Mexico
Press Release

High Oil Prices Benefit Mexico’s Pemex but Pose Budget Risks

Bnamericas Published: Wednesday, March 30, 2022

By Fitch Ratings

New York-30 March 2022: Mexico’s non-financial public sector (including Petroleos Mexicanos (PEMEX)) will benefit from higher oil prices although these pose risks to federal government revenue, since the government has committed to prevent gasoline prices from increasing above the rate of inflation, Fitch Ratings says in its latest sovereign dashboard.

The government manages gasoline prices by reducing gasoline excise tax IEPS and tax credits to suppliers. High oil prices will benefit PEMEX and reduce the need for government support in 2022. We expect positive free cash flow of USD10 billion if the oil price (WTI) averages USD95 a barrel (bbl) from a negative USD11 billion in 2021. While the government paid 1Q22 amortizations, appetite for further support may diminish as oil prices currently benefit the company.

PEMEX’s key challenge is to raise oil production, which will prove challenging given financial constraints and high capital spending needs. We expect the government will delay the goal to reduce oil exports (aiming for energy self-sufficiency) to benefit from high oil prices.

The government supported PEMEX with USD13.5 billion (1.1% of GDP) in 2021 by reducing the profit-sharing tax on the company and capital injections for debt amortizations. We expect annual capital injections as PEMEX’s financial improvement will be temporary given structural financial weakness and our expectation of lower oil prices in 2023 (averaging USD80/bbl) and in 2024.

Fitch expects higher federal government oil-related revenue to compensate for lower gasoline-related tax collection if the Mexican oil price mix remains below USD100/bbl (annual average). Above this threshold, higher subsidies needed to maintain gas prices in line with inflation will more rapidly outweigh oil-related revenue increases.

Fitch’s Brent projection is USD100/bbl for 2022, nearly double Mexico’s 2022 budget estimate of USD55/bbl. The government will likely resort to spending cuts to avoid a widening of the fiscal deficit in the coming preliminary budget report “pre-criterios” if gasoline tax reductions result in lower-than-expected revenue coupled with a likely downward revision of growth projections.

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