Sovereign Analysis /

Mexico: Don’t get too comfortable, especially with PEMEX & CFELEC

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    15 January 2019
    Published byTellimer Research
    • In this report, we recommend reducing positions on Mexican sovereign, quasi-sovereign, and corporate credits and shifting towards Brazil, as it appears poised to enter into a period of strong economic recovery based on a series of market-friendly policies we expect to be enacted by the Bolsonaro administration.
    • We also recommend shifting from Pemex to other regional oil and gas credits with more upside potential such as Petrobras (mainly) but also YPF and even Ecopetrol

    Most investors we talk to are long Mexico in general, and Pemex in particular (and CFELEC to a lesser extent). Up to now, there have been good reasons for that: a relatively stable economy, good credit metrics, low inflation and unemployment, decent GDP growth hovering at c2.0% per year, and a currency that after a shot-lived hiccup resulting from the MEXCAT blunder, returned to more normal levels at cMXN20 per US dollar.

    But we think there is potential for a deterioration in the country’s fundamentals, driven by the policies and priorities of the López Obrador (AMLO) administration. So far, we have seen: 1) the president cancel the New Mexico City Airport (NAICM); 2) a botched and then reviewed and accepted offer for a third of the outstanding MECAT family of bonds; and most recently 3) a budget that prioritises social spending over productive activities with a high emphasis on handouts (such as increasing the amounts paid to senior citizens, scholarships for low-income university students, and payments to youngsters that neither study nor work, to enter into apprenticeships in public and private entities), all funded with federal funds.

    In addition, the main infrastructure projects that this administration wants to develop are the “Mayan Train”, the Isthmus railway, the construction of a new refinery in Dos Bocas, Tabasco (AMLO’s native state), and the construction and/or refurbishment of airport runways and terminals in Santa Lucía, Toluca, as well as the existing Benito Juárez airport in Mexico City. The government has stated that it intends to fund these projects through public/private investments and partnerships, but as yet there are no executive projects, permits, authorisations, or budgets for any of the projects, and no calendar or schedule for works to start, let alone finish.

    If the above spending issues were not enough to create at least some sense of concern about the viability of the 2019 budget as approved by Congress, we continue to see cracks in credits such as Pemex (please see our report Pemex: The AMLO effect, 19 November 2019) with more recent issues such as the government’s approach to the hydrocarbons theft problem – which the AMLO administration has handled by shutting down some pipelines and using trucks to transport fuel to the service stations – creating shortages, mainly in those states where his party, MORENA, does not govern. These examples demonstrate, in our view, that many of this government’s decisions are improvised and undertaken without a pragmatic cost-benefit analysis. We see this as a sign that the governing learning curve is proving to be steeper for this administration than most of the Mexican bulls thought it would be.