In 2022, Mexico's oil revenues failed to offset the costs of the IEPS subsidy

The costs of maintaining the IEPS subsidy are likely to grow

While “republican austerity” has characterized the Andrés Manuel López Obrador (AMLO) administration to date, FrontierView believes AMLO will prioritize the hot-button issues he campaigned on, such as gasoline prices, and the upcoming elections over his commitment to austerity. Furthermore, despite his stated plans to push Mexico toward energy independence, we believe that AMLO will continue to prioritize oil exports to bolster government revenue during this period. Still, if spending increases significantly, or oil production slows further, limiting Mexico’s capacity to attract additional oil revenues, fiscal strain could emerge as early as 2023, impacting Mexico’s “super-peso,” which has relied heavily on the country’s stable macroeconomic position to maintain its strength against the USD.


  • Mexico was one of the only LATAM countries that did not implement a large-scale fiscal stimulus program during the pandemic. A record-level influx of remittances and limited-to-no lockdown measures enabled the economy to tick on, though GDP contracted by 8%. Fast-forward to 2022, and AMLO’s commitment to fiscal austerity positioned Mexico as one of the most fiscally stable countries in the region, which, among other indicators, bolstered the Mexican super-peso.
  • In 2022, however, pressure to spend increased as inflation soared throughout the world following the Russian invasion of Ukraine. Key among AMLO’s campaign promises was avoiding a gasolinazo; the president vowed that the price of gasoline would not increase above inflation during his six-year term. 
  • To prevent a hike in oil prices and even-higher inflationary prices, the AMLO government implemented a subsidy tied to the IEPS (Impuesto Especial sobre Producción y Servicios) tax on gasoline and diesel, which eliminated taxes paid at the pump, costing the government in forgone revenues but cushioning the blow of rising energy prices on the population.
  • Although the Mexican government estimated that surplus oil revenues stemming from high oil prices would make up for the forgone revenue from the IEPS subsidy, final 2022 numbers showed that subsidy spending overtook oil revenues. While the government was able to fill the gap with personal income tax and VAT revenues, this could raise risks down the line, particularly given that economic growth is slowing.

Our View

In 2023, oil prices are expected to remain at US$ 92, above the estimate baked into Mexico’s 2023 budget of US$ 68.7 per barrel. Still, even with 2022 prices averaging US$ 97 per barrel to the 2022 budget’s ~US$ 60 per barrel, surplus revenues did not cover the IEPS cost, as increased oil prices, in turn, kicked up the costs of maintaining this subsidy. Furthermore, personal income and VAT tax revenues, which closed the fiscal gap in 2022, are likely to decline as economic growth slows. Moreover, not only is the government expected to extend the IEPS subsidy during the pre-electoral period to continue upholding AMLO’s promise to keep gasoline prices stable, but also, additional social spending is likely as the government seeks to rally MORENA’s base ahead of the 2024 presidential election. Therefore, while we expect Mexico to remain among LATAM’s most fiscally stable markets, the country’s fiscal position is likely to be eroded in 2023 and 2024, elevating FX risk.

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