The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Mexico’s Pemex Crisis Grows

Mexico’s currency has been plunging the past year, as its economic problems mount. The US president-elect is persuading US companies to shelve plans on moving parts of their manufacturing to Mexico. He also wants to build a big wall, paid for by Mexico. At the same time, Mexico’s expatriates working in the US, legally or illegally, are sending much less money home to Mexico.

This all fits in with our view, as expressed in our award-winning WELLINGTON LETTER, (now in its 40th year) that the emerging markets are facing huge problems which will envelope the global markets.

Here is an excerpt from an excellent article on the Pemex $100 billion debt and the problems of Mexico caused by the oil price plunge.

“Mexico’s ‘ATM’ is stewing in a toxic mix.”

Despite the partial recovery of oil prices, 2016 was not a kind year to Mexico’s fast-shrinking state-owned (but soon to be privatized) oil giant, Pemex. For over 70 years the company served as a huge funding asset, at times providing as much as one-third of total government revenues. But in 2016 it became a national liability, requiring a €4.2 billion bailout from the government. It’s unlikely to be the last.

During the first 11 months of 2016, the company registered average production of 2.16 million barrels per day, its lowest in more than three decades. Pemex forecasts that production will fall to around 1.94 million barrels a day by 2017, marking the first time that the figure has fallen below the 2 million barrel point since 1980. Given the gathering deterioration in the company’s accounts — including a total debt overhang of around €100 billion — daily production could fall by as much as €1.6 million per day by 2020, Morgan Stanley warns.

As goeth Pemex’s production, so goeth Mexico’s oil revenues, which have shrunk from 6% of GDP three years ago to 2.5% today. The export figures are just as ugly. In 2011, when the price of Brent crude averaged over $100 a barrel, Pemex’s export revenues hit a historic peak of $49 billion, a monthly average of $4.11 billion. In the first quarter of 2016 the monthly average was just $893 million. That’s a plunge of 78%.

In November Pemex reported a €10 billion loss, the biggest quarterly shortfall in company history. The company has now reported $70 billion of accumulated quarterly losses since 2012. Worse still, their respective size keeps growing. The company’s losses through the first three-quarters of 2016 outpaced total losses for the last three years combined.

So, that, in a nutshell, was Pemex’s 2016. How do things bode for 2017?

If the last two days are any indication, not very well. On Sunday, the first day of the year, thousands of people all over the country marched on Pemex gas stations, blocked roads and picketed refineries, to register their rage at the government’s latest massive hike in gasoline and diesel prices, which has been dubbed “gasolinazo” in Spanish (roughly meaning “gas punch”).

Their anger is understandable: Mexicans, together with South Africans, currently spend more of their annual income on fuel than residents of 59 other countries tracked by Bloomberg, due largely to the country’s low salaries and high gasoline consumption.

Full article: