2018: Counter-reform adds to Pemex risk

We said:

Investor fears of a big shift in energy policy directives continue to percolate following the nomination of diehard energy nationalists to top posts. 

AMLO's tactical decision to put political appointees rather than technocrats in these leadership positions has invariably fuelled nervousness among sector players that he is preparing to roll back key swathes of energy reform, even if he has sent signals that he would not move to revoke it outright. To add to these fears, notwithstanding a firestorm of criticism about these appointments, AMLO has thus far resisted all pressure to replace his nominees. Assuming that there are no big changes to AMLO's energy picks, the top energy priorities of the next government will be very different from those of the current administration. 

What is less clear, however, is how the Finance Ministry would fix the budgetary hole left by Pemex. Last year, the state oil firm's tax payments accounted for roughly 20% of the federal budget, down from about 40% in 2016. Another problem is that it is likely to take years for additional investment to yield visible results, and if Pemex is propped up in the meantime by the government or takes on anymore debt, fiscal worries will only increase. 

AMLO has long dreamed of building more domestic refineries and making Mexico energy self-sufficient. It remains patently unclear how the new government will make its planned new expensive mega-refinery profitable. It is also unclear whether it will be Pemex that will ultimately be saddled with the brunt of the construction costs or whether the government will inject funds into the refinery project via another route. Either way, ratings agencies have already warned that they could downgrade the firm and/or the country. Either way, we view the downstream part of AMLO's energy plan with extreme scepticism, and it is a major reason why fiscal erosion appears as a growing risk over the medium term, particularly if this part of AMLO's programme continues to gain traction. 


The government has indeed frozen key parts of energy reform and partially rolled back others, though it has allowed nearly all of the contracts auctioned off under energy reform to proceed. It has also offered more fiscal aid to Pemex, although this is insufficient for the troubled state oil firm's E&P targets. 


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