The hundred-billion-dollar question.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Low oil prices continue to sow fear, uncertainty, and mayhem across the emerging market complex. On Wednesday, it was leaked that the IMF and World Bank would dispatch a team to oil and gas-dependent Azerbaijan to negotiate a possible $4 billion emergency loan package in what threatens to become the first of a series of global bailouts stemming from the tumbling oil price.
In Latin America’s largest economy, Brazil, the government has refused to rule out bailing out Petrobras, once the jewel of the nation’s crown but now a scandal-mired shadow of its former self, weighed down by $127 billion in debt, most of it denominated in dollars and euros.
If it is unable to sell the $15 billion in assets it has targeted by the end of this year – a big IF given how the prices of oil and gas assets have deteriorated – Petrobras might need some serious help from Brazil’s Treasury. According to Citi, that help could reach $21 billion – just enough to plug the company’s cash hole and fix the capital structure on a sustainable basis. That’s a big payment for a government that has on its hands a widening budget gap, a 4% economic contraction, and double-digit inflation.
Brazil is not the only Latin American economy entertaining a bailout of its national oil company. The government of Mexico just announced that it quietly injected 50 billion pesos ($2.7 billion) of public funds into the coffers of state-owned oil company Pemex.
The timing of the announcement could not have been more convenient, coming just a day before Pemex was due to launch a $5-billion bond issue, which was predictably gobbled up by investors. In all likelihood, it will be the first installment of what could end up being a very large, very costly bailout of Mexico’s oil sector. Pemex is the world’s second largest non-publicly listed company, with $416 billion in assets. But things are looking decidedly grim.
The company reported a record $9.9 billion loss in the third quarter of 2015 alone, and its towering debt mountain is expected to top $100 billion this year. Standard & Poor’s has just downgraded Pemex’s debt one notch deeper into junk to BB. Its reasoning: despite Pemex’s efforts to reduce costs and “reconsider” some of its investments, these measures will not be enough to offset the pressure from weaker oil prices.
In this new global reality of dirt cheap oil and increasingly expensive US dollar-denominated corporate debt, Pemex faces a maelstrom of ugly pressures: a plunging domestic currency, a mountain of dollar-denominated debt, declining output, now at its lowest point since 1990, and rising dividends to the state.
For the last 70-odd years, Pemex has almost single-handedly bankrolled Mexico’s public spending. The money it has generated has helped fund roads, subway systems, bridges, schools, universities, Olympic stadiums, fire fighters and police forces, hospitals and airports. It has created — and maintained — millions of jobs, paid (admittedly very meager) state benefits, and filled offshore bank accounts for many of its executives, contractors and well-connected politicians; and during the Tequila Crisis hangover years in the mid-1990s, it helped bail out a fair number of Mexican (and now largely foreign-owned) banks and Wall Street investment firms.
In 2008, Pemex provided 4.4 of every 10 pesos of public revenue. By 2015 that figure had more than halved, to 2 out of every 10 pesos, partly due to crumbling oil prices but also because of the company’s newfound status as a semi-privatized entity having to fight for scraps in a highly competitive, buyer’s market.
For Mexico, the hundred-billion-dollar question, as WOLF STREET pointedly asked in July last year, is whether or not it is ready for life without its sugar daddy. More to the point, how will its government, which has for decades used a state-owned company as a finance vehicle to fund 30% of its budget, begin bailing out that same company with funds that no longer exist?
By hiking direct and indirect taxes across the board? This has already been tried, and while it may have increased government revenues somewhat, it will almost certainly not be enough to plug the growing fiscal gap, especially with poverty sharply on the rise and the country’s super rich who own almost half of the nation’s entire wealth avoiding taxes with embarrassing ease.
What about government spending cutbacks, mass redundancies at Pemex — which began this week with an announcement of over 10,000 layoffs, with more expected — and the divestment of some of its prized assets, at a time of collapsing oil prices? Will they make up the difference? It’s unlikely. More to the point, as Pemex continues to tighten its belt, many of its beneficiaries will start dropping like flies, with brutal knock-on effects for local economies. Some heavily oil-dependent regions like Tabasco are already feeling the pinch.
Unless global oil prices stage a strong, sustained recovery soon, Pemex’s growing financial pains could end up triggering surging unemployment and a full-blown fiscal crisis. Mexico’s government already runs a persistent 2% current account deficit and a 3.2% budget deficit. Doesn’t sound so bad, you say, compared to the public deficits in other countries these days. The problem is that it doesn’t take into account Pemex’s massive and mounting losses. By Don Quijones, Raging Bull-Shit.
These sorts of bailouts are just too juicy to stop. Read… Who Gets to Pay for the Italian Banking Crisis? (Well, the missing capital buffer).