Regulatory uncertainty and price increases for fuels are the main factors that continue to foster a negative outlook for the Mexican energy industry, according to Fitch Ratings,
“The outlook on the Mexican mining sector is deteriorating due to the recent volatility of variables that affect companies of the sector such as strong changes in fuel prices and regulatory uncertainty,” said Óscar Álvarez, Senior Analyst, Fitch. The rating agency considers that the sector requires policies promoting development and investment.
Other factors continue to discourage investment in the sector, including the reform to the Electricity Industry Law (LIE) that favors CFE, the delay in CRE granting permits to private energy players and a possible dispute panel in which Mexico would need to confront the US and Canada under the US-Mexico-Canada Agreement (USMCA) due to Mexico’s alleged violations of the agreement.
The analysis points out that these factors risk the stability of the commercial relationship between the three North American countries, as 39.9 percent of Mexico’s foreign direct investment (FDI) comes from the US while 10.3 percent comes from Canada. Moreover, Fitch highlighted that FDI in the electric energy sector continued to show low levels at the end of June 2022.
The highest FDI numbers were recorded in 2018, with US$4.8 billion. This figure decreased in 2019 to US$1.6 billion and reached its lowest level in 2021 with only US$584 million.
Meanwhile, in June 2022, FDI in the subsector had already surpassed the numbers presented in 2020 and 2021. The US and Canada together represent 50.2 percent of the country’s FDI, so Mexico must maintain a good commercial relationship with both countries.
Furthermore, Fitch Ratings indicate that the conflict between Russia and Ukraine and subsequent economic sanctions have increased volatility in LNG prices, which reached US$6.6/MMBtu on average in October 2022.
In Mexico, around 70 percent of the natural gas demand is covered by imports from Texas, which exposes the country to volatility in the price of gas and the exchange rate. Moreover, the report noted that CFE has shown an important decrease in its operating margins because of gas prices that grew 69 percent compared to the average price in 2021. Furthermore, more than 60 percent of CFE’s installed capacity requires natural gas for electricity generation.