Mexico gets creative with its biggest financial burden—Pemex
Creative accounting reveals the biggest threat to Mexico’s oil company is a lack of political knowhow.
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Analysts and investors agree: Mexico is at an economic impasse. The private sector won’t invest in a significant way until uncertainty subsides. An investment partner would go a long way, they say. It is a role the government would usually play but currently all it has in its coffers is wishful thinking. Hauling a worrying budget deficit and unable to plug much money into the economy, Sheinbaum’s administration is keen for corporations to make the first move.
And so no one budges, as one side waits for the other.
At the heart of uncertainty lies Pemex. Mexico’s State-run oil company is the world’s most indebted and one of its least productive. Because it is politically impossible for the government to privatise the company, the Mexican State must continue to back the company’s debt. Most of Pemex debt, as opposed to Mexico’s national debt, is in dollars—an unproblematic point as the Trump administration devalues the dollar, but a disaster if the peso were ever to depreciate.
Then, last week, Mexico did a thing:
The government announced that Pemex would be seeking to raise money estimated at between $7 billion and $10 billion dollars. Since no one will lend to Pemex directly since its bonds were declared junk during the pandemic, the sale is being conducted through a bit of financial wizardry that will result in Pemex administering a portfolio of US government debt which will act as collateral.
The measure is meant to ensure short term liquidity and push the more onerous parts of its debt repayments down the road as Pemex moves to ramp up production.
The hope is that, if Pemex isn’t as swamped with the short term payments of its $101 billion dollars in financial debt, it will be better able to pay the private contractors the $21 billion dollars it owes them—including $700 million to Carlos Slim. Investors, many of whom are currently contractors like Slim, are likely to smile upon this and be more likely to be lured into public-private oil production agreements.
July saw the preparation of 17 mixed funding contracts to get production back up. It marks a change of pace from previous, more liberalising governments’ attempts to get the private sector to take greater risks for big rewards in exploration—mostly in deep waters. The exploration budget under this government, meanwhile, was slashed by $1.3 billion dollars earlier this year.
The new strategy instead looks to plug in capital to poorly managed but proven wells—many on land. The name of the game is, keep extraction steadily moving up while stopping the money hemorrhage.
The debt sale is a novel way of biding Pemex more time. It is the sort of creative accounting that energy secretary Luz Elena González—previously Mexico City’s finance minister under Sheinbaum’s mayoralty—was brought on to implement.
Political maneuvers are what’s left. Slim and other Mexican business giants met with Sheinbaum for private discussions on investment where oil surely came up. High level politicking is one thing, concern spikes the lower down the Pemex org chart one goes, where the politics gets dirtier but the current officials become less and less political.
Just as González is a more technical than political profile, so is Víctor Rodríguez, Pemex’s CEO. He’s an academic known more for his papers on oil extraction than for cracking skulls politically. Pemex’s restructuring has meant cuts; 2,900 employees are currently being sacked, and the powerful Pemex union must be assuaged.
The bet seems to be that Pemex is in such a state and it is such a priority, that if need be, Sheinbaum and other heavy hitters will weigh in politics rears its ugly head. The rest of the team is to be technical—both financially and petrochemically—because their main job will be to get Pemex back on its feet as a company.
If Pemex looks even slightly on its way to paying off its debt and attracting investment, the ultimate bet is that this will trigger a domino effect and get investors off the bench. Given its solid fundamentals, the rest of the Mexican economy should be raking it in; the massive elephant in the room that is Pemex, which many see as a threat to the financial stability of the entire Mexican State, is what’s keeping many out of the game.
The idea is that moves like this week’s will show the private sector Mexico is serious about getting back on track.
