Crisis, Signs of Recovery in Mexico’s Energy Sector: Fitch

Last week, Fitch downgraded key players in Mexico’s energy sector. PEMEX, CFE, IEnova and Cometa all received a downgrade in direct relation to the downgrade of Mexico’s sovereignty rate. PEMEX had already seen a downgrade some months ago, after its ambitious plans were not deemed sufficient. Nonetheless, Mexico still has the capacity to bounce back.

“Mexico's sovereign rating downgrade reflects the economic shock caused by the COVID-19 pandemic,  which will lead to a severe recession in Mexico in 2020. In line with its April 2 ‘Global Economic Outlook’ update, Fitch expects the economy to contract by at least 4 percent in 2020, with a steep fall in 1H20 (first half of 2020) followed by the start of a sequential recovery in 2H20 (second half of 2020). Given the nature of the crisis, there is a higher than usual level of uncertainty around our forecasts and the balance of risks is firmly to the downside,” published the rating agency.

On April 3, Fitch had already stated that the pandemic would likely compound all the issues already present in Mexico’s energy sector. Gregory Remec, Senior Director for Energy in Latin America for Fitch, argued that the NOC had plenty of issues weighing its rating down. Regardless of the crash in oil prices, Minister of Energy Rocio Nahle confirmed yesterday that the government still sees the controversial Dos Bocas project as viable. On the other hand, CFE’s current downgrade is almost entirely linked to the earlier sovereignty downgrade, as Fitch stated company ratings would go up as soon as the sovereignty ratings pick up as well.

Nonetheless, Remec’s forecasts are not entirely gloom. Although recovery might be somewhat delayed due to the COVID-19 pandemic, there are signs that the industry can work toward recovery starting in 2021. One major issue is how deeply Mexico’s economy is linked to oil. Diversification, therefore, is valuable for the country. "I have had signs from the president that perhaps renewable energy will play an important role in the portfolio," Remec mentioned. Energy auctions cancelations and uncertainty regarding CELs would have to be resolved as well. None of this is out of reach, however. If President López Obrador shifts his attention toward renewables, these themes can be resolved swiftly. Without a doubt, Mexico possesses an abundance of natural resources allowing for renewables to be competitive and providing perspective toward diversification. A small push forward from the government could go a long way.