MEXICO CITY: Mexico will inject $3.9 billion into ailing state oil company Pemex, officials said on Friday, promising to strengthen its finances and prevent a further credit downgrade, although investors saw the plan as only a short-term fix.
Falling oil output, corruption and high labor costs have contributed to the decline of the company that was once a symbol of national pride. It now holds roughly $106bn in financial debt, the highest of any national oil company in Latin America.
Fitch and Moody’s rate its credit one notch above junk.
Fitch said on Friday that the plan, which includes additional tax cuts, more government spending on the company and debt refinancing, would likely not be enough to prevent “continued deterioration” in Pemex’s credit quality.
The agency cited an ongoing “significant level of underinvestment” for Pemex.
Pemex will receive $1.8bn in pension liability monetisation as part of the new plan and finances will be helped by a corruption clampdown, officials said in a presentation that was short on details. They vowed the Mexican government will not take on new debt in 2019.
Pemex must make more than $27bn in debt payments over the next three years.
Investors said they had expected stronger measures, and while encouraged by government vows of support, they said the plan offered only short-term relief.
“The measures are not a long term fix and won’t be enough to stabilise oil output,” said Edward Glossop, Latin America economist at Capital Economics.
If oil prices and output decline further, he estimated yields on Pemex bonds could rise by around 1 per cent this year. The price fell after the announcement for Pemex’s most heavily traded bond on Friday, maturing in 2047, as its yield rose 14 basis points, according to MarketAxess data.
The price on a Pemex bond maturing in 2024 also dropped, with its yield up 32 basis points, reflecting bondholder skepticism of the plan.
What’s more, the measures will do little to shore up Pemex’s standing with the ratings agencies, said Julie Murphy, a Latin America analyst at JP Morgan. “We are extremely disappointed with the measures,” she said.
The Mexican peso weakened by more than half a percent against the dollar after the announcement, before recovering later on Friday.
DO WHAT IT TAKES: Over time, Pemex taxes will go down and the capital injection will allow debt refinancing over the year, Finance Minister Carlos Urzua told a press conference.
If Pemex requires more help, the government will do whatever it takes to keep Pemex’s finances healthy, he added.
Published in Dawn, February 17th, 2019