Despite what Everyone Thinks, Biggest Threat to Mexico’s Economy isn’t Trump but Pemex

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



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  22 comments for “Despite what Everyone Thinks, Biggest Threat to Mexico’s Economy isn’t Trump but Pemex

  1. Tom Kauser says:

    Trump tells all what they want to hear and not want he will do!
    If elected he should cutback on the armoured cars and take a hands off policy maybe not move into the white house and live in his hotel ( like the pope does? ) and charge the American people for the room?

    • MC says:

      Yet XOM is still trading at over $80 and their freshly issued 30-years bonds carry a measly 4.114% coupon.

      Yet there’s something very intriguing. Exxon has long held unto a very conservative capital structure: 90% equity and 10% debt. Starting in 2013 the capital structure started to change and it’s now 80% equity and 20% debt. Even more intriguing, this debt is worth $44.5 billion and bar $3.5 billion maturing between 2045 and 2046, it will come due between 2018 and 2026, with a peak around 2019 and another around 2024. Which is around the date peak oil demand is supposed to hit.

      You may want to hold onto your hat until there.

      • DV says:

        I do not buy this peak oil demand story. You just add another billion to the middle class (in India, Bangladesh, Vietnam, China, Indonesia and a host of other populous countries) and the demand for oil will hit through the skies. But even at the present modest demand growth rate the peak oil supply (at under 110 bpd) is likely to happen first.

  2. anthony hall says:

    the problem with Mexico is the War on Drugs.Which is unwinnable because the Cartels Corruption reaches right up to Nieto. The Cartels are supplying an insatiable demand for Cocaine, Amphetamines and Marijuana from the United States. It`s a 2 Way Traffic; Drugs go North and the Latest,State of the Art US Weaponry go South. The CIA and ATF were heavily involved supplying Guns to the Cartels.The Sinaloa Cartel helped the Federal Reserve save Wall Street in 2008. Mexico like Afghanistan are Narco States serving the United States.

    • walter map says:

      “the problem with Mexico is the War on Drugs.Which is unwinnable because the Cartels Corruption reaches right up to Nieto”

      Also because U.S. banks are doing a brisk trade laundering money for them, and banksters play the levers of power like a piano. QE seems to have had some undesirable side effects.

  3. Ptb says:

    Trump talks of the “wall” but I was watching a CSPAN discussion on illegal immigration from Mexico about a month ago. All three panelist, who are immigration researchers , agreed that since about 2012 the illegal immigration has pretty much stopped. Better internal employment and more hostility/lack of employment in the US seemed to be the driving factors. Retracting NAFTA deals could change this.

    • Raymond Rogers says:

      If you believe that, I have a bridge to sell you. The surge has not stopped, it has been handled more efficiently and out of sight of the average person. Added to this is a surge of Haitians who were employed for the Rio Olympics, and now do not have jobs. They are in stash houses in Mexico, and are brought to the Port of Entrys in various locations a dozen at a time. This is done as to process these people into the interior efficiently as to not overload the system.
      This of course does not replace the influx of a massive amount of people from Central America. This is still a problem.

      There are ingenious numbers regarding illegal immigration. Rules that dictate the counting of known crossings often are further from the truth than you can imagine. This does not even speak of the increased competancy of human smuggling brought about by the Border Wars TV series that gave the cartels and illegal aliens insight in how the US operates. The growing sophistication came about noticibly in 2012. There was about a two year lag period from when the series began.

      • chris Hauser says:

        gee, you think this hasn’t been going on for a 100 years?

        they send people and loads to purposely get caught, it’s part of the show.

        ah, never mind.

      • Adam Eran says:

        You’re right, of course.

        What’s missing from these accounts? U.S. responsibility.

        That’s the U.S. making such migration necessary through economic and military attacks. Between 1798 and 1994, the U.S. was responsible for 41 changes of government south of its borders. Gosh, I wonder why so many refugees come to Gringolandia?

        Reagan famously asked the Mexican president to endorse his notion that Nicaragua was a threat to the U.S., as, by hook or by crook (i.e. Iran/Contra), he supported the proxy war of Contras against the elected lefty Sandinistas. (Nicaragua and Haiti are the two poorest nations in the hemisphere.) The Mexican president replied he would be happy to go along with his friend Ronny if there was any way he could do so without being laughed out of office.

        Meanwhile, NAFTA shipped a bunch of subsidized Iowa corn down south, putting lots of Mexican subsistence farmers out of business. Sure, corn is only arguably the most important food crop in the world and those little Mexican farmers were keeping the diversity in the corn genome alive…but they weren’t making any money for Monsanto! Pullleeese!

        Finally, NAFTA–such a good idea that the U.S. had to come up with an emergency $20 billion to bail out our banks in Mexico–had an impact on Mexican real incomes. Real Mexican median income declined 34%–really saying something in a country where half the population gets by on less than $4 a day.

        The most similar decline in U.S. incomes occurred in the Great Depression (GNP decline: 34%). But that prompted no great migration…oh wait! Those Okies!

        The Mexican most responsible for this NAFTA fiasco, Harvard-educated Carlos Salinas Gotari was so unpopular he spent the first fiew years of his retirement in Ireland. I’m guessing assassination was a real possibility. The population certainly hated him.

    • walter map says:

      ‘Trump talks of the “wall”’

      Trump himself has imported illegal aliens, directly and indirectly. So far he hasn’t boasted about it in a standard rambling campaign speech, not that such things detract from the ascendancy of a cult leader.

  4. mynamett says:

    The same thing will happen to Canada if the price of oil stay low. Canadian currency seems ready to crash lower. We have been told by our finance minister that full time job are a thing of the past and from now on part job is the new norm. Canada is turning into Venezuela ?

  5. James Murray says:

    I live in Central Mexico and have for almost a decade. The trade between Mexico and the US is huge. No one on either side is going to do anything to harm that. I know a lot of Mexicans that went to the US to make money and have returned when the jobs dried up in 2008. They don’t want to go back to the US. Mexico is growing unbelievably.
    I live about 40 miles south of Guadalajara. 10 years ago, you could drive it in 45 minutes easily, now it takes 90 minutes. New cars, new buildings etc are everywhere. New manufacturing plants are everywhere, so are high rise condos. Places that were pastures 10 years ago are now covered with buildings.
    10 years ago, if PEMEX had shut down, it would have been a horrible blow for Mexico. It would hurt today but not be a fatal blow.

    • Petunia says:

      I’m glad you are writing about all the money going south into Mexico. It is all not just from trade. I lived in south Florida for many years and know how much money was regularly sent back there by illegals working in FL. I would see them lined up in the supermarket wiring money back home, $1000 was usually the smallest amount. The morons here that think those people are paying taxes are in la la land.

    • Lee says:

      James,

      I’m guessing that you live around Lake Chapala or in that area………

      Is the Tlaquepaque/Lake Chapala area still full of “American refugees”?

      How about the Lake? Has it gotten better or worse since you’ve been there?

    • Ptb says:

      I live southern AZ and my observations match the data given about illegals entering this area. No one sees it anymore and I don’t see them looking for work anywhere here as well. So unless someone is sneaking them to some far off place , the experts research supports my own experience

  6. Edward E says:

    Mexican President Enrique Peña Nieto should just read his book and say to Trump, hey buddy, let’s make a deal. Mexico needs a wall along their southernmost border with Central America, just work out a swap, Mexico will pay for your wall if you’ll pay for ours and reveal your tax returns. Help us out here Mexico.

    Since I’m on the subject of Latin America, here’s a little of what it was like to grow up in Arkansas, if you were a little too close. My mom said to Bubba Clinton, right to his face, you’ll never make it in politics. Little did she know he was practically raised by mob families in Hot Springs. Where I got into trouble was digging into the dirt of beasts of Bentonville and companies involved with this. This has much of it all put together.

    Air Cocaine: the Wild, True Story of Drug-Running, Arms Smuggling and Contras at a Backwoods Airstrip in the Clintons’ Arkansas

    http://www.counterpunch.org/2016/11/04/air-cocaine-the-wild-true-story-of-drug-running-arms-smuggling-and-contras-at-a-small-airstrip-in-clintons-arkansas/

    At least I lived through it. One leg shorter than the other, sucks, but what can you do.

  7. So what ?

    America’s government fails spectacularly at almost all government initiatives. So why should Mexican be any different ? Well, at least America did get ecology-religion when I was a child and nicely cleaned up many lakes, rivers, ponds, streams, swamps, ocean harbors and the air. Mostly. In contrast, undertaking to breathe in Mexico City is a risk to one’s life. Perhaps as bad as Chinese urban areas.

    Again I say, who cares ? Mexican authorities are incompetent :

    See the Cantarell Field :

    http://www.resilience.org/stories/2004-08-18/cantarell-second-largest-oil-field-world-dying

    http://www.mydigitalpublication.com/article/Cantarell%3A+The+Rise+And+Decline+Of+An+Oilfield+Supergiant/1896437/0/article.html

    http://energyskeptic.com/2014/2nd-largest-oil-field-in-the-world-mexics-cantarelle-declining-rapidly/

    What I have read about the field is that Pemex pumped the field hard, and used different technologies to pump more oil, and faster – – thus damaging the field. Perhaps irreparably.

    The Saudis are masters at pumping their fields effectively to maintain excellent output throughout a field’s useful life. Shutting down wells when necessary, and managing individual well output to maximize field life.

    Not so the Mexicans. So who cares ?

    Failure deserves what it reaps. Mexico is a failing nation.

    SnowieGeorgie

  8. mvojy says:

    Mexico’s problems were created by Mexico. The same goes for many other countries in Central and South America. These problems are only exacerbated by OPEC, not America.

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