Fitch expects 'unwavering financial support' for Pemex

Credit ratings agency Fitch expects "unwavering financial support" from the incoming Mexican government for Pemex, the country's heavily indebted national oil company.

Pemex is laboring under a debt pile of more than US$100bn. In recent years the government has injected capital into the company and cut tax rates to help Pemex fund investments and service its debt.

In a press release on Thursday affirming Mexico's foreign-currency issuer rating at 'BBB-' with a stable outlook, Fitch said it expects the government of president-elect Claudia Sheinbaum to continue to provide financial support to Pemex.

On October 1, Sheinbaum takes over from current president and political mentor Andrés Manuel López Obrador (AMLO).

Sheinbaum has indicated that she aims to maintain Pemex's dominant position in the Mexican oil market, both upstream and downstream. 

"This will likely require continuing federal transfers unless there is a significant improvement in the company's operational efficiency or reduction in its debt burden," Fitch said.

The agency estimated that AMLO's administration provided support to Pemex of close to 4% of GDP from 2019 to 2023, "effectively transferring liabilities from Pemex's balance sheet to the federal government."

Ongoing support for Pemex could result in a lower tax take and/or higher general government debt burden, Fitch added, negatively impacting public finances.

The agency said the government specified support measures for Pemex in the budget for the first time in 2024, underscoring its commitment to ensuring Pemex's liquidity.

"We expect Pemex to receive unwavering financial support from the government and that it will continue to be included as a line item in subsequent budget exercises."

For the Mexican economy, Fitch is forecasting a slowdown in real GDP growth to 2.0% in 2024 from 3.2% in 2023, further declining to 1.8% in 2025. 

The agency expects that a combination of a slower US economy, a tighter fiscal stance as the new administration takes office, and a restrictive monetary policy will result in a slowdown in growth next year.

Fitch added that nearshoring will offer Mexico significant opportunities to enhance its global supply chain participation and diversify its manufacturing capacity.