La Jornada – Official support for Pemex will maintain pressure on public finances: BBVA

Mexico City. Petróleos Mexicanos (Pemex) will continue to put pressure on the country’s public finances in the medium term if the government continues to provide support to the oil company.

In an analysis made by the bank’s study area, he specified that in recent years the finances of this company have benefited from significant reductions in the rate of the Shared Utility Right, tax incentives and equity contributions aligned with the maturity profile of its short term debt.

“This financial support package from the federal government has undoubtedly contributed to mitigating the adverse impact of the Covid-19 pandemic, as well as considerably reducing Pemex’s net indebtedness,” said BBVA.

However, BBVA stated, it is “questionable” that Pemex can receive financial support packages similar to those of 2020 and 2021 in the following years.

“To improve its finances in a more permanent way, the state-owned productive company will have to better control its operating expenses and focus its investment on the most productive oil fields.

In this sense, BBVA insisted that an appropriate measure would be for the state-owned productive company to resume investment mechanisms between private parties, the so-called farmoutswhich would allow Pemex to attract capital and knowledge for the exploration and production of new fields, particularly in deep waters.

“It would also be convenient for Pemex to streamline its refining activity before thinking about its expansion. Going forward, the company will have more difficulty obtaining financing on competitive terms due to the increasing number of global investors adopting environmental sustainability criteria in their investment decisions,” he noted.

BBVA’s analysis deals with the pressures for the country’s credit rating by the rating agencies, in which various factors that could influence a downgrade to Mexico’s note are touched upon.

In this sense, he explained that economic growth and the evolution of tax revenues will be two relevant factors that will influence the sovereign credit rating granted by the three main rating agencies.

“Although the federal government has remained on the sidelines of proposing a tax reform that would shore up tax revenues through the elimination of VAT exemptions and higher income tax rates, the expectation of higher tax revenues for the coming years it is based on tax collection improvements and administrative and technological simplification actions with more control authority for tax payment compliance,” he said.

If the foregoing is fulfilled and with stability in public debt as a percentage of GDP, the bank considered that the risk of losing investment grade in the following two or three years would be mitigated.

However, he pointed out, the aforementioned factors that put pressure on public finances will continue to be present and in the face of a complex macroeconomic environment, the country’s credit profile could deteriorate in the medium and long term.