Mexico could face its worst fiscal and financial crisis in decades
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The fear of a Donald Trump victory has reached fever pitch in Mexico this weekend, as the nation’s economists pontificate on the potentially devastating effects such an outcome would have on both the country’s currency and its broader economy. In recent weeks, Mexican financial authorities even ordered local banks to stress-test the potential impact on their balance sheets of Trump winning the U.S. presidential election.
They have good reason to be concerned. If Trump wins the election and actually honors some of his pledges, particularly those regarding trade, the immediate fallout for Mexico is likely to be brutal. After all, a staggering 80% of Mexico’s exports go to the U.S. That’s similar to the level of dependence that the Cuban economy had on its trade with the Soviet Union at the height of the Cold War.
There’s also the threat a Trump victory could pose to the remittances sent by Mexican immigrants from the U.S., which amount to nearly $25 billion each year, roughly 2% of the Mexican gross domestic product, according to the World Bank.
And that’s not to mention the risk posed to the Mexican peso, which for years has been liberally used and abused by traders as a general proxy for global risks. In recent months it has become the number-one hedge against a Trump victory. As election fever – and fear – have risen in the U.S., the peso has experienced one of its most volatile periods in decades, prompting the Mexican Secretary of Finance José Antonio Meade Kuribreña to concede that the pressures it faces are so huge that there would be no point in the government or the Bank of Mexico even trying to intervene to bolster its value.
“It would be like sprinkling drops of water in the sea,” he said
If the currency were to plummet in the event of a Trump victory, it would be particularly bad news for local companies with high levels of US-denominated debt, of which there are legion.
While the effects of a Trump victory on Mexico are likely to be huge, there are plenty of other reasons the country’s economy and currency are under growing pressure, including a consumer slowdown in the U.S. In fact, all the hullabaloo about a prospective Trump presidency provides the Mexican government with a perfect smokescreen for many of the country’s deep-seated homegrown problems, chief among them the ongoing decline and fall of its debt-burdened, money-losing, fast-shrinking, state-owned oil company Pemex.
In the last three years alone, Mexico’s oil revenues have shrunk from 6% of GDP to 2.5%, on the back of sharp declines in both international oil prices and domestic production. The export figures are just as ugly. In 2011, when the price of Brent crude averaged over $100, Pemex’s export revenues hit a historic peak of $49 billion, a monthly average of $4.11 billion. In the first quarter of 2016 the monthly average was just $893 million. That’s a plunge of 78%.
And the losses keep piling up. Last week the company reported a €10 billion shortfall, the biggest quarterly loss in company history. Pemex has now reported losses in 12 consecutive quarters dating back to 2012. Worse still, their respective size keeps growing. The company’s losses through the first three-quarters of 2016 outpace total losses for the last three years combined.
Just after reporting its latest quarterly losses, Pemex unveiled its latest five-year business plan for 2017-2021, as the company put it, “based on conservative scenarios and realistic parameters.” For example, Pemex argues that it has “upgradeable but stable finances”; it will “reach financial equilibrium by 2019, and eliminate losses in the National Refining System in 2021.”
This lightning-fast turnaround will apparently hinge on two key factors: a massive cost-cutting program, with thousands of redundancies that already began months ago; and ambitious joint ventures with private sector operators, the first of their kind in eight decades. “The challenge is to turn around financial and operational losses through alliances, ” said Pemex’s CEO José Antonio González Anaya.
It’s a mighty big task, particularly with global oil majors cutting back their investments across the board, especially in deep-sea exploration, a key priority in Pemex’s latest five-year plan.
Pemex’s recent track record of fulfilling the goals and objectives set out in its five-year plans is hardly confidence-inspiring, as the Mexican financial daily El Financiero points out. In the last one (2012-16), the company failed to fulfill any of its key objectives for 2016. Crude oil production was supposed to rise to 2.82 million barrels per day; instead it slumped to 2.19 MMbd. Natural gas production was expected to average 5.68 million cubic feet per day; instead it averaged 6.06 MMcfd. Crude exports in 2016 came in 9% lower than predicted while the gap between Pemex’s forecast of Mexico’s dependence on imports in 2016 and its actual level of dependence — 36% versus 63% — is plain embarrassing.
If the new five-year plan is anything like the old five-year plan, things are going to get a lot uglier for the world’s ninth largest oil producer, and by extension Mexico’s economy. Pemex’s debt is expected to pass the $100-billion threshold by the end of the year. That doesn’t include the $72 billion of labor and pension liabilities it has on the tab. By extension, Mexican taxpayers are on the hook.
The credit ratings agency Moody’s has estimated that the firm will need an additional bailout of €17-20 billion just to get through the next 12 months, much of which may need to be provided by the government, which is already in the early throes of a deepening fiscal crisis, just as the economy begins to grind down.
And now a firm that for over 70 years was a huge national asset, providing as much as one-third of total government revenues, has become a huge national liability. For Pemex, the degeneration has already gone too far. Many argue that it was all by design. Successive governments in Mexico have sought to weaken the company, first by overtaxing it and then by starving it of investment, until the only option left is to completely privatize the company and sell off its most valuable assets.
The challenge will be doing so in something approaching an orderly manner, when the company owes more than $100 billion to national banks and international creditors. If things get disorderly, Mexico could end up facing its biggest fiscal and financial crisis in decades. But while Trump’s exploits hog the headlines and front pages of Mexico’s media, the accelerating decline and fall of the country’s erstwhile sugar daddy — and what it could mean for the nation — barely warrants a mention apparently. By Don Quijones, Raging Bull-Shit.
The big-oil bailout by taxpayers already under way. Read… Pemex Collapse Threatens Biggest Banks in Mexico