By Rodrigo Camara Rowe
A long-disputed topic in Mexico as of late has been the financial mess that PEMEX (Petróleos Mexicanos) is facing. With over $110 billion in debt and another $77 billion in pension liabilities, the state-owned oil giant has lost its direction and poses an important challenge to the Mexican government and the country’s economy. The challenge lies in the government’s refusal to let the oil giant fail through routine cash injections, tax breaks, and other financial reliefs, but to no apparent avail. Because of this vicious cycle, it’s not unthinkable to imagine a scenario where the Mexican economy would follow PEMEX off the cliff.
To the disappointment of the majority of investors (both home and abroad), the Mexican government recently decided to provide PEMEX with more cash injections and tax breaks yet again. Instead of allowing the company to restructure and become more efficient before reaching for a federal lifeguard, the government has decided to possibly prolong and worsen the issue at hand, possibly putting Mexico’s own sovereign rating at risk. Undoubtedly, PEMEX has serious problems to deal with, but by having the government’s assistance as a guaranteed last resort, the company will not look out for itself and adjust to the situation. On the other hand, it’s very likely that the government will understandably not let go of one of its major revenue sources so easily. Hence, the solution is not as simple as it might seem: while the Mexican economy has a diverse infrastructure and doesn’t depend heavily on oil (or at least not as much as it once did), the same thing can’t be said of the federal budget. Historically, the Mexican government treated PEMEX like a cash cow, aiming for short-term profits, sacrificing the company’s long term growth. Now that the government’s exploitation of the oil giant has come to a halt, so has the scope of its policies been squeezed.
With descriptions from reputable financial institutions along the lines of “bankrupt” and “a risk for Mexico’s economic stability”, Petróleos Mexicanos is now not only facing crippling losses in revenue, but also a frightening wave of maturing bonds and an inevitable need for restructuring. The former has already shown its sharp teeth to the state-owned oil company in 2020: $6 billion for maturing bonds. That, however, was only a fraction of bonds that will mature by 2030. President Andrés Manuel López Obrador’s (AMLO) government alone will face over $30 billion worth of maturing bonds by 2024, and the oil giant’s debt outstanding will amount to over $64 billion by 2030. In 2019 the Mexican government was able to refinance over $29 billion, but to the world’s surprise, 2020 presented what might be described as a deal breaker for PEMEX. While the company was already facing declining output and falling crude prices, the Covid pandemic brought about an economic catastrophe to Mexico. For perspective, during the second quarter of 2020, Mexico suffered a -18.7% economic growth rate. For PEMEX, in particular, the backlash in oil demand represented a steep drop in revenue. This came shortly after PEMEX declared a net loss of $18 billion for all of 2019. Looking for further financial relief, PEMEX’s sight on federal funds remained fixed stronger than ever. However, with a coming health crisis at home, the Mexican government, led by the austere hero AMLO, had a burdensome decision to make: safeguard its oil industry “flagship” or provide its citizens with more funds to fight the ongoing pandemic.
The second problem, the need for restructure, has been largely ignored by the government, even after warnings from the country’s own central bank. This partially highlights the nature of the problems PEMEX is facing– AMLO’s government aims for complete control over the energy industry. This is clearly reflected by policies that aim to both increase pressure on the renewables market and to prevent private investment in the oil and renewable sectors. Admittedly, restructuring the company is no easy task, especially when most investors suggest cutting off all weak heads, which includes the closure of loss-making fields and layoffs. This, however, would help both PEMEX and the government to focus on more important and promising endeavors. For the government, it would be able to end its dependency on its oil industry by expanding on its already prominent renewable sector. For PEMEX, restructuring would allow them to allocate resources more efficiently, close inefficient fields, and focus on refinancing its debt payments, before it all becomes too overwhelming for the company to deal with and its only choice left is the feared outcome: bankruptcy.
Contemplating the scenario where the debt burden becomes too unbearable for PEMEX and its only choice is to declare bankruptcy is frightening. The Mexican economy would have to rely on the private oil sector as the government would be forced to allow other companies to have a significant presence in the oil industry. Thus, while the federal budget would certainly be reduced, the overall health of the economy probably wouldn’t deteriorate drastically, as it is significantly diversified and its exports focus on other sectors as well. Nonetheless, the effects that this scenario would have on President AMLO’s agenda for the energy industry would leave one question hanging: will Mexico finally give way for a smoother transition to a renewable energy industry or will it remain fixed to the oil paradigm? With an already prominent renewable energy sector and the visions of many energy investors and researchers alike worldwide, Mexico has the chance to rise as a leader in wind energy production and geothermal power capacity. The proactive involvement of the government in this transition could possibly bring a boom to the renewables market. Could the optimism and ambitions of a more clean future push the country in a different direction? □
- Image source
- Hidalgo, A. (2020, September 22). Pandemic, problems At PEMEX suggest a rethink of Mexico’s energy strategy. Retrieved March 25, 2021, from https://resourcegovernance.org/blog/pandemic-pemex-mexico-energy-transition
- Eschenbacher, S. (2020, March 23). The numbers don’t add up at Mexico’s PEMEX as oil prices crash. Retrieved March 25, 2021, from https://www.reuters.com/article/us-mexico-pemex-debt/the-numbers-dont-add-up-at-mexicos-pemex-as-oil-prices-crash-idUSKBN21A2P3
- Taylor, B. (2021, March 04). Oil and Gas Investors Need to Start Asking Tough Questions. Retrieved March 25, 2021, from https://www.barrons.com/articles/oil-and-gas-investors-need-to-start-asking-tough-questions-51614867040Mexico’s Pemex says will focus on refinancing regular debt payments. (n.d.). Retrieved March 25, 2021, from https://finance.yahoo.com/news/mexicos-pemex-says-focus-refinancing-183110722.html