Debt Spiral Grips Both, Pemex and Mexico

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Nightmare is coming true.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

It was just a matter of time before Pemex, Mexico’s chronically indebted state-owned oil giant, began dragging down the national economy it had almost single handedly sustained for over 75 years.

The company has been bleeding losses for 13 straight quarters. As of December 31, it had $114.3 billion in assets and $180.6 billion in liabilities, a good chunk of it denominated in dollars, leaving a gaping hole of $66.3 billion (negative equity), after having been strip-mined over the decades by its owner, the government. And given these losses and the equity hole, new credit is becoming harder to come by.

Now it seems that Mexico’s worst nightmare is beginning to come true, thanks in no small part to Moody’s Investors Service. The credit rating agency last week downgraded Pemex’s credit rating from Baa1 to Baa3. In November Pemex had a perfectly respectable credit rating of Aa3; now, just six months later, it’s perilously perched just one notch above junk.

“Moody’s believes that Pemex’s credit metrics will worsen as oil prices remain low, production continues to drop, taxes remain high, and the company must adjust down capital spending to meet its budgetary targets,” the report said.

That was for Pemex. Now Moody’s also changed the outlook for Mexico’s sovereign rating from stable to negative.

This, coupled with the mounting risk of a credit downgrade, heaps further pressure on a government already struggling to shore up its balance sheet. Hardly helping matters is the fact that oil prices, a key source of government revenues, continue to languish at low levels, while the prospect of a massive bailout of Pemex looms ever larger. As if that were not enough, Mexico’s manufacturing industry is beginning to feel a very sharp pinch from weakening U.S. consumer demand.

“Moody’s is signaling that if the government and Pemex don’t get serious about a fiscal consolidation [i.e. sharp spending cuts], then the rating agency would lower the rating,” said Benito Berber, senior economist for Latin America at Nomura Holdings Inc. in New York. “If authorities deliver on the spending cuts and carry out additional measures, the downgrade will likely be prevented.”

This presumably means higher taxes for the country’s already cash-strapped middle classes, mass layoffs at Pemex, and the privatization of large chunks of the oil giant, a goal the government has pursued for years.

Mexico is not the only country to have found itself on the sharp end of Moody’s opprobrium this year. So far in 2016 the rating agency has downgraded the credit rating of 22 countries, many of which depend on oil revenues. That’s more than the other two main credit rating agencies — Standard & Poor’s (13) and Fitch (7) — combined. Indeed, throughout the whole of last year Moody’s downgraded just 13 sovereigns, while upgrading 19. This year it has upgraded only one, which hardly bodes well for the global economy.

In Mexico, as in many other countries that have recently suffered a downgrade or deterioration in their outlook, financing conditions are likely to get worse in the coming months, making it even harder to achieve Moody’s stated objectives. This Monday the rating agency cranked up the pressure by adding a whole bunch of other Mexican institutions and companies to its negative watch list, including the country’s eight biggest banks — most of them are foreign owned (BBVA Bancomer [Spain], HSBC [UK], Santander [Spain], Scotiabank [Canada], Banco Azteca [Mexico], Banamex [Citigroup, US], Banorte (Mexico), Banco Interacciones S.A [Mexico].

The rating agency cited two main reasons for this decision:

  1. The gathering headwinds facing the macro economy, including lower domestic growth, which could hurt the banks’ balance sheets as well as limit their ability to issue debt in foreign currencies, rising global volatility and the slowdown of the U.S. economy;
  2. The fact that the banks’ credit portfolios have been growing at twice the rate of nominal GDP. They are also acutely exposed to riskier segments, such as consumption and small businesses.

Also included on Moody’s negative watch list are 22 Mexican states, 42 municipalities, eight government institutions, four heavily indebted mega-corporations (Arca Continental, Coca-Cola Femsa, and the Carlos Slim-owned telecommunications duopoly America Móvil and Telmex), and four national development banks, three of which recently extended Pemex a 15-billion peso ($840 million) lifeline to help the firm pay some of its smaller suppliers — that’s in how much trouble Pemex is!

As we warned at the time [read… Big-Oil Bailout Begins…], rather than restoring investor confidence in Pemex, the loan operation has merely served to reinforce investors’ fears that lending to the debt-burdened oil giant could have serious consequences. When push comes to shove, Pemex can count on government assistance, at least for the short term, but that does not come without costs and risks, chief among them the mass transfer of debt from its crumbling balances onto the sovereign, and ultimately taxpayers.

With investor fears rising about the health of Mexico’s wider economy and the broadest measure of debt as a percentage of gross domestic product swelling to 46% last year, its highest level since 1995 during the “Tequila Crisis,” much of it in foreign currency, the Peña Nieto government doesn’t have much room for maneuver left. All the while, Pemex’s debt spiral accelerates. By Don Quijones, Raging Bull-Shit

Mexico, as troubled as it is, is still in better shape than many of the Emerging Markets; they are face a Financial Crisis. Read…  “Are We Prepared to Impose Temporary Debt Standstills?”

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  19 comments for “Debt Spiral Grips Both, Pemex and Mexico

  1. Chicken
    April 5, 2016 at 8:21 pm

    Seems we may need more than just a simple wall?

    • TheDona
      April 5, 2016 at 9:46 pm

      LOL Great comment.

  2. Chip Javert
    April 5, 2016 at 9:19 pm

    Thank god: for once, Citi Corp and BankOfAmerica aren’t front and center with billions of failing loans to a corrupt country.

    On second thought, maybe those banks’ IT systems are so bad they just haven’t realized it yet…

    • Dave
      April 6, 2016 at 5:38 am

      All the countries are corrupt. Yes even the U.S. It’s just a matter of what degree of corruption and how much we are aware of it.

  3. Chip Javert
    April 5, 2016 at 9:29 pm

    Oops! I spoke too soon:

    Citi Corp owns Banamex (bought it for US$12.5B in 2001). I guess the good news is its taken them more than 15 years to ruin the investment.

    Ugly. Just ugly.

  4. nick kelly
    April 5, 2016 at 11:19 pm

    Moody’s thinks the government and Pemex will ‘have to cut spending’

    Oh, the austerity!

  5. Islander
    April 6, 2016 at 1:47 am

    Stupid austerity, the only one to profit from Mexico “reigning in spending” are vulture like foreign financiers collecting on usurious, corrupt loans they forced onto the country. Paying for it are children who will now go without adequate schooling, the national infrastructure etc.

    We’ve been through cycles like this before, and they usually end in revolt. Because in the end it doesn’t matter how legal and notarized the documents are that shackle you to a life of poverty and depredation. But that time it’s not now, to bad really.

  6. frederick
    April 6, 2016 at 1:54 am

    Chip İn Raleigh NC they call them Bank of Amexico because they seem to have more Mexican customers than American looks to me the FED will eventually need to bail Pemex out to “save” the economy

    April 6, 2016 at 10:08 am

    Watch how the Mexican government is really going to push their “people” to illegally enter Gringo land. Let the stupid Gringo take care of them.

    In addition, the Mexican rulers will extend Peso loans to all those corporations in need. Here comes Mexican inflation….another reason for the peasants to illegally invade America.

    It is going to get worse. Far worse. Are you ready?

  8. unit472
    April 6, 2016 at 11:08 am

    Crossing the border does not mean you will find work when you do. While Trump’s ‘Wall’ may or may not be built the idea of a ‘Tobin Tax on foreign remittances couple with a system similar to that used for Cuba seems likely to corral drug money being wired back to Mexico and to ensure that those making the remittances are legally here and have paid taxes.

    • brad coons
      April 14, 2016 at 3:51 pm

      Preventing “remittances” would get rid of many things, most of them good things.

  9. frederick
    April 6, 2016 at 11:09 am

    @CENTURİON nope not ready whatesoever but it really wont effect me as İ have already expatriated Now İ make the natives crazy instead of the other way around Trump 2016

  10. Juan Pablo Ramos
    April 6, 2016 at 7:45 pm

    When you live in Mexico… You don’t have to wait to the “Dollar Collapse”, as Mexican Government is doing whatever is necessary to crash it’s currency.

  11. Carlos
    April 6, 2016 at 9:05 pm

    Pemex charges Mexicans outrageous prices at the pumps, oil is cheap, and pockets all that money. But Pemex is also supposed to be the oil industry nationalized (ie. belongs to the people). The only excuse I’ve heard for the outrage is that the profits go to the govt in lieu of taxes to help fund things. But that is not even true they are just in debt! Pemex is a disgrace…

  12. nhz
    April 7, 2016 at 7:27 am

    “With investor fears rising about the health of Mexico’s wider economy and the broadest measure of debt as a percentage of gross domestic product swelling to 46% last year,”

    Wow, 46%! The Netherlands has a debt load (public + private) of something like 350% of GDP and they still have (almost) top ratings from Moody’s. At least until today, they may reconsider the rating now that the Dutch have rejected the pact with one of the US favorite client states in Europe ;-(

    The US ratings agencies are nothing more than shills for Washington’s imperial policies.

    • April 7, 2016 at 7:55 am

      A good part of Mexico’s debt is denominated in dollars and euros (including the 100-year euro bond they issued early last year). These foreign currency bonds become explosive when the peso sinks against those currencies (which it has been doing), because it takes more pesos to service the same debt.

      And those foreign currency bonds cannot be inflated away – the classic measure of wiping out investors. So if Mexico runs into a bout of 10% inflation for a few years, it will slash the burden of its peso debt, but it will make it only more difficult to deal with its foreign currency debt.

      Why do countries like Mexico issue foreign currency bonds? Because they can get lower rates. The real question is why investors buy these things?

      • nhz
        April 7, 2016 at 12:16 pm

        Good point, but are these Mexican bonds really a worse deal for investors than buying e.g. Spanish euro bonds at nearly 0%? They all require faith that the current central bank orchestrated Ponzi can continue for many more years.

        • nick kelly
          April 7, 2016 at 1:47 pm

          I also doubt that Mexico could sell peso bonds- except at an astronomical rate, and very likely not at all long term.

        • April 7, 2016 at 3:02 pm

          Spanish euro bonds are essentially guaranteed by the ECB’s printing press. Mexico’s dollar or euro bonds are on their own.

          That said, your point is well taken: I don’t think Spanish debt at these yields is anything I’d touch with a ten-foot pole.

Comments are closed.