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THE DEBT OF PEMEX, UNPAYABLE?

Credit rating agencies, worth recalling, were partly responsible for the 2007 financial crisis. Hence, their reputation has been diminished and they have even been attacked. On that occasion, they were accused of being judges and partly by positively rating investment funds that contained unpayable mortgages, subprime calls , as they benefited financially from the payments they received from banks for these ratings. It is for the foregoing that even when the rating agencies are important entities in the international financial system, they are not exempt from making mistakes and allowing themselves to be dragged by political pressures.

These rating agencies also assign ratings to the sovereign debts of the countries and their parastatals, divided into long and short-term ones. The long-term credit ratings are assigned along an alphabetical scale divided into two groups. The first is “Degrees of Investment Bonds”, ranging from AAA to BBB, where AAA is the best and BBB the lowest. The second group is “No Investment Grade” or “Junk Bonus”, and ranges from BB to D. All of these ratings have their respective intermediaries with the +/- modifiers for each category.

At the end of 2018, Pemex had a debt of more than 2,000 million pesos, derived from the placement of bonds and the acquisition of other credit instruments. It should be mentioned that 81% of these financial obligations are referenced in dollars since, thanks to the export of crude oil, PEMEX prefers to request debt in this currency.

On January 28, 2019, Fitch Rating, one of the leading credit rating agencies in the world, downgraded BBB + to BBB- Pemex’s debt, a degree close to being considered “junk bond”. This credit decrease applies approximately 80 MMD of debt. The above is due to the fact that Fitch estimates that PEMEX will have negative cash flows of between 9,000 and 14,000 million dollars between 2018 and 2019.

Fitch also warned that the programs announced by the government to support Pemex’s finances are not enough to offset the deterioration of Pemex’s credit profile. The financial difficulties, the rating agency mentioned, can interrupt the supply of fuel, which would have great social and economic consequences for the country.

Undersecretary of Finance and Public Credit, Arturo Herrera Gutiérrez, said in a press conference that the decrease in the rating does not surprise the Mexican government, given that Pemex had already seen low performance, but it does worry. On January 31, President Andrés Manuel López Obrador accused Fitch of being a hypocrite and complicit in the looting of Pemex and the country’s low growth. It affirms that, in spite of considering important the comments of these qualifying organisms, “they are not infallible judges” and it is always possible to dissent. Although this accusation by the president is imprecise, since the rating agencies do not impact on the efficiency or lack thereof in the management of the companies, it is a sign of bad reputation that these agencies have been acquiring for the aforementioned. On the other hand,the Mexican Stock Exchange suffered a loss of 0.11% as a consequence of this adverse scenario of Pemex.

With certainty, we can speak of a complicated financial environment in the short term if the downgrade in the rating is seconded by other rating agencies, a situation that to date has not taken place. Thus, interest rates could rise due to the increase in financial risks of the largest public company in Mexico and, it is worth considering, the most indebted oil company in the world, according to a recent report by Moody’s. The panorama so that Pemex can leave the adverse financial cycle is full of challenges and this generates greater pressures to the Mexican economy and could reduce the resources for government programs, especially those that are welfare.

Do you know how to deal with the oscillations in the economy due to Pemex’s finances? How can it impact the business objectives of your company? Approach Political Risks to elaborate a risk mapping and thus you can mitigate any crisis.

 

Photo by Zbynek Burival on Unsplash

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