Today, Mexico begins the Jornada Nacional de Sana Distancia (National Social-Distancing Program) to confront the COVID-19 outbreak. A lot has been said about the strategy but the general reception has been positive.
The Mexican healthcare sector has been challenged the whole year due to the many changes it has gone through and the COVID-19 outbreak was the last straw in an already strained system. Figures such as José Narro, former Ministry of Health, have said that Mexico has indeed the capacity to face this pandemic. “Mexico has a structure supported by equipment, techniques and specialized personnel,” he said. What is needed now is more investment on the sector.
On the other hand, institutions like INSABI and INER have stated that this situation is surpassing their capacity. On March 16, INER workers protested outside the institute due the lack of protocols and proper equipment to face the pandemic. Meanwhile, on March 20, families of patients demanded better information and attention to their situation. Other institutes such as INCMNSZ and INC are cancelling shutting down their normal services to support hospitals treating COVID-19 infected. Finally, on the night of March 20, the government announced that the Jornada Nacional de Sana Distancia would be implemented starting on March 23 and would last at least four weeks.
Given that the impact of the COVID-19 pandemic on the Mexican economy will be greater than expected, the Ministry of Finance (SHCP) is working on a preventive “cushion” that includes private investment in oil and gas projects. The goal is to be proactive and provide a coordinated effort to limit the damage, ministry head Arturo Herrera said.
“Even under the most favorable scenario there will be an impact on the economy,” Herrera warned during his inaugural address at the 83rd Banking Convention held in Acapulco. Herrera explained that besides the damage already done, stress in the transport and tourism sectors is likely to worsen. “We are not waiting for the impact to happen. We are starting now to provide incentives, to create an economic cushion,” he explained.
Among the incentives, the government will provide advance allocations for investment and acquisitions. Herrera said SHCP is already working on incentive programs with development banks to provide additional support to the most-affected sectors.
Hours before the convention started and after a meeting with Governor of Banxico Alejandro Díaz de León, Herrera said all possible scenarios to fight the pandemic are being assessed.
Oil & gas projects next
Mexico also will invite private firms to invest in oil and gas projects, Herrera said during the annual financial sector event. According to Reuters, Herrera said the long-awaited energy plan will be unveiled soon, disclosing all projects available. Energy auctions will not be included in the plan. “It’s not just a general outline, we’re going to say that this project here, here and here, this amount and size are open to investment,” Herrera said.
Some of the projects are considered in the US$92 billion investment package presented last week by private energy companies to President’s López Obrador administration. Herrera told Reuters that projects with PEMEX were not viable at the moment, after oil prices last week experienced their sharpest decline since 1991.
Herrera stressed that accelerating spending was a “more efficient” way of stimulating growth than raising spending, and added that PEMEX should spend its budget quickly too. “In this context, we need to make sure that PEMEX is executing its investment program on time and in a clear manner,” he said.
Given the surplus of fuel in Asia due to the COVID-19 pandemic, PEMEX is aiming to take advantage of cheap imports from China, South Korea and Japan. The Oil Price Information Service (OPIS) reported that PEMEX PMI is planning to import up to nine more fuel shipments in addition to two already purchased early in March, according to Reforma.
Total imports of 2.7 million barrels of gasoline, diesel or jet fuel are expected to reach the Salina Cruz refinery in Oaxaca, the only one of the National Refining System (SNR) in the Pacific Ocean. The medium range ships hired by PEMEX are scheduled to arrive to Mexico by April and have a capacity of between 280,000 and 300,000 barrels. No detailed information was available about which fuels are contained in these two shipments.
Cheap imports might become one less stress factor for the troubled NOC that doubled its loses from 2018 in 2019 and that now faces a sharp decline in oil prices. The global contingency gave also an opportunity for Asian markets to turn to Mexico to relieve their excessive fuel provision.
According to OPIS, PEMEX increased orders from Asia late in February and will likely continue in the short term. “We cannot know how much longer prices will drop and how long it will take for the Chinese economy to recover,” the agency has reported.
In 2019, the Salina Cruz refinery in Oaxaca recorded a production plunge of 24 percent, processing 125,104b/d and working at a 37.9 percent of its capacity, according to the latest Ministry of Energy crude oil processing report.
Despite the MX$25 billion (US$1.1 billion) investment announced for the modernization of the SNR, its six refineries are working at a modest production capacity of 36.1 percent, the lowest level in 30 years. The PEMEX Business Plan 2019-2023 contemplated a processing goal of 643Mb/d, which required the SNR to work at 39.2 percent of its installed capacity.
An intense program to improve the crude oil reception system and the primary plant distribution is ongoing at the Salina Cruz refinery, after facing a number of incidents. More investments in the port linked to the Tehuantepec Isthmus Railroad (FIT) project are also expected. Early in February four tenders were published to cover repairs of 157km of train tracks from the Port of Coatzacoalcos in Veracruz to the Port of Salina Cruz for the FIT project.
More troubles are likely to shake the markets even further after OPEC’s behemoth Saudi Arabia unveiled plans on Wednesday to dramatically ramp up oil production, raising the stakes of a lasting price war with non-OPEC leader Russia. Saudi Aramco was asked by the Saudi energy ministry to raise production to 13MMb/d, up from the 12MMb/d produced at the moment. If this trend keeps going, global oil prices will continue to plunge and more cheap fuels import form Asia will likely reach Oaxaca.
The COVID-19 outbreak and the price war between Russia and the OPEC that led to a drop in oil prices have created a perfect storm that is now threatening Mexico. On Wednesday, both BMV’s and BIVA’s reference indexes plummeted over 1 percent, which puts the Mexican market back in a rocky position after a slight increase in oil prices on Tuesday. The S&P/BMV IPC index fell 1.71 percent to 38,890.6 units, while FTSE BIVA stumbled 1.47 percent to 803.81 units. Among the biggest losers are Genomma Lab with a 7.9 percent drop and Orbia Advance with -6.26 percent.
Despite these negative results and the peso’s depreciation against the dollar, which now stands at an exchange rate over MX$21, the Minister of Finance Arturo Herrera says the Mexican economy and its public finances are shielded against global turmoil. During a press conference, Herrera said the Ministry is taking prudent action to face these complications without creating a negative impact on the country’s debt. “Since 1995, we have tried to build public finances that are designed with extreme caution. We are trying to shield the economy against highly negative scenarios,” he said.
Herrera also highlights that the country can still rely on its credit lines from the IMF and the US Treasury of US$61 billion and US$9 billion, respectively. In addition, Mexico can make use of the stabilizing funds FEIP and FEIEF of MX$158 billion (US$7.4 billion) and US$60 billion (US$2.4 billion), respectively, in cases of reduced income. The FEIP, however, has already been partially depleted in 2019 to face income shortages.
Lastly, the Minister pointed at the coverage that PEMEX has contracted to secure a minimum price of oil of US$49 per barrel, although an El Economista report says the production volume covered by this insurance was not disclosed. “We are watching how the situation evolves and analyzing how we can support PEMEX. However, we keep in mind that this might be a temporary conflict,” said Herrera.
The government is also implementing internal measures to shield the economy. While tax incentives are not being considered to reactivate the economy, Herrera said tender processes have been accelerated to kickstart infrastructure works. Gabriel Yorio, Deputy Minister of Finance, also highlighted that most of the country’s debt is valued in pesos and negotiated at a fixed rate, which limits the effect of the peso depreciation against the dollar.
The price war that knocked down oil performance yesterday, dragging the Mexican export mix bellow US$25 per barrel, will put additional pressure on PEMEX’s finances, which can have bigger implications for the Mexican economy, according to analysts. Mexico's credit rating (BBB+, with a negative outlook) is now at risk, according to Joydeep Mukherji, who is responsible for Mexico's sovereign rating at S&P Global.
“Mexico could be hurt due to recent events, because of its significant oil sector and of course its connection to the US economy,” Mukherji said, according to a Notimex dispatch. He explained that low oil prices, poor growth of Mexico's GDP and the US economy's slowdown can have a major impact on the country’s outlook.
After the main oil producers Saudi Arabia and Russia failed to reach an agreement on a production cut, a price war between the two nations escalated. Last Monday recorded one of the sharpest oil-price drops in history, leading the Mexican export mix to a drop of over 31 percent to US$24.43 per barrel. While COVID-19 has created uncertainty for the global economy, this scenario is much more complicated for PEMEX and its current debt, which is the highest of any oil company at US$105.22 billion at the end of 2019. After the NOC reported a US$18.3 billion net loss in 2019, now a decline in crude oil prices can have a major impact in public finances and the peso’s position against foreign currencies.
President López Obrador is optimistic and forecasts a mild impact for Mexico given the healthy public finances in his administration. Today, the president praised how the Mexican currency has endured the global financial impact and said a stabilization fund totaling US$184 billion dollars is available to provide an additional shield to the national economy.
Zama Under the Spotlight
Energy companies trying to strike a deal with PEMEX to share Zama field lamented the NOC’s slow response, which indicates a move to take total control of the project, a case that can become a test for President López Obrador foreign investments goals and his agenda, the Financial Times has reported.
“I don't understand who benefits from a delay. It is not us, nor the arrival of first oil, nor the workers nor the Treasury. We cannot find out who else benefits, except PEMEX,” said Talos CEO Tim Duncan.
A consortium led by US’ Talos Energy and including UK’s Premier Oil and Germany´s Wintershall DEA discovered the Zama 700MMboe field in 2017. Those companies await a decision from the Mexican government on how to share responsibility for the oil field that reaches into one of PEMEX’s blocks.