Pemex and Mexico’s Sovereign Rating

Genevieve Signoret & Delia Paredes

(Hay una versión en español de este artículo aquí.)

We continue to share excerpts from our September 11 report, Quarterly Outlook 2023–2025: Soft Landing Yet Again, where we present three scenarios for the global economy over the next two years. You can think of our scenarios as train tracks: each takes the economy in a different direction. A scenario is built on a group of assumptions. Our three sets of assumptions “pivot” the economy from one track to another.

Pemex is the most indebted state energy company in the world, owing US$ 110.5 billion, mostly to bondholders. A whopping $25 billion of that debt is short-term, and of that, $4 billion will mature yet this year.

Before AMLO’s election in 2018, the government’s plan was to reform Pemex: sell its least profitable assets, shrink its work force, and negotiate with labor a haircut on labor liabilities. AMLO undid these plans and, in 2020, Pemex debt was downgraded to junk.

Total Pemex debt comes to 8% of Mexico’s GDP. Since 2018, fiscal support to Pemex has cost Mexico, annually, 1% of GDP. Tax collections in Mexico come to a mere 13%–14% of GDP.

Will Mexico keep draining its own coffers to ward off a Pemex default? If so, can it still hold on to its own investment-grade sovereign debt rating? Or will it save itself by allowing Pemex to restructure its debt (to default) and subsequently reform itself?

In Soft Landing, we assume that, during the forecast period, the government will keep supporting Pemex. But further assume that, rather than downgrade the sovereign, ratings agencies will respond by merely cutting their outlooks on Mexico debt.