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Fitch Ratings downgrades Pemex’ credit profile to “negative” from “stable” on October 19

Reports indicate that on October 19 Fitch Ratings, considered one of the “Big Three credit rating agencies”, downgraded the status of the state-owned energy company following purported uncertainty regarding its business strategy, especially ahead of the investiture of President-elect Andrés Manuel López Obrador (AMLO) on December 1. Fitch’s decision comes days after Pemex issued ten-year bonds for 2.000 billion USD to finance investment and refinance debt. In August, the company’s bonds with maturity in 2028 suffered a setback at the market after AMLO announced he would appoint Octavio Romero Oropeza as head of the national company. Oropeza, a long-standing ally of Obrador, has allegedly no experience in the oil sector. While Pemex has a total debt surmounting USD 100.000 billion, during his campaign AMLO pledged to increase public spending to finance the company, increase production, expand existing oil facilities, and build a new refinery in Tabasco at an approximate cost of USD 8.000 billion. However, AMLO has further pledged to limit oil exports to prioritize internal consumption and to cancel fracking operations owing to environmental concerns.

While Mexico stands to benefit from the discovery of the new basins and the subsequent expansion of offshore drilling operations, the Mexican economy is unlikely to experience an immediate boost. For instance, although the Gross Domestic Product (GDP) is expected to grow 2.2% in 2018, fiscal deficit is expected to reach 2.9% in relation to the GDP. Considering pledges of incoming President Manuel López Obrador (AMLO) to heavily invest in the public sector, state expenditures are expected to increase in 2019. Although ALMO has committed to further develop the oil industry, his pledges to halt or limit crude exports to prioritize internal consumption could potentially undermine foreign investment in the energy sector. Furthermore, adverse weather conditions underscore the Gulf of Mexico remains vulnerable to production freezes caused by seasonal hurricanes and storms, as recently witnessed following the passing of Hurricane Michael between October 7-12, which paralyzed 40% of oil and 30% of natural gas production. That said, in the short-term Mexico could likely benefit from surging oil prices in the global market due to expected lower outputs from Iran. However, it is uncertain whether this trend will consolidate moving forward into 2019. The downgrade of Pemex by Fitch Ratings seemingly reflects lack of confidence in AMLO’s ability to manage the Mexican economy.

Taking into account that the national oil company has been witnessing downward outputs throughout the last decade, AMLO’s commitments cast doubt on whether Pemex will be able to meet its commitments and performance objectives. Given that AMLO is perceived to oppose foreign involvement in the energy sector, although the incoming administration will likely fulfill pledges to invest in Pemex, the company will be further dependent on public funding. Furthermore, bearing in mind that Pemex approximately contributes with 15 to 20% of the federal budget, investors are concerned AMLO’s administration could mismanage oil revenue to sustain a populist agenda, especially if the upward trend in oil prices continues past into 2019. Conversely, if the administration decides to reduce fracking operations, or reduce crude exports to satisfy domestic consumption, Pemex risks losing substantial incomes in USD and other hard currencies needed to repay debts. These factors will continue to give rise to concerns amid foreign investors, thus making it harder for Mexico to finance infrastructure projects required to boost production. Noteworthily, as southeastern parts of the country are experiencing gas shortages due to lack of infrastructure, the country imports 80% of the gas consumed domestically from the U.S. Going forward, considering the precedent of nationwide violent protests in early 2017 amid rising gasoline prices, problems in the distribution of gas or oil could spell trouble, leading to limited political turmoil and demonstrations.

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