Surging Prices in Slowing Economy Portend Tough Year Ahead for Mexico

Bank of Mexico faces stagflation or worse.

Mexico has begun the new year in much the same way as it began the last one — with news of a gasolinazoThis time the tabled increase in fuel prices, at 6.9%, is considerably smaller than last year’s eye-watering one-off hike of 20%, but with inflation already at well over 6%, in part due to last year’s gasolinazo, the consequences are still likely to be severe.

The main reason for last year’s hike was the liberalization of Mexico’s energy market which put an abrupt end to most of the government’s fuel subsidies. It was also done for a fiscal reason: over just a few years, Mexico’s fast-shrinking state-owned (but soon to be privatized) oil giant, Pemex, had morphed from a huge funding asset to a national liability.

Empty Promises

Mexico’s reformist president Enrique Peña Nieto had repeatedly promised that market liberalization would lead to markedly lower prices at the pump. However, as his government began withdrawing the generous public subsidies that had underpinned the market for decades while raising fuel excise duties to help fill at least a few of the holes on the government’s balance sheets, the only way for prices to go was up.

The price jumps sparked a wave of protests in Mexico’s main cities that led to 500 arrests for robbery and vandalism just in the capital and neighboring state Estado de Mexico alone. The price hike also cost the state-owned oil company, Pemex, hundreds of millions of dollars worth of stolen fuel last year as oil theft, now one of the biggest sources of funds for Mexico’s drug gangs, surged to unprecedented levels.

Now, 12 months on, the prospect of a new, albeit smaller, gasolinazo has raised concerns that Mexico could be about to witness a new wave of violence… 

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