Page 5 - LatAmOil Week 09 2020

LatAmOil COMMENTARY LatAmOil
 Under these circumstances, the Mexican gov- ernment’s commitment to keeping the com- pany afloat has not been sufficient to mitigate investors’ concerns. Pemex’s bond prices have therefore sunk from the high marks registered in February.
No more downgrades yet
Even so, no downgrade seems likely in the immediate future. Moody’s indicated earlier this week that it did not expect to conduct any reviews of the NOC’s credit ratings – which now stand at Baa3, one level above junk status – before the end of June.
Nymia Almeida, the ratings agency’s chief Pemex analyst, told Bloomberg in an interview that she did not anticipate any major changes in the short term, especially since Pemex was still on track to push production up by 1% and to improve liquidity this year. She acknowledged that Moody’s outlook for the company was neg- ative but explained that the agency had taken this position because of concerns about the Mexican government’s sovereign rating.
“If nothing major happens, positive or nega- tive, we are not taking Pemex again to the com- mittee to review the rating before mid-year,” Almeida told Bloomberg. “It would be triggered basically because of any change in the rating of Mexico. The question is how sustainable these positives are.”
Moody’s typically does not opt for a down- grade without “two-to-three years of visibility” with respect to bad news, she added.
Ongoing concerns
In other words, Moody’s has concluded for the time being that Pemex does not qualify for such action because Mexico itself has not passed the threshold for a downgrade. Even so, it is worth noting that the agency has a negative outlook for the Mexican government’s rating, which now stands at A3.
Mexico’s central bank, known as Banxico, also appears to be concerned. According to Natural Gas Intelligence, one member of Banx- ico’s board of governors said at a meeting with
government officials on monetary policy last December that the government’s exposure to Pemex was so great that it created the risk of another downgrade.
Another board member downplayed that risk, describing it as “latent,” NGI reported, citing the minutes of the meeting. But a third board member spoke in more dire terms, say- ing: “[Challenges] of great transcendence per- sist, whose solution is still pending.”
Another challenge
One such challenge is rising pension liabilities. As Reuters noted earlier this week, Pemex saw its unfunded pension liabilities soar last year, rising by fully 34.8% to nearly MXP1.5tn ($77.3bn). These liabilities now account for about three quarters of the company’s total debt load, which stands at around MXP1.94tn ($105.2bn).
Jorge Sánchez Tello, the director of the inde- pendent Mexican think tank Fundación de Estudios Financieros (FUNDEF), characterised this situation as unsustainable.
“No company in the world, whether pri- vate or public, can sustain these,” he told Reu- ters. “What has brought Pemex to bankruptcy is, [among] other things, its terrible pension system.”
Kim Catechis, the head of investment strat- egy at asset management firm Martin Currie, spoke similarly. “Pemex is a company that has no control over its balance sheet, let alone its destiny,” she said, according to Reuters.
Unfortunately, unfunded pension liabilities may become even worse before they get better. Fitch Ratings has praised the NOC’s efforts to rein in its liabilities on this front, but it has also said that the company will not reap full benefits from these measures for several years.
As such, Pemex’s fortunes will remain pre- carious, at least for the next few months. Con- ditions may improve in the second half of the year if exploration and development drilling campaigns give a boost to production, but both Moody’s and S&P Global are likely to retain the current negative outlook for the company, even if they do not announce any donwgrades..™
“ main challenges
is unfunded pension liabilities
One of Pemex’s
Mexico’s government is keen to reduce dependence on imported fuels (Photo: Shutterstock)
Week 09 05•March•2020 w w w . N E W S B A S E . c o m P5