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:
- 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;
- 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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