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Mexico's rainy-day fund

The sovereign-wealth fund is a good idea—now it just needs some wealth to manage. The FMP’s executive coordinator spoke to Petroleum Economist

"We have a very explicit mandate—to make sure the general Mexican voter is aware of what is happening to these hydrocarbon resources that actually belong to all Mexicans." Carlos Lever Guzmán, a macroeconomist, is talking about the sovereign-wealth fund (SWF) he runs—the Fondo Mexicano de Petróleo para la Estabilización y el Desarrollo (FMP).

No one can doubt the fund's aims are noble—especially in light of lingering popular opposition to the sweeping energy reforms launched by Enrique Peña Nieto four years ago. Transparency, says Lever, is at the core of the FMP, itself a creature of the reforms.

Like much else in Mexico's big upstream opening, though, the FMP is in something of a holding pattern, waiting for the new zeal to yield fresh oil, the crude to fetch a decent price and the revenue to bring a dividend for the fund to spend.

It formally opened its doors—and bank account—in January 2015. For now, its most significant task is to collect money raised in oil and gas contracts. This makes the FMP "more hands-on" than other SWFs, says Lever, and compels it to wash Mexico's oil and gas linen publicly: "We receive the revenues, process them, are made aware of missing revenues." The FMP releases all the data "at a very detailed level about prices and costs" so that "everyone can have access to this information and realise what is going on with the sources of hydrocarbons revenues, but also their destination." The fund's website, http://www.fmped.org.mx/, is rife with fiscal data, updated monthly.

All this is important, not least in persuading some sceptics that Mexico's reforms can clean up a sector once known not just for inefficiencies but also for some lax attitudes to financial management. Oil minister Pedro Joaquín Caldwell told a Petroleum Economist conference in Mexico City in October that investors had committed about $80bn to his country since the reforms began—the FMP will account for every peso.

The problem for the FMP is that, so far, it's not been able to carry out its other main mandate: investing Mexico's oil income. That $80bn isn't arriving imminently. And the fundamentals don't look favourable at present. When the fund was created, Mexico's crude sold for more than $100 a barrel. For the past year, says Lever, it has fetched less than half that. Oil output was around 2.9m barrels a day in 2013, when the reforms began. In August, Pemex said the average was now just under 2.2m b/d.

Mind the investment gap

Because of the FMP's money-transfer rules, that leaves its investment account empty. Although the fund is the first collector of oil and gas monies—from state-owned Pemex and private firms—all the income, less some small running and other expenses, must be transferred to the state, up to the point that the revenue amounts to 4.7% of GDP in a given year. (The threshold restarts at the beginning of each fiscal year.)

That 4.7% was not arbitrary; it's the share of GDP Mexico's oil and gas receipts accounted for in 2013, before the crash. Yet in 2015, its first full year of operation, the fund collected about M$400bn (then about $24bn), equivalent to just 2.2% of GDP. In 2016, receipts were down to a bit more than M$307bn, or 1.6% of GDP.

The 4.7% target won't be met this year, meaning the fund is a SWF without the wealth to invest. When will that change? It will depend entirely, acknowledges Lever, either on strong oil-price inflation or a sharp increase in Mexican oil output.

"The stated purpose of the reforms is a very significant increase in production volumes, and if we'd stayed at the prices of 2013, any additional production would have been a saving," says Lever. But the industry's long cycles mean the FMP might be waiting a while before the upstream bonanza the government wants begins to yield fruit. "So we're talking down the line, 10, 15 years, until a very significant ramp-up in prices."

His patience is salutary—but the reforms' critics will need some too. For all the momentum Mexico's upstream is building, production is still falling. A decade or more is a long time to wait for the dividends of de-nationalisation.

And even assuming the output trend is reversed in the coming years, oil prices rise, and the FMP starts building a surplus, its hands are tied on how it can spend the cash. It won't be buying prestige shopping centres or hotels in London. Of any surplus, some money will be transferred to other older stabilisation funds; then, once the surplus (after the 4.7% has been transferred) reaches 3% of GDP, another 60% of the holdings will go to other domestic investment and infrastructure funds, scholarships, and so on.

In essence, when and if it ever gets to the wealth part of the SWF moniker, Mexico's FMP should be a stabiliser for the economy. It decidedly won't be gambling Mexican oil revenue on luxury property or fattening the wallets of international equity brokers. "Let's remember," says Lever, "dependence on fiscal revenues from hydrocarbons exposed us to lots of volatility. If we do this right, we can have a significant buffer where we can save some of the costs of hedging and guarantee a more stable government."

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