people inhabiting the Globe,….117 years later it has increased to over 7.6 billion.
    This is a 5X increase & mostly happening in the 3rd world & places like Mexico & Latin America.

    in the 1895 census Mexico’s population was 12.5 million people,11 million were Indian/Mestizo.

    in 2015,Mexico’s population was 120 million with only 11.5million pure white & over 108 million semi educated Indians/Mestizo,largely unqualified for earning a decent living in the modern post industrialized world.
    These numbers cannot be maintained & Mexican society,as it now is,cannot survive!

  9. sid weiner says:

    Brazil is also in a situation similar to Mexico’s.
    Brazil’s population today is close to 211 million people.
    Back in 1960 it was it was 72 + million.
    a 3x increase in 57 years.
    This also can only be be accommodated in a country with a large,well educated & skilled Middle Class!

  10. Graham says:

    I always find it ironic that despite being a total mess of corruption and (therefore) a source of both illegal drugs and immigrants that prompt some people to demand a tighter border – nowhere does the topic of ‘regime change’ come up with these countries.

    Meanwhile North Korea, an ordered society of free housing, education and largely vice free – and of course Syria, Libya and Iraq – all economic successes and highly functional are targeted ‘because the ruler is no good’.

    Sadly it seems that the US government is rather content to sit amongst a set of countries that wallow in their own mess – one may even point to cases where they causes this – like in Cambodia for instance – perhaps this is a rather blinkered short term attempt to be the colonial power – the exceptional rich country – without realising that when you sleep with dogs you wake up with fleas:

    Looking at the US economy one finds that since 2000 it’s been undermined and is merely held up with some FED scaffolding that is rapidly approaching it’s maximum loading. The middle class are on the run, war and its costs are looming for a country with a $20Tn debt, a collapsing housing and auto market, a huge unemployment problem, crumbling infrastructure and a republican monarchy that has decided the answer is higher war spending and doubling down on actions that will end the reserve currency status of the mighty fiat dollar.

    Despite the best efforts to kill the silk road, the Russian gas pipelines and the Chinese access to their only coast it looks like the US is now the lone bandit, run by people who only care how it can benefit them.

    How they think they can compete with countries run by people like Putin, who makes a little improvement here, a little less corruption there and has by the process of these adult, sober fixes transformed Russia into something that gives prospects to it’s citizens – even down to free land to farm and burgeoning deals with China – is beyond me.

    So I see no future for Mexico while the US is happy with its government, I suspect it’s being steered towards the rocks quite intentionally and would take a miracle and a genius to steer it back to a course of improvement again. Or a US collapse – which I suspect would prompt the same thing and it IMO more likely.

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