At the beginning of July, the AMLO government’s biggest bet on energy self-sufficiency — the Dos Bocas refinery in Tabasco — began processing crude oil. But since then, things have not gone according to plan.
Mexico’s economy is in a relatively sweet spot right now, chugging along at an annual growth rate of around 3%. Granted, that’s partly thanks to all the investments flooding in from multinational corporations, including many from China, seeking to “near-shore” part of their operations to North America. The minimum wage has almost doubled in the past four years, unemployment is at a 20-year low of 2.7%, and public debt, at just over 50% of GDP, is relatively low in today’s terms. Inflation, currently at 5%, is also on its way down. In fact, Mexico is one of the only G20 economies to have had real positive interest rates throughout the past three years.
The Weak Link
But the economy has one major weak link: state-owned oil company Petróleos Méxicanos, aka Pemex. With long-term and short-term debt of $110.5 billion (equivalent to almost 10% of Mexico’s GDP) at the end of the second quarter, roughly $80 billion of which is owed to bondholders, Pemex is the world’s most indebted oil company. And it is not exactly in rude financial health, with production stagnating, profits falling 80% year on year in Q2-22, and debt servicing costs climbing.
The company has been plagued by a litany of problems, all of which took root long before President Andrés Manuel Lopéz Orbrador (aka AMLO) took office in late 2018. They include years of severe budget cuts, shrinking oil reserves, chronic mismanagement, lack of vision, lack of investment, negligence, the huge tax burdens imposed on the company in the years preceding Mexico’s energy privatisation reforms (2013-14), rampant pipeline theft (though that appears to have declined since 2020) and simple, plain white-collar corruption.
Put simply, it has been plundered from all directions, most notably from within. Its former CEO Emilio Lozoya went on the run in 2019 after being accused of serious financial irregularities during his tenure. In 2020, he was arrested in Spain and extradited back to Mexico where he is currently in jail awaiting trial on charges including involvement in the Odebrecht scandal, money laundering and influence peddling. Yet during Lozoya’s tenure, when the company was being systematically plundered from within and without, Pemex’s credit ratings remained more or less the same.
To its credit, Mexico’s current AMLO government has slowed or even partially reversed some of Pemex’s worst ailments, first by increasing investment in key areas and second by trying to tackle its widespread culture of corruption and the pipeline theft. Nonetheless, Pemex’s debt load remains dangerously bloated while its labour liabilities have risen from 1.28 trillion pesos ($76 billion) to 1.34 trillion ($80 billion). Even more important, its crude output levels continue to stagnate. With ratings agencies piling on the pressure and the cost of servicing the debt rising, the company is now in need of yet more state assistance. From Reuters:
Mexican state energy company Pemex, whose financial debt ballooned to $110.5 billion by the second quarter, said Friday that it received 64.9 billion pesos ($3.8 billion) from the government to meet its obligations and may tap bond markets this year or next.
It made the disclosure in a filing with the local stock exchange.
Chief Financial Officer Carlos Cortez told investors during an earnings call that despite “significant” government support, Pemex was evaluating whether it would tap bond markets this year or next. He gave no details on how those funds would be used.
The good news for Pemex is that, like any state-owned company, it can, if and when needed, receive assistance from the State. The AMLO government has already put together a $4 billion to help tide the company over. As mentioned before, it has quite a lot of fiscal leeway, given it has significantly lower public debt levels (54% of GDP) than most of its emerging market peers, not to mention most advanced economies. It also has $180 billion in foreign currency reserves and has been able to raise new tax revenues in recent years by simply encouraging inveterate corporate tax avoiders such as Walmart, FEMSA Coca Cola, BBVA and América Móvil, to finally settle their debts.
But the pressure is nonetheless rising from US ratings agencies…
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Nick Corbishley 