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S&P Downgrades PEMEX and the Country

By Peter Appleby | Fri, 03/27/2020 - 13:41

Standard & Poor’s has downgraded PEMEX’s global scale foreign currency and local currency ratings from BBB+ to BBB and A- to BBB+ respectively, in a direct blow to the hopes of the administration’s energy strategy.

S&P’s, one of the world’s major credit agencies, made the downgrade decision in response to the impact it believes lower oil and natural gas prices, “anticipated over the next two years,” will have on the successful execution of the NOC’s business plan, which was published to some criticism last year. According to the statement released by S&P alongside the downgrade decision, the business plan is in jeopardy “because weaker cash flow will limit the ability to fully fund its multi-annual capital investment needs.”

Though the global oil price collapse has come as a direct impact of the COVID-19 pandemic and the Saudi Arabia-Russia price war, the “recurring government aid to Mexican oil company PEMEX over the last twelve” months has reinforced S&P’s view of the “almost certain likelihood of extraordinary government support if the company were to run into difficulties.” Underlining concerns that the credit agency has about PEMEX´s dependency on the federal government, the statement noted that “the negative outlook on PEMEX mirrors that on the sovereign and reflects our view that the close relationship between the company and the sovereign will remain unchanged in the next couple of years.”

In a direct swipe at the administration’s energy strategy, the rating agency stated its view that “the reversal in Mexico’s energy policy under the current administration […] curbs the participation of private players in the domestic energy market.”

The downgrade came at the same time S&P cut Mexico’s sovereign credit score to BBB, just two scores above junk. As reported by Bloomberg, the country will remain on the agency’s watch list, opening the door for a second cut within the next 12 to 24 months. Yesterday, as reported in El Universal, American investment bank JP Morgan adjusted its 2020 growth forecast for Mexico, expecting that the country’s economy will contract 7 percent over the next year.

This news comes in the wake of a series of decisions by oil and gas operators working in Mexico to reduce their global CAPEX. Included in the list is Eni, the Italian IOC that in 2019 made history by becoming the first international company to hit offshore production in Mexico since the enactment of the Energy Reform.

Neither the Mexican government nor PEMEX have yet had time to respond to the downgrades. But comments made during the presidential morning briefing on Friday by President Andrés Manuel López Obrador hinted at the state's warming attitude to the idea of private investment to help steady the country’s wobbling energy industry. In response to the very last question of the briefing, the president announced that “next week, the plan will be presented for the participation of the private sector for investment in PEMEX and CFE." Time will tell if the private sector yet has a larger role to play in PEMEX's future.

The data used in this article was sourced from:  
S&P Global, Bloomberg, El Norte, El Universal, Mexico Business News
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Peter Appleby Peter Appleby Journalist and Industry Analyst