Mexico Announces Emergency $25.5bn Package

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(S&P Global Platts, 22.Apr.2020) — Mexico announced a Peso 622.56 billion ($25.5 billion) package on Wednesday that will help the nation face the economic consequences of the coronavirus pandemic, with the focus on Pemex, the state-controlled oil firm.

The emergency budget will be aimed at 38 priority projects of the government which include crude production, the rehabilitation of the six existing refineries, the construction of a new refinery and power generation using the country´s hydroelectric plants, President Andrés Manuel López Obrador said during his daily press conference.

The move comes a day after the central bank of Mexico announced a series of measures worth Peso 750 billion to improve liquidity in the financial system that included cutting the benchmark interest rate by 50 basis points to 6% and providing a Peso 250 billion financing facility for commercial and development banks to increase lending.

More information about the specific projects will be given in the following days, the president said.

NOT ENOUGH

Some analysts, however, think the capital injection, even if it were correctly implemented, will be insufficient, and does not solve the fundamental issue in the country, which is the political mismanagement.

“They are a piecemeal,” Aaron Gifford, sovereign fixed income analyst at T. Rowe Price, said of the Mexican government’s measures. “Nobody is going to avoid a recession,” he said in an interview. Gifford said the macro-economic backdrop and the business environment in Mexico has deteriorated greatly as a result of the president’s decisions.

However, Gifford also said Mexico had one of the strongest balance sheets in Latin America before the pandemic, and that the “many levers” it has, like the credit lines with the International Monetary Fund, can allow it to get through the year.

Marco Oviedo, chief economist for Mexico at Barclays in New York, agreed Mexico is not in a serious economic position, and believes the measures announced by the president Wednesday are a good first step in the right direction, but said the government’s goal of producing and refining more crude is an “unviable obstinacy.”

“The best thing they can do is stop producing, stop refining and give maintenance to the facilities,” he said in an interview.

STEADY COURSE

Mexico has stuck to its plans to increase crude production even at current prices in order to increase the production of transportation fuels and reduce its imports. Mexico was recently allowed by the OPEC+ countries to limit its share of the output cut.

This week, Mexico reached 800,000 b/d of crude being processed at its refineries and intends to increase the figure to 1 million b/d by May, the president said in his Monday briefing.

In 2019, Mexico imported roughly 70% of its 800,000 b/d average consumption of gasoline, official figures show.

John Padilla, managing director at consultancy IPD Latin America, told S&P Global Platts that Pemex’s strategy of continue with its drilling and refining is losing money. With a production basket that has become increasingly heavier, Mexico’s inefficient refineries have very limited ability to meet the goals of the government, he said.

“Pemex cannot increase crude processing at its refineries by 400,00 b/d as the government wants, even if it wanted to. The refineries are in horrible conditions,” he said.

According to the latest poll by Citi among local economists, Mexico’s GDP is expected to drop 6.7% in 2020 as a result of the current crude price crisis and the pandemic, the response to which this week reached what is being called “phase three.”

During phase three, people will be restricted from leaving their homes except for basic activities like buying food or medicine. Industrial activities not related to defense, health or security will also be restricted.

By Sheky Espejo

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