Mexican state oil company's troubles could trigger a broader debt crisis if the economy goes into recession.
A protracted crisis at Mexico’s state-controlled oil company Pemex could push global investors to unload roughly $140 billion of Mexican bonds, according to market observers.
“If the government suddenly drops support for Pemex and the company sees another credit downgrade, on top of what Fitch [Ratings] and Moody’s have already done, that could trigger a selloff,” a New York-based bond trader working for a major investment fund told Global Finance.
So far, investors have held on to their Mexican bond holdings as the country’s sovereign, Pemex and many of its corporations, still pay high yields at a time when U.S. and developed-market companies do not. Mexico’s 10-year note pays over 7%, for example.
“It’s less about fundamentals and more about the [suppressed] global rate environment,” the trader added. “Investors are chasing yield and willing to overlook potentially weaker fundamentals as a result.”
Indeed, investors have backed a recent spate of Mexican debenture sales including from REIT Terrafina and the Mexican Treasury itself, which managed to sell over $4 billion of new notes at highly-subscribed rates although deal premiums were higher.
Despite this, President Lopez Obrador’s recent reversal that the government will not tap a rainy-day fund (also called the Oil Revenue Stabilization Fund) to help shore up Pemex—whose production rates continue to plummet amid big losses—has spooked the market and boosted the possibility of another ratings downgrade for Pemex.
Fitch Ratings in June downgraded Pemex to junk while Moody’s changed its outlook to negative. Moody’s said in mid July it was monitoring developments at Pemex, adding that its investment-grade status is at risk after its business plan failed to assuage concerns that it can shore up its business.
The plan reduces Pemex’s tax burden and hands the company $7.2 billion of financial support over three years which is not enough to change its fortunes according to Moody’s analysts, who hinted that a downgrade to junk could come within six months. That—coupled with a similar move by S&P—could trigger a wide selloff of Pemex’s bonds and drag down Mexico’s sovereign rating, which Fitch Ratings already has at two notches above junk.
Some Mexico City-based watchers agreed Pemex’s worsening situation could see investors unwind their Mexican holdings—especially of Pemex bonds which are already trading as junk—but noted that more would have to happen for investors to sell sovereign notes.
Claudia Ceja, a debt strategist at BBVA, said Mexico’s economy and fiscal status would need to worsen significantly to prompt investors to begin dumping the country's debt and the country is already teetering on the edge of recession.
“Mexico still pays significantly more than any U.S., European or emerging market bond,” said Ceja, adding that international buyers have not significantly altered their holdings of roughly $140 billion of Mexican paper, $36 billion above Pemex’s $104 billion debt pile. “I don’t think we are going to see a significant decline in foreign investors’ holdings, which account for 40% of all Mexican bonds.”
Pemex apart, investors will be watching the 2020 budget which is slated to be released in September, as the next big event that could prompt them to modify their holdings, Ceja concluded.