AMLO's Pemex Gamble Gets Serious Warning From Fitch, Moody's
Fitch Downgrades Mexico While Moody's Shifts Outlook to Negative
(Bloomberg) -- President Andres Manuel Lopez Obrador’s plan to rescue Mexico’s heavily-indebted oil company suffered a decisive blow when two ratings firms warned he’s only hurting the country’s finances.
In almost simultaneous announcements late Wednesday, Fitch Ratings cut Mexico’s credit rating to BBB from BBB+, while Moody’s Investors Service shifted the outlook on its A3 rating to negative. Both warned that Pemex’s ballooning debt, which makes the state-owned company the world’s most indebted oil producer, is a risk to public finances amid weaker growth.
Just this year, the administration of AMLO, as the president is known, has presented three rescue packages for Pemex, formally known as Petroleos Mexicanos. But investors say Mexico should throw less money at a company with perennial inefficiencies and limited ability to boost crude output, and instead work to increase private investment in the industry, which the president has halted.
“The government’s fiscal plans were always inconsistent. AMLO wanted to spend on his plans, and then pay through savings that were always too ambitious,” said Daniel Kerner, Latin America analyst at Eurasia Group. “Then add bad plans for Pemex, and the numbers don’t add up. The question now will be how they respond, because AMLO cares about stability."
Instead of reining in spending on Pemex, Lopez Obrador is building a $7.7 billion oil refinery at the same time the economy is expected to grow as little as 0.8% this year, according to the central bank. The refinery has helped increase Energy Ministry spending by 364% in real terms in the first four months of 2019 compared to a year ago, even as the government is cutting expenditures at most ministries. The focus on Pemex helps put future fiscal accounts at risk, the ratings firms say.
“Lower growth, together with changes to energy policy and the role of Pemex, introduce risks to Mexico’s medium-term fiscal outlook,” Moody’s stated in its decision to lower its outlook. “Unpredictable policy-making is undermining investor confidence and medium-term economic prospects.”
Mexico’s peso weakened on the news, declining 0.8% to 19.7379 per dollar at 10:52 a.m. New York time. Pemex 2027 bonds dropped the most since January on Thursday.
AMLO shrugged off the decision by the two credit rating companies, saying their models are antiquated and they don’t take into account the gains from fighting corruption.
“We have healthy public finances,” he said Thursday at his daily press conference in Mexico City. “The economy will grow more, at least 2% this year.”
Fitch, which left Mexico’s credit rating two notches above junk level, said it now sees the country growing 1% this year, making it harder to boost revenues.
“In Fitch’s view, meeting fiscal targets will become more difficult heading into 2020 and could result in tighter policy that creates a further headwind to growth,” the rating firm said in its statement.
--With assistance from Amy Stillman and Justin Villamil.
To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net
To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Robert Jameson
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