Mexiconvexity: Credit, IMF, Pemex

6 minute read

Mexico's president seems eager to use new IMF covid funding programs to support state-owned oil producer Pemex.

Current forwards imply that Pemex will have a hard time to continue on its current trajectory. In this context, we note that forward funding rates for the state-owned oil producer currently are very high.

With a high debt load and clear capex needs just to maintain a crumbling fossil infrastructure – or alternatively investing for an energy transition aligned with the Paris targets – such high forward spreads are likely prohibitively expensive for Pemex on a longer-term horizon.

We see three general outcomes in this situation. Firstly, the President is credible, and Pemex spreads converge driving the curve flatter and putting Pemex forward funding rates at a ‘sustainable’ level, i.e., bull flattening.

Second, the status quo presides, and Pemex continues in a limbo of semi-official support from the government, implicit support from the IMF, and dodges any commitments coming out of COP26, i.e., the trading sideways/curve would be neutral.

Lastly, the President’s statements are not credible, and/or IMF support turns out to be Paris-aligned, thus leaving Pemex with a weaker government support, likely driving drive spreads significantly wider and flattening the credit curve, i.e., bear flattening.