Moody's Warns of Fiscal Constraints Linked to PEMEX

Moody's Investors Service has warned that consistent support for PEMEX and priority programs such as pensions and flagship projects are making the federal government's spending control "more rigid." These spending dynamics will limit the fiscal room for the government in the future. For the next fiscal year, the federal government plans a total net expenditure of MX$9.06 trillion (US$526 billion), which is 4.3% higher in real terms compared to what was approved for this year.

Pension spending will amount to MX$1.5 trillion (US$87 billion), in addition to MX$465 billion (US$26.9 billion) for the Universal Pension Program for the Elderly. As for the priority investment projects for the six-year term, they are expected to total MX$222.66 billion (US$12.9 billion), with MX$120 billion (US$6.9 billion) allocated to the Mayan Train.

Moody's noted that Mexico's 2024 Economic Package indicates the government's intention to accept a high fiscal deficit, exceeding 5% of the GDP, due to increased spending on priority projects. "According to official estimates, the borrowing would be in line with what is allowed by the fiscal rule. The budget for next year implies a clear shift in fiscal policy management, as fiscal deficits averaged only 3% of GDP during the pandemic years,” stated the firm.

Rising interest burden, both as a percentage of GDP and government revenues, is increasingly straining the sovereign's fiscal strength compared to its rating peers. Moreover, PEMEX will refinance revolving credit lines with banks to complete the capital injection that the government allocated to the oil company in the Budget of Expenditures project so it can cover its debt maturities in 2024.

Refinancing plans include US$3 billion in revolving credit lines to address debt maturities in the last year of President Andrés Manuel López Obrador's six-year term, according to data from Bloomberg.

The refinancing operation will add to the MX$145 billion (US$8.2 billion) contribution from the federal government included in the 2024 budget, which still needs to be approved by the Chamber of Deputies. The federal government's goal is for PEMEX to reduce its debt by the same amount as the budgetary contribution after paying off the amortizations.