The market “gave its backing” to state-run oil company Petróleos Mexicanos (Pemex), they say. Its five-year bond issuance of US $ 1.5 billion at an unprecedented 6.95 percent yield last Thursday was oversubscribed. “The market” is demanding this high yield from Pemex now because it lost its investment grade and is the world’s most indebted oil company.
Just before the bond issuance, Morgan Stanley put out a recommendation to buy Pemex bonds, despite acknowledging that the company’s performance is very poor, that Mexico’s prospects overall are not good and that there are political risks to investing in Mexico’s energy industry.
Speculators are also very active in the currency markets and in the sovereign debt market, given a weak dollar. They have inflated the Mexican peso through the so-called “carry trade”, taking the exchange rate for the Mexican peso from 23.00 pesos per dollar on July 1st to 21.22 pesos per dollar on Monday of this week.
(The carry trade, for those unfamiliar with the concept, refers to a speculative bet in which a double profit is sought, due to a rise in the exchange rate and to the spread between interest rates in Mexico, at 4.25 percent annually, and in the U.S., at 0.25 percent).
Morgan Stanley made its recommendation based on the certainty that the López Obrador government will soon inject capital into Pemex to pay debts coming due and to keep the company afloat. In addition to the “attractive” carry trade, it said. Without a doubt, if the government did not provide it with more taxpayers’ money, Pemex would go bankrupt.
In its report, the brokerage –which frequently makes calls to buy or to sell Pemex debt, depending on its interests or on market movements– notes that the infusion of public funds into Pemex over the coming months will be at the expense of the much vaunted fiscal austerity of the López Obrador government.
It tells us that, in the short term, Pemex “requires 21 billion dollars in financing. The likely scenario is that the federal government will use funds that it has available to ensure that Pemex can get back into the capital markets to at least refinance its upcoming maturities. This will imply committing an additional 1 percent of GDP, the equivalent of 10 billion dollars. The other 11 billion will be financed on capital markets through bonds and loans”. (This will happen, even though the government says it will not take on any more debt).
Pemex got into the betting game by publishing a new prospectus for investors on its operating and financial results. In its very optimistic self-evauation, Pemex boasts that it “still contributes to Mexico’s development” and “is one of the most profitable companies in the global oil industry”, as if the fiscal, bureaucratic and labor burdens weighing on the company simply did not exist.
In turn, Mexican Finance Minister Arturo Herrera, said that Pemex “is a blessing”, because it brings 900 billion pesos in revenues into the country annually. It is a figure that sounds stratospheric, but converted into dollars it is less than what Pemex would bring in solely for crude oil exports a decade ago. It is far from sufficient for Pemex to pay for its investments and expenditures, debt maturites and tax outlays, without mentioning the need to make good to its insolvent and angry contractors.
A few months ago, in the most recent episode of carry trade, speculation took the exchange rate to 18.56 pesos per dollar last February. Then, the Covid-19 pandemic hit risk assets, bets were reversed and the peso fell to 25.36 per dollar on March 23rd, which was the worst performance of any emerging market currency in the circumstances.
Now the only thing that would be needed is a new chapter of risk aversion for speculators to run to the exits again, sell their bonds, and for the peso to collapse again. I have never seen an estimate of the cost of this recurrent speculation and most likely it is not quantifiable, but it must be very expensive for the country.