Mexico energy reform a credit positive

The passage of the energy reform is unlikely to have a near-term impact on the sovereign ratings of Mexico. Future rating actions will focus on actual economic and fiscal performance as well as Mexico's ability to mitigate credit weaknesses such as moderate growth rates and limited fiscal flexibility underpinned by a narrow revenue base, high reliance on oil revenue and limited fiscal buffers, according to Fitch Ratings.

"Of the several reforms approved since 2012 to address Mexico's structural constraints on growth, the energy reform should yield the richest dividends in terms of investment and economic activity," said Shelly Shetty, Senior Director and Head of Fitch's Latin America Sovereign Group. Increased private sector participation should facilitate an increase in oil output and lead to a decline in electricity tariffs, improving the competitiveness of the country's manufacturing sector.

"However, the magnitude of the impact will depend on the prudent and timely implementation of the reform, as well as the extent to which the private sector takes advantage of the new opportunities provided by the energy sector's liberalization," added Shetty.

The energy reform, which transforms Pemex and CFE into state-owned "productive enterprises" with greater budgetary and financial independence, should be broadly neutral for fiscal accounts. Although the reform involves a gradual reduction in Pemex's tax burden, the government would have some leeway to adjust dividends to mitigate pressures on public finances.

The prudent establishment of the Mexican Oil Stabilization and Development Fund will have a positive impact on Mexico's fiscal buffers in the medium term. On the other hand, the possible absorption of a portion of Pemex's and CFE's pension liabilities could lead to an increase in federal government indebtedness, though the magnitude of the impact is still uncertain.

The opening of a sector that has traditionally been dominated by public entities is promising and could lead to the greater economic dynamism much needed to reduce Mexico's income gap with higher-rated sovereigns and facilitate a faster reduction in the government debt burden.

Did You Like this Article? Get All the Energy Industry News Delivered to Your Inbox

Subscribe to an email newsletter today at no cost and receive the latest news and information.

 Subscribe Now

Whitepapers

Maximizing Operational Excellence

In a recent survey conducted by PennEnergy Research, 70% of surveyed energy industry professional...

Leveraging the Power of Information in the Energy Industry

Information Governance is about more than compliance. It’s about using your information to drive ...

Reduce Engineering Project Complexity

Engineering document management presents unique and complex challenges. A solution based in Enter...

Revolutionizing Asset Management in the Electric Power Industry

With the arrival of the Industrial Internet of Things, data is growing and becoming more accessib...

Latest PennEnergy Jobs

PennEnergy Oil & Gas Jobs