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Pemex gets tax break and $1.5 billion relief to tackle debt

🕐 1 min read

Mexico will grant a hefty tax break and $1.5 billion to the nation’s state-owned oil company to help it pay contractors after debt levels at the company soared to new highs.

Raising the tax deduction ceiling will result in a 50-billion peso ($2.9 billion) boost for Pemex this year alone, the Finance Ministry said in a statement. The ministry will also use debt swaps to absorb 47 billion pesos in Pemex pension liabilities this year. The aid will depend on Pemex reducing liabilities by 73.5 billion pesos, the same amount as the support package.

“Clearly the government is going beyond a short-term Band-Aid, choosing instead to work with the company to make it better and more productive,” Rafael Elias, the head of emerging markets strategy at Cantor Fitzgerald, wrote in a note to clients.

The government support comes as Pemex’s debt reaches historic levels amid weak oil prices and 11-straight years of declining crude output. Pemex, which has more than $87 billion in debt and owes more than 100 billion pesos to service providers, was downgraded two notches by Moody’s Investors Service last month on expectations high taxes and low oil prices will hurt its credit.

The support plan, $1.5 billion of which will be transferred to Pemex April 15, strengthens the company’s financial position and will help it limit the need for additional debt, Deputy Finance Minister Miguel Messmacher told reporters Wednesday.

The oil producer already reduced its staff by more than 10,000 employees last year and had its budget cut by $5.6 billion in February.

At the very least, the measures will prevent further downgrades by Moody’s, which put the company’s credit on negative outlook, said Marco Oviedo, chief Mexico economist at Barclays. “This is positive,” Oviedo said about the tax break. “At such low prices, it definitely helps” prevent more losses at Pemex.

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