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PEMEX Debt Major Reason Behind Fitch’s Mexico Downgrade

By Peter Appleby | Thu, 04/16/2020 - 13:50

Fitch Ratings yesterday downgraded Mexico’s long-term foreign currency issuer default rating (IDR) to BBB- from BBB. This is just one step above junk status. The reasons behind the rating agency’s actions included the impact of the COVID-19 pandemic on the Mexican economy. But the heavy debt of PEMEX, the country’s national oil company and one of the major contributors to its national purse, was a “key risk factor” that drove the decision.

According to the agency, the “economic shock represented by the COVID-19 pandemic will lead to a severe recession in Mexico in 2020.” Meanwhile, the recovery, which is predicted to begin in 2H20, will be held back by “a previously noted deterioration in the business climate in certain sectors” and “a perceived erosion of institutional strength in the regulatory framework.”

PEMEX's financial status and maturing debts that the NOC seems ill-equipped to pay was also a major concern, adding fuel to the fire that has been delivered to Mexico by the global pandemic. As Fitch stated, there is a “contingent liability” represented by the US$105 billion PEMEX debt, which equates to 9 percent of the country’s entire GDP.

That said, the administration’s sound oil price hedging strategy, which in 2019 secured a per barrel price of $55, has provided strong protection for PEMEX’s output. Though the hedging strategy costs around US$1 billion annually, it is reported that in 2020, the Mexico crude export oil basket is secured at US$49 per barrel, well above its Wednesday's trading price of US$14.23 per barrel. According to Bloomberg News, Mexico’s hedging would deliver the country roughly US$6 billion if low prices remain until November.

Mexico’s success in fighting off OPEC+ demands to reduce output by 400Mb/d and agreeing on only 100Mb/d instead, has helped the company reduce losses. But if this is extended over the year, it will still result in a 0.2 percent loss of federal income in what was to be expected for 2020. Similarly, the federal government’s decision to bring forward the company’s tax burden reduction will wipe a further 0.25 percent (around US$2.68 billion) in expected receipts.

The data used in this article was sourced from:  
Fitch Group, El Economista, Bloomberg, Reuters
Photo by:   Pixabay
Peter Appleby Peter Appleby Journalist and Industry Analyst