Experts Warn Government Financial Aid Is Not Enough

The infusion of billions of pesos into PEMEX to meet its debt obligations has temporarily stabilized markets, yet underlying issues continue to trouble analysts and bondholders.

In its latest budget proposal, the Mexican government earmarked MX$145 billion (US$8.2 billion) to assist PEMEX in covering US$11.2 billion in debt payments due next year on its massive US$110 billion debt burden. This strategy enables Mexico to use more affordable sovereign debt to cover PEMEX's bond payments. While this may alleviate short-term lender concerns, investors and analysts caution that PEMEX's operational challenges demand comprehensive reform. The company's debt remains in junk territory, with Fitch Ratings downgrading it further in July and Moody's assigning a negative outlook.

According to Senator Fluvio Ruiz Alarcon, in the first 1Q23, PEMEX received support from the federal government for a total of MX$17.7 billion (US$1 billion), through capital contributions. Of this amount, MX$10.5 billion (US$605 million) were used to improve the National Refining System, MX$6 billion (US$346 million) for the construction of the Dos Bocas refinery and MX$1,2 billion (US$69 million) to strengthen its fertilizer chain. From April to June 2023, PEMEX did not receive capital contributions or support from the federal government to meet its financial obligations. 

In its 2Q23 report, PEMEX informs that from 2019 to June of this year, it has received government support for over MX$720 billion (US$41.5 billion), which have been channeled to items such as debt payment, construction of the Dos Bocas Refinery, the acquisition of the other half of the Texas Deer Park refinery, the rehabilitation of the National Refining System and the strengthening of the fertilizer chain, among other actions. Likewise, the gradual reduction, between 2019 and 2023, of the Shared Utility Right (DUC) rate from 65% to 40% brough savings of MX$416 billion (US$23.9 billion) to the company.

Aaron Gifford, Analyst, T Rowe Price, which holds PEMEX bonds, noted that explicit budgetary support for the company is a first and should address market and credit rating agency concerns. However, he emphasized that this is not a silver bullet, highlighting ongoing issues like negative cash flow, a substantial capital expenditure budget and hefty tax payments to the Mexican government.

With Mexico gearing up for general elections in June 2024, these problems will likely come under increased scrutiny. The change in leadership will bring fresh questions about the future of the state-owned company, which has heavily relied on governmental support under President Andrés Manuel López Obrador. While López Obrador aims to "rescue" PEMEX, giving the company around MX$1.32 trillion (US$76.1 billion) in financial aid since taking office in 2018, oil production has continued to decline.

Experts have suggested various reforms, including reducing PEMEX's tax burden, increasing investment in exploration and production and encouraging greater participation by private companies. While PEMEX claims to be on a path to better financial stability, it remains clear that structural challenges persist.

Analysts are concerned about the high deficit, particularly as the economy grows, potentially leaving less room to respond to economic downturns or falling oil prices. Gabriel Casillas, Economist, Barclays, says that while most fiscal matters may find relatively straightforward resolutions, addressing PEMEX's challenges will require a more structured approach.