Pemex-Peso-Dollar Crisis Takes its Toll in Mexico

No one is immune to the crippling effects of a crumbling currency.

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

With Brazil going through a period of extreme political and economic turmoil, Venezuela taking the art of basket-case economics to a whole new level, and Argentina’s economy grinding to a stagflationary halt, Latin America — in particular its Southern Cone — is not having the best of times.

One exception is Mexico. Or was! According to the economic data forecaster World Economics, “recession looms” for Latin America’s second largest economy. World Economics’ Sales Managers’ Index (SMI) for Mexico was just 47.3 in May. Below 50 means contraction. And it has been below 50 since February. All five sub-components — confidence, market growth, sales, prices, and staffing — are now below 50.

None of this should be much of a surprise given how dependent Mexico’s economy is on the manufacturing exports it sends to the US, whose economy is beginning to show signs of strain.

For now, World Economics’ data are a statistical outlier. As the Financial Times points out, in March the Bank of Mexico foresaw solid growth of between 2% and 3% this year while the IMF forecast 2.4% growth in its April global economic outlook. In the same month, a panel of 22 banks and other organisations polled by data analysts Consensus Economics found a median gross domestic product growth forecast of 2.4% per cent for 2016.

But the omens are stacking up. Chief among them are the ever-worsening trials and tribulations of Mexico’s multi-generational sugar daddy, Pemex. At the beginning of March the state-owned oil giant reported its annual results for 2015. Even with expectations at the bottom of the barrel, so to speak, Pemex managed to shock with the sheer scale of its total annual loss: 522 billion pesos ($30 billion), almost double its loss in 2014. It was its biggest annual loss ever.

But those were just the preliminary results. On Wednesday, Pemex announced its definitive, revised results for 2015. Turns out that its total losses were actually 712 billion pesos (or $38.5 billion), a difference of 36%.

It’s another massive blow to a company that is continually bleeding losses while creaking under the weight of a total debt load that is almost certain to cross the $100 billion threshold later this year.

Pemex is already being bailed out. In early April, it was given a $4.2 billion cash injection to help tide it over, but it’s a tiny fraction of what will be needed, especially if losses continue to pile up anywhere near the rate experienced in 2015.

It’s not just Pemex that’s feeling the pain. Last week Mexico’s biggest construction company, ICA, announced that if it does not reach an agreement to refinance its debt soon, it faces a very bleak fate, as do its creditors and shareholders. “Our future depends on our ability to successfully refinance or restructure our debt,” the company said. “If we are forced to liquidate our operations, the holders of our debt and our shareholders could suffer substantial losses.”

ICA’s shareholders have already suffered considerable pain, having seen the stock lose 80% of its value last year and a further 40% this year. On Friday, when news began circulating that some lenders had closed ICA’s funding lines, the shares plunged 29.75% to 1.70 pesos, their lowest point ever, before being briefly suspended. When they came back, shares managed to recoup 37%, a dead-cat bounce. Today the shares are down a 17%.

ICA’s problems began long ago but were recently magnified by political problems at home, in particular President Enrique Peña Nieto’s blatant favoritism for two of ICA’s biggest rivals, the scandal-tarnished Spanish firm OHL and homegrown Grupo Higa, whose secretive owner, Juan Armando Hinojosa, a couple of years ago helped Peña Nieto’s wife and Mexico’s finance minister, Luis Videgaray Caso, purchase luxury homes in Mexico City, conflicts of interest be damned.

Global economic forces, in particular the strengthening dollar, have also added to ICA’s woes. Many Mexican corporations are acutely vulnerable to a strengthening dollar and rising U.S. interest rates. The sudden rise in central bank-engendered liquidity after the outbreak of the Global Financial Crisis enabled Mexico’s biggest companies to borrow from the international markets, in foreign currency, much larger amounts and for much longer periods than at any other time in history. And the slide of the peso against the dollar has significantly increased the amount of leverage (the pile of dollar-denominated debt) at some companies.

After firming somewhat in February and March, following a rate hike from Banco de Mexico, the peso is once again losing ground against the dollar – and at a worrying pace. So far in May alone, it has lost close to 8% against the dollar, stoking fears among the country’s senior central bankers of a “disorderly depreciation.”

The biggest risk is that the migration of foreign investors out of the peso becomes a stampede. According to BNP Paribas, “The market is asking for a higher premium for holding Mexican assets and Banxico will be forced to do it (with a further rate hike).”

The weak peso has even taken a toll on the fortune of Mexico’s (and once the world’s) richest man, Carlos Slim, whose ranking on Bloomberg’s Billionaire Index recently slid to 8th, after more than $20 billion of his paper wealth vanished into the ether over the last two years. Although increased competition in Mexico’s telecommunications sector, in which Slim’s América Movil and Telmex enjoyed unchallenged monopoly positions for decades, is largely to blame for Slim’s dwindling fortune, the weaker peso has also played an important part.

“It becomes a lot more expensive to operate,” said Jose Otero, director of Latin America and the Caribbean for trade group 5G Americas. “Anything from the equipment you use for infrastructure, to the mobile phones – it’s all paid by the company in hard currency” like dollars and euros. Which just goes to show that no-one, not even one of the richest men on the planet, is completely immune from the crippling effects of a crumbling currency. By Don Quijones, Raging Bull-Shit

For the broader Mexican economy, Pemex’s woes are just part of the problem. As the company’s oil production continues to crumble, Mexico will depend even more on its manufacturing sector. But that, too, is showing serious signs of strain. Even auto exports to the US. Read…  A New Crisis Kicks off in Mexico

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  22 comments for “Pemex-Peso-Dollar Crisis Takes its Toll in Mexico

  1. nick kelly says:

    There is hope in Argentina- the new minister of finance Prat-Gay sounds like he is in in touch with reality, no small event in this part of the world.
    The country successfully sold 15 billion in bonds paying 7.5 % but no one would have lent the former regime a button.
    Now the fact that the new government is a turn to the right, AND selling bonds will no doubt set off a baying of hounds, but most of them don’t live in Argentina.

    • jerry says:

      People are too desperate for yield and are not doing proper risk assessment.

      • nick kelly says:

        Well they have defaulted seven times- twice this century, so 7.5 for the 30 year? Much as wish them well I don’t think I’d jump in yet.
        I have friends in Uruguay which is a small well run socialist country (it can be done) with two giant screwed up neighbors- Brazil and Argentina.
        If Argentina was to become a Venezuela, Uruguay could be looking at a refugee problem, among others.

        • Petunia says:

          In Florida the illegal populations from Uruguay, Argentina, and Brazil are growing by leaps and bounds. When I lived in my big corporate rental in South Florida most of the workers, over 50%, they sent to work on the house were illegals from these countries. The house I rented need a lot of work over the course of the time I lived there and I saw a lot of these guys.

  2. Agnes says:

    Hugo Salinas Price has tried to tie Mexico’s economy to Silver. He started out as a seller of electrical machines, I think. Mexico’s equivalent of the Fed has defeated him many times, although some Estado Governors have supported him. He wrote a white paper on implementing the silver dirham in Malaysia. The Libertad has much to do with his backing.

    A quote from recently: “Mainstream economists love equations, they adore the simplicity of E=mc2.
    But human activity does not operate on the basis of equating one thing with another, it operates by choosing between what is preferable and less preferable, in other words, not by equating things, but by differentiation in power of satisfaction.” I myself like to call this the “Sovereign Consumer” philosophy.

    • nick kelly says:

      The history of silver as money is deep and interesting. It has entered US politics and finance from time to time- notes redeemable for silver “Silver Certificates” have circulated.
      As a poor man’s gold it has tended to be money more in poorer countries I think. (I don’t pretend to know much about this)
      I recall that a sharp fall in the price of silver hurt China at the onset of the Depression.
      A problem has been fixing the gold/ silver ratio where both are used as money. Silver coins are easier to adulterate with cheaper metals.

      In the early 1980’s the Hunt brothers of Texas and the Sauds of Saudi Arabia teamed up to corner the silver market and drove the price to US $50 per ounce. They bought future contracts like crazy and then startled the market by actually demanding the metal, not just taking a profit.
      This murdered the shorts- and began to threaten a big dealer, Mocatta Metals, which had agreed to supply silver it didn’t have.
      Mocatta scoured the world for silver and to convince holders that they should unload now because the price wouldn’t last- Mexico agreed and sold a lot.
      But it wasn’t enough and politics took over. The Hunt’s had angered the FED with a proposal to create a silver backed bond- their own ‘silver certificate’ and a clear competitor for the US dollar, which was was under siege- inflation was double digits. People wanted out of US$.
      To reverse this trend- Paul Volcker of the FED raised rates to about 18% but to further combat silver and thwart the Hunts, the Chicago Commodities Exchange stopped taking orders for silver futures, only for silver sales- to convert silver to dollars.
      This worked although the FED rates produced a housing price crash.
      The Chicago move deeply scandalized the Hunt brothers, who for years afterward reacted to its rule change as though the Pope had cancelled the Ten Commandments.

      • Petunia says:

        When the subject of fixing the ratio of gold to silver comes up, I always think of the utility problem. It is impossible to fix a ration when the utility of the metals keeps changing. The applications for the use of silver in industry, seems to be expandable due to properties and price, while gold seems noncompetitive.

        • Chicken says:

          Silver could be considered a consumable. From this perspective, what are the top three uses and is demand increasing in any of them?

        • Petunia says:

          The top three uses of silver to me are all expanding now. The use of silver as an investment, the use of silver as a replacement for gold, and the use of silver in technology will only go up.

        • Chicken says:

          Okay, not a very convincing explanation though. My DD doesn’t lead me in this direction.

        • Finn says:

          In a free market no “fixing” is required. The market will discover the “fix”.

        • nick kelly says:

          Silver has many industrial and medical uses, and is consumed as it is used ( although some can be recovered)
          Gold has virtually no industrial use that can’t be substituted ( some plating of electrical contacts) and most of the gold ever mined exists now as bars or ornaments.
          Recently a theory has made a lot of headway: the reason that gold is here and there but no huge deposit is because it is of extra-terrestrial origin- the result of meteorites.

    • d says:


      I don’t think that is completely dead either.

      What hasn’t been organized yet is a silver fix free of then ECB, FED, and Wall Street.

      No a chinese libertard/Silver fix is not the Answer, it would be even more corrupt than the others.

      A Mexican silver coin, has been a reserve and international trade currency before.

      Yes I do have some. The 1/4 and 1/2 make transaction simple if you wish to use them and can agree the local currency silver rate.

    • Agnes says:

      1)soldering(silver has highest heat and electrical conductivity bar none)
      2)photovoltaic “Solar capacity in China leapt from 0.8 to 18.6 gigawatts between 2010 and 2013, with Beijing setting a target of 70GW by 2017.”
      3)antibacterial…(the air ducts that are in the hotel where Legionnaire’s happened are now coated with silver)

  3. alexaisback says:

    “”” The weak peso “””

    I think the faux concern over a week peso is just a sham.
    I think it is all part of the plan, currency war.
    Everyone will race for the bottom in effort to keep employment
    up when faced with competition whether that be China, India,

    All the Central Banks will pretend weak currency is horrible
    but this is what they want. Just like China wants to dump
    cheap steel. They want to sell they want to export regardless
    of price they need employment – they want dollars brought into their country.
    .When it is important, Lie. ( Draghi)
    The weak peso is the goal; don’t be fooled.

    • nick kelly says:

      It might be someone’s goal but not Mexico’s. The peso is not a reserve currency, no one can buy anything outside Mexico with it. Mexico including Pemex the national oil company has huge $US debts. If the peso drops by 50%, those debts double.
      Sure they don’t want an overly strong currency (a big problem for Switzerland, and according to them, the Japanese) but this is NOT a problem for Mexico.
      The danger is that the currency becomes worthless. In Venezuela now, were this is happening, international organizations like the Red Cross are working to arrange supplies of essential drugs e.g. insulin because Venezuela doesn’t make them and can’t buy them.

      • alexaisback says:

        Just as predicted CHINA .

        After a brief haitus from the ongoing currency wars, China fired another salvo at The Fed tonight by devaluing the Yuan fix to 6.5693 – its weakest against the USD since March 2011.
        Do Not be fooled Mexico wants the American jobs
        Mexico wants to produce automobiles etc…..

        • d says:

          Intolerance level appears to be 6.7

          china is having a “hissy fit”. As teh G7 wont do what china says, and ignore the illegal actions of china in the Western Philippine sea.

          china has now defined the G7 as an “imperial historic anachronism” irrelevant in the world as the decision are now all made in the G20. china says.

          china incidentally is hosting, and considers it is running, the next G20 meeting..

  4. Yoshua says:

    A gallon of light crude oil API 35.7 containing 140.000 BTU… will cost 80.000 BTU to produce (extract, process and deliver) next year.

    Of those 140.000 BTU only 100.000 is accessible to us since 40.000 BTU goes to waste heat in the transformation of energy to work.

    Oil producing nations that produce expensive to produce medium crude API 31-22 or heavy crude API 22-10 are most likely under water already today.

    • Agnes says:

      I appreciate your posts Yoshua. I went and looked at a place that you referenced. It looks like we will have cheap fuel for up to three years and then shortages. One of the good things about a coal mine is that it is not diluted by water when they stop pumping. Sure some lower levels will be damp, but the coal itself is not soluble.

    • nick kelly says:

      The loss in the transformation of energy to work is common to any combustion process. Emissions are lowest with natural gas, for which at least a century of supply exists.

  5. Thomas Malthus says:

    The net debts of the largest Western oil companies have surged by a third over the past year, increasing their vulnerability to another fall in oil prices.

    The aggregate net debt of the 15 largest North American and European oil groups rose to $383bn at the end of March, up $97bn from 12 months ago, according to company reports compiled by Bloomberg.

    Oil companies’ revenues have slumped as a result of the crash in crude prices that began in the summer of 2014. Although they have cut capital and operating costs sharply, most of them have had to borrow to finance their investment programmes and dividend payments.

    The debt surge was particularly sharp in the first quarter of this year, when oil prices dropped to a low of about $27 per barrel.

    Although interest rates are near record lows and oil prices have since recovered, ending last week at about $49, the increased indebtedness of the industry means it will face greater difficulties should oil prices slip back again.


    That’s what happens when oil is priced at under the $100 that most producers need to break even….

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