Pemex support reaches $81 billion, risk for Mexico’s rating: Fitch

Mexico City The current administration has provided support to Petróleos Mexicanos (Pemex) for 81.8 billion dollars, which has helped the oil company to pay its debt immediately. However, the company’s finances represent a pressure for the country’s sovereign rating, and this could be lowered if the debt increases as a proportion of the gross domestic product (GDP), due to the lack of fiscal measures that compensate for the aid to the state company, warned Saul del Real, director of Latin American Sovereigns at Fitch Ratings.

“Pemex will continue to be a burden on the sovereign’s fiscal position, but we do not expect any change in the government’s willingness to support it financially,” the analyst commented. On this point, already assuming that aid to the company will continue in the next administration, Del Real commented that Claudia Sheinbaum, Mexico’s virtual president-elect, “will fall short in providing an absolute guarantee for Pemex’s debt or a capital injection that improves the company’s financial profile.”

Pemex, which is one of the Latin American oil companies with the lowest rating by Fitch, is generating practically half of the cash flow it needs to cover debt and operate, reported Adriana Eraso, director of Latin American Corporates. Of the 12 billion dollars that, according to estimates by the risk rating agency, the oil company would be generating, up to 9 billion would be absorbed by interest payments while investment costs average 10 billion dollars, the analyst explained in a virtual seminar.

“Everything that the company is generating and that should go to capital expenditure, to exploitation, which is the business that is really making money for the company, is not going in that direction, it is going to pay interest,” emphasized the analyst, who recalled Pemex’s rating of CCC-, which makes its debt highly speculative in the market. This despite the fact that both Del Real and Eraso reiterated that a default by the Mexican company is not expected, due to the support it has from the federal government.

According to Fitch’s GRE assessment of corporations that have a sufficiently close link with a government, such as a parent company and subsidiary, the recurring support provided by the federal government is not being counted for Pemex because “it is not significant enough (…) to see a change in operations”; Petroperu is in the same situation.

“The reason is that, although we have seen some support in the form of financing, capital injections or guarantees for banks and some types of loans, this particular support comes too late, just to avoid a default event. However, it is not significant enough for us in order to see a change in operations that is making these companies weaker,” Eraso justified.

Saul Del Real explained that Pemex’s weight has been declining as part of the Mexican economy, but due to its “strategic importance,” since 2019 the State has helped it every year with about one percent of GDP, which has affected fiscal accounts. According to Fitch’s forecasts, the fiscal deficit in Mexico will reach 5.4 percent of GDP in 2024 – above the 3.2 percent average for other economies with a BBB rating.

However, Del Real acknowledged that the oil company’s debt has fallen as a proportion of GDP, closing last year at 5.9 percent, well below the 10 percent it reached in 2020, when the Mexican economy also collapsed due to the coronavirus pandemic. “We are seeing a reduction in the size of the responsibility for containment that this represents for Mexico (…) state support for Mexico has become recurrent,” the analyst added.