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Mexico cuts spending, suspends high-speed rail project

In this Wednesday, Jan. 21, 2015 photo, Mexico's President Enrique Pena Nieto attends a ceremony promoting housing for low income families, single mothers and members of the armed forces, at Los Pinos presidential residence in Mexico City.

Marco Ugarte/AP

The Mexican government will cut 2015 spending by 0.7 per cent of gross domestic product on the expectation that oil prices may remain low for years, Finance Minister Luis Videgaray said. Stocks extended declines.

President Enrique Pena Nieto's administration will reduce spending by 124.3 billion pesos ($8.3-billion U.S.) this year from the level approved by lawmakers in November, Videgaray said at news conference in Mexico City. The government is cancelling plans for a passenger train in the Yucatan peninsula and suspending a high-speed rail project meant to connect Mexico City and Queretaro, Videgaray said.

The reductions will allow Mexico to avoid raising additional debt or increasing taxes, Videgaray said. Mexico's state-owned oil and electricity companies will cut their own outlays, and all the reductions will have a marginal effect on 2015 growth, Videgaray said.

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"We will take measures not only addressing the current situation, but rather we'll take them in an integrated manner and with medium-term vision," Videgaray said.

The government depends on oil revenue to fund about one third of federal spending. Mexico's crude prices have tumbled to a five-year low, mirroring the decline in international prices after the Organization of Petroleum Exporting Countries decided against cutting supply in November.

The spending cuts won't affect plans for a new airport for Mexico City, Videgaray said.

Stocks, Growth

While the government says that Mexico is hedged against lower crude prices in 2015, that doesn't protect public finances from falling production or low oil prices in future years.

Mexican stocks declined on the dimmer outlook for the construction industry, said Jorge Lagunas, a money manager at Grupo Financiero Interacciones.

The IPC index extended its decline after Videgaray's comments, dropping 2.2 per cent to 40,950.58 at the close in Mexico City. Cemex SAB, the largest cement-maker in the Americas, fell 4.3 per cent. Grupo Carso SAB, whose holdings include a construction unit, dropped 2.8 per cent.

The peso weakened 1.2 per cent against the dollar to 14.9770, the biggest decline except for the Brazilian real among 16 major currencies tracked by Bloomberg.

Growth Outlook

The government stands by its previous forecast for economic growth, Videgaray said. In November the Finance Ministry forecast GDP growth of 3.2 per cent to 4.2 per cent this year, up from estimated growth of 2.1 per cent to 2.6 per cent in 2014.

Mexico's crude mix has plummeted 61 per cent from a June high to $40.40 per barrel on Friday.

Also Thursday, the central bank kept borrowing costs unchanged at a record low, saying the economy faces significant downside risks. After a surprise half-point cut in June, policy makers have kept rates unchanged at a record-low 3 per cent in an effort to provide stimulus without stoking inflation.

Production at state-owned oil producer Petroleos Mexicanos, known as Pemex, is headed for the worst month of output since 1995, falling to 2.235 million barrels a day through Jan. 25, according to preliminary figures. That's less than the Finance Ministry's estimate of 2.4 million barrels a day for this year.

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Oil Hedge

Pena Nieto last year pushed through final rules for an overhaul to open the oil industry to private-sector participation, and the first contracts are scheduled to be awarded later this year.

Pemex will cut 62 billion pesos from its budget, and Comision Federal de Electricidad, Mexico's state-owned power provider, will reduce planned spending by 10 billion pesos, Videgaray said.

While Mexico's 2015 oil exports are hedged at $76.40 a barrel, double the current market price, crude is likely to remain low in 2016 and beyond, Videgaray said.

Mexico wouldn't be able to repeat its hedge at higher prices after the market's plunge, Shelly Shetty, the head of Latin American Sovereigns at Fitch Ratings Ltd., said on a panel at the Council of the Americas in New York on Thursday.

Videgaray said he remained open to an independent probe into his 2012 purchase of a home in Malinalco, Mexico, from a unit of Grupo Higa, which also built a house for Pena Nieto's wife. He declined to say what interest rate he paid on Higa– provided financing for the Malinalco property.

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Another Higa company was part of a group that won a $4.3-billion contract to build the Mexico-Queretaro high-speed rail line in November, three days before the government canceled the deal due to "doubts and concerns." The bidding process was set to start afresh this year before Videgaray announced the project's suspension Friday.

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