Economics: Pemex, Public Finance Weaken

MEXICO - Report 11 Aug 2016 by Mauricio Gonzalez and Ernesto Cervera

Last month, Pemex announced its second quarter of 2016 results. Despite a slight recovery in oil prices during the year and a fall in its tax payments, the company’s financial situation continues to weaken rapidly.

The news is not encouraging on almost any level, and the company’s situation has deteriorated for a number of reasons, including the ongoing contraction of oil production, greater losses by Pemex subsidiary companies, and an increasingly difficult operating situation within the National Refining System (NRS). Total sales declined 18% when comparing the first quarter of 2016 with the same period last year.

Pemex has been posting negative net income for several years. During only two out of the past 10 years did Pemex report a net profit (2006 and 2012). The results of the last six months point to a significant reduction in losses (24% less compared to the same period of 2015). However, Pemex's net loss reached over 130 billion pesos in 2016 to date.
The deterioration of Pemex’s finances continues unabated despite the reductions made to the company’s tax payments over the past three years, although its tax burden remains far from levels that could be regarded as optimal for its operational health.

The market and Mexican society are both waiting for Pemex to produce a new business plan that would contemplate the sale of more assets and an acceleration of the actions needed to revive production. It is widely expected that such a plan will be presented sometime in August.

Other economic news last week was predominantly negative, with adverse indicators extending to the consumption sector of the Mexican economy.
The coincident index came in at 99.9 points for May, a single basis point below the indicator’s long-term trend (100 points), due largely to decreases in the monthly GDP proxy (IGAE) and the index of industrial activity component.

In the case of business confidence, the sharpest erosion of sentiment was among construction firms. With that sector’s indicator tumbling 2.4 points below levels of July 2015, construction managers were significantly more reticent about the prospect of investing at this time (-3.9 points). Confidence in the commercial sector skidded 1.7 points year on year, and in the manufacturing sector it slipped 0.3 points.

The first half of this year has generally been marked by a growing degree of pessimism that was apparent in investment data for May, as gross fixed investment slipped 0.1% on a 12-month basis due to a 0.4% softening of sentiment in the construction sector at the same time as investment in machinery and equipment was flat compared to a year ago. Based on original series data and on an accumulated basis for the first five months of the year, gross fixed investment grew 0.9% year on year, as opposed to the 4.9% rise between January and May 2015.

In terms of consumption, consumer confidence fell 3.0% in July due largely to the extent to which people grew starkly more pessimistic in their perceptions of how Mexico’s economy is likely to perform in the next 12 months (-11.4%) and how they perceive the economy has evolved in the last year (-5.1%).
This erosion of sentiment is already apparent in consumption indicators that continue to show growth, albeit at a considerably slower pace than in past months.

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