Wednesday, March 16, 2016

Don Quijones — Big-Oil Bailout Begins as Debt Spirals Down

The stakes could not be higher. According to Juan Pablo Castañón, president of the Business Coordinating Council, one of Mexico’s most powerful business lobby groups, the consequences of failing to meet the challenge would be both serious and far-reaching.
“Pemex not only finances close to 30% of the public budget, it is the central provider of basic provisions for the population,” he said. “There are some states whose dependence on its operations is irreplaceable.”…
As such, a company that was once the proud sugar daddy of Latin America’s second biggest economy, providing the lion’s share of public funds for generations, could soon become a gargantuan financial liability. The fact that this is all happening at a time when state finances are already stretched to breaking point while Mexico’s gross external debt is over $400 billion, the fourth highest of 17 of the world’s biggest emerging economies, is hardly helpful.
It’s no secret that the Peña Nieto government has long sought to privatize and asset strip large chunks of Pemex; despite the government’s feeble denials, it’s what its 2014 energy reforms were all about. Now it’s got the perfect excuse to execute its grand scheme. But first it must somehow bail it out. Then it will sell it. Already, there are concerns, given how things went in the past in Mexico, that during the entire process of bailing out Pemex and then selling it, vast sums of supposedly public money will be disappearing into very deep, hidden, private pockets.
After all, what lies in the balance is not only the future of a huge, emblematic company that can no longer function in its current form, but the health of the entire Mexican economy. As Castañon says, providing for Pemex is no longer just an energy or fiscal challenge, it’s a matter of national security.
Don Quijones

6 comments:

Bob said...

Nothing that a bit of austerity wont fix ;)

Tom Hickey said...

After privatization and asset-stripping.

Auburn Parks said...

Right, instead of the Society\Govt\Economy getting all those profits (funds 30% of the public budget, whatever that means) they should give it to some rich people so they can cut labor costs, increase profits and hide money offshore (way easier to launder dollars than pesos). And then the Govt can instead tax the private oil revenue and get less than 30% of the budget (whatever that means), which you guessed means they have to cut Govt spending because now Mexico's revenue is lower. But hey, everyone knows that private cartels with no public accountability are more generous, benevolent and efficient than Govt cartels with at least some nominal public accountability.

Ryan Harris said...

There are different ways of looking at it, the Mexican government funded a massive education effort by levering their oil assets. Their productivity has soared economy wide and their middle class has grown to the point that there is no long a net Mexican immigrant flow to the United States but instead from the United States. Whatever financial defaults Pemex ultimately suffers, can't take away the real benefits Mexico gained from the industry. The bigger problem is that Mexico under-invested in Pemex for years. Production has suffered and environmental damage have made the company a huge liability for government. No one will touch the company with a 10-foot pole unless the government takes responsibility for that. It could sell some assets but selling a stake in Pemex is a non-starter because those liabilities are probably much larger than any value in the company. And even if they do spin the company off to try and regain productivity and boost lagging production, they will retain ownership, taxation and royalties. They have leaky pipelines everywhere, dangerous refineries and theft of finish goods from trucks, taps on pipelines and refineries which have led to terrible unregulated pollution that generations will suffer from. Private companies can't get away with this behavior, but people looked the other way for Pemex because they helped the government and country get ahead. I say privatize it and then tax the hell out of it to take away all the economic rents but benefit from the better theft control, less pollution and higher productivity. It's too tempting for politicians to raid the piggy bank, arrange theft, and allow pollution when it is a state run company because they'd rather spend on social programs than the environment. Private companies are the opposite, they over spend on environment out of fear of lawsuits.

Neil Wilson said...

"Private companies are the opposite, they over spend on environment out of fear of lawsuits."

That assumes an American style court system.

The issue here is the same as with any big old company or organisation - entropy. The private sector, working properly, has a way of getting rid of entropy but the public sector doesn't.

Matt Franko said...

Bill from today:

"The neglect of our teenagers will have a very long memory indeed and the negative consequences will be stronger given the ageing population."

Same thing applies to these oil rent nations... they have been trained to expect high levels of "non-productive contribution" for the last 10 years or so...

Now that rent has been taken away and they are perhaps in BIG trouble....

This is becoming a "no shitter" as basic food provision is at risk in some of these nations... it could get A LOT worse from here...