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Mexico

Mexico and Pemex risk further downgrades

  • We think Mexico and Pemex seem likely to suffer further rating downgrades

  • Moody’s expects the Mexican economy to weaken further this year and that Pemex needs additional government support

  • We believe Pemex and the government do not comprehend the clear flaws in their strategy

Mexico and Pemex risk further downgrades
Rafael Elias
Rafael Elias

Director, Latin America Credit

Tellimer Research
18 June 2019
Published by

In the absence of a revised strategy, we think Mexico and Pemex seem likely to suffer further rating downgrades: 

  1. Last week, Pemex announced it would take back exploration and production blocks earmarked for auction in October – Mexico’s National Hydrocarbons Commission has now cancelled the auction. This represents another roll-back of the energy reform approved under the previous administration.
  2. In addition (or, perhaps, as a result), Moody’s said yesterday that it expects the Mexican economy to weaken further this year, likely forcing additional spending cuts from the government to enable it to meet the primary fiscal surplus in this year's federal budget. The rating agency also pointed out that Pemex appears to need additional government support (further weighing on public finances) to fund its infrastructure projects, to reach its “ambitious production targets” and, “potentially, for debt maturities”.

Our view is that most specialists believe Pemex needs a radical re-think, specifically cancelling the Dos Bocas refinery and concentrating expenditure on exploration and production activities; however, the government and the state oil firm appear to have doubled down on their failing strategy by withdrawing from the auction.

We believe Pemex and the government do not comprehend the clear flaws in their strategy to improve the company’s finances and operations. We seem to be on path towards more rating downgrades, and perhaps earlier than most anticipate. Without major strategic changes, we expect Moody’s to downgrade the sovereign and Pemex within the next three months, rather than the next six-to-nine months, which was our previous forecast.

We maintain our Hold recommendation on Pemex's bonds for technical reasons, since we continue to expect many holders of the company's debt to rely on what we see as unavoidable government support, keeping bond prices fairly stable. 

However, we believe that the company’s fundamentals do not support current prices and yields. In our opinion, we will see massive forced selling as the Moody’s downgrade becomes imminent and the company faces losing its IG rating from a second of the three main agencies. Only S&P would remain after that.