Pemex y el soberano

"Educación Financiera BBVA" presents "Peras y Manzanas" with Valeria Mui. "El podcast, donde la economía cuenta". TRANSFERENCIA MITA. Hello, how are you? Here again with "Peras y Manzanas". Today I want to talk about debt. But what kind of debt? People ask me, "How is the government's debt?" "Who pays for it?" "How much does it cost?" And it's hard for us to understand, at first, how debt mechanisms are that have... A government that can be a state government, a federal government, the government of Mexico, the US government, the government that you want. Because what the governments do know is spending. And to pay that spending, you have to pay debt. You have to pay it back and the difference has to be paid. And in that sense, we talk a lot, or at least we talk a lot in the financial sector and we read a lot of notes about the Pemex debt. And we all heard that it is the most debt-earning oil company and that it has, I don't know, hundreds of thousands of millions that it has to pay in September, in November, the year it enters, and that it doesn't have to be accumulated. And we don't understand very well, or it's hard to understand, and that has to do with the Pemex debt, because Pemex is Mexican oil, that's what they told us at some point, especially when we went to school. But what does it mean if, at the end of the day, the debt is from a company, a company that can be a huge company, a company that can be from the government, but what does it have to do with the actual Mexican government's debt? And to understand the differences, or not, because in one of those there isn't, in one of those everything is wrapped in the same canasta and at the end of the day, we all have to pay for it in the same bag. Today it's with us Alexis Milo, Alexis, my friend, economist, doctor in economics, has been in the financial sector very, very, very involved, he understands perfectly the debt issues, the bonus issues, and is founder of Teleconomics, founder, partner, consultant, from Teleconomics. Alexis, once again, welcome to Pérez y Manzanas. Hello, Valeria, thanks for inviting me. Today we've talked here about Pemex with you, and we've talked about the financial situation of Pemex, which suddenly sounds critical, and analyzing the numbers, we see that there's another huge loss in September, and that nobody knows how it's going to be paid, and that there's no flow of cash, and then the bonus or Pemex debt begins to be paid more, because it's more risky, and we say, "What does this have to do with everything?" And I'd like, Alexis, to tell us on the inside, how are these Pemex debt structures very simple, and then what does this have to do with the sovereign bonus? Or what do you want? Why do we always say "the sovereign"? How does the Pemex debt transfer to the sovereign? So, Alexis, go ahead, explain to us first Pemex, and then what does it have to do with the sovereign? Of course, Valeria. Look, a government, or Pemex, that is, a large entity, can have many different types of debt. It can have debt with providers, for example. It can have debt with banks, as well as asking for a credit to a bank, or a government can ask for a credit, Pemex, as well. It can have debt with international financial agencies, such as the Monetary Fund, the World Bank, the Inter-American Bank of Development, etc. And, let's say, the most modern version of debt, and where the thickness of the debt is found, both for the government and for Pemex, and now we're talking about the differences, it's among the famous bonds that these organizations, whether it's the government, or sovereign, as it's also called, or Pemex, place in the international financial markets. A bond is simply an obligation that comes out and places, whether it's in pesos, as is the majority of the government, or whether it's in dollars, as is the vast majority of Pemex. Now, how do both relate? The government places these bonds, which is simply a loan, which has an interest rate, and that interest rate can go up or down. Pemex does the same thing, right? Now, what's the difference? The government has a source of payments that are the taxes it charges. And that's why the government enjoys, so to speak, a better qualification of credit than Pemex. Now, we all know that the government is the owner of Pemex. So, Pemex can also issue its bonds. The only difference is that Pemex can't guarantee them anything, right? That is, it can't guarantee them... But why can't it guarantee them anything? They don't sell oil, they don't refine, they don't do... I mean, they don't have productive activities, because in the end of the day it's a company that should be productive, right? Of course, look, it can't guarantee them anything. Pemex can't tell them, it can't tell them in private, "Hey, if I don't pay you, then if I don't pay you, then you can charge me with my oil." They pass you the barrels, right? That doesn't work. They pass you the barrels, right? Now, when you talk to the lawyers who have been involved in the details of all this, Pemex would potentially have some assets with which to back up his debt. I mean, a boat that was parked in I don't know where, you didn't pay and the boat was taken away from you. That could happen, but these are extreme scenarios. In some way, Pemex and the government are based, let's say, on the trust that is paid, right? And there's more trust in the government, because it has many more resources than those that have Pemex. And Pemex, and here comes the important issue, it doesn't have the explicit guarantee of the government, right? I mean, we all know that it's backed by the government, but it's something informal. I mean, they're entities, we're going to understand it as the big deal, they're separate entities, Pemex and the government, in terms of debt payment. That's right, they're separate, right? And it's supposed, in theory, legally, Pemex could simply stop paying, and go to a series of legal, legal procedures, so that they can get rid of it, etc., but in theory... And the government could say, "Well, there you go." I mean, as if they were going to break a company, the government could, in a scenario, we're making assumptions, they could say, "Well, thanks for participating, there you go, you break it, and there you go." Exactly, so it's like that, as you just said, right? Now, what happens in the background? Or where does this issue come from? That Pemex is so important, that if the government tells Pemex what you just mentioned, "Hey, you know what, there you go, if you can pay, that's good, if not, no way." The government... More well, there you see your donors, right? I never gave you the explicit guarantee. And also, that's why your donors were gaining a higher interest rate, because there was a higher risk that you would fail, that you would fail, right? So, but the real world isn't that simple. The truth is that Pemex is so important, that many perceive that the government would do what it was, with the fact that Pemex wouldn't stop paying their debt. And this generates, so to speak, a kind of implicit guarantee to the government, right? I mean, the government won't let Pemex fail, so I, as an investor, live a little in that gray area that we talked about last time, where the government doesn't make explicit its guarantee, on the other hand, Pemex's donors are emitting without this guarantee, but everyone knows that the government would do it. Because everyone says, "No, man, the government won't let Pemex fail." Because it's not just too big, and not just too big, but it's also become a representative company, beyond the size that Pemex can have. Sure, sure. So, the government's donors are the famous sovereign donors, the ones that the federal government emits, that can be already emited in pesos, as is the vast majority, or emited in dollars in the international markets in the United States. Those are the sovereign donors. And when we talk about these sovereign donors, why? Because the sovereign donors are a whole, there's a plural, of what donors we're specifically talking about. CETES, BONOSM, UDIBONOS... All of that. We all add them, we put them in a canister. Look, there are those in the short term, which are the CETES. In the short term, it's always understood in terms of donors and in terms of financial assets, as in what has a maturity of at least one year. Yes? These are above all the CETES, right? Yes. The CETES is more than a year, which is what we call a long term. There is a large number of donors, but there are mainly two. The UDIBONOS, which as its name says, are indexed to the UDI, to the investment unit. It's as if they were donors in a currency that moves along with inflation, and therefore they are protected against the same inflation. That somehow protects the owner over the loss that he could have in real-time interest rates. Exactly. Those donors, for example, demand them a lot, the SAFORES, because you know that the SAFORES have to protect their long-term income. That's why they use the UDIBONOS a lot. The other donors, which are the vast majority, are the well-known as M-BONOS, right? There are 3, 5, 7, 10, 20 and 30 years. Those are the long-term ones. They are very well-known in real-time interest rates. That is, there is the risk that you just mentioned that inflation will take your real-time return. There, let's say, there are more or less in the M-BONOS, there are approximately four to five parts of the sovereign debt, like the 80%. And there are other BONOS that are also sovereign, but they are also in dollars. Also, the nominal fixed rate, right? But obviously, these BONOS have the attractive that they bring the protection of the type of exchange. Now, these BONOS, these interest rates, they reflect, you tell me, maybe I'm wrong, they reflect the risk of the country, or here we refer to the risk of the country. That's right, look, a BONOS is issued, right? And the BONOS brings a stipulated rate, right? But the price of the BONOS can drop or rise, depending on the quality of credit that is perceived. For example, let's assume that the government suddenly has a natural disaster, it will have to spend a lot of money on that natural disaster, right now there are no funds anymore, right? And then the investors say, this reduces the possibility that the government pays me, or increases the risk that the government pays me, to put it that way, right? So, the investors would say, this BONOS is worth a little less. And then, for each price of the BONOS, that means that the BONOS at the end, if it is paid, it will be paid to what is worth the BONOS. And if the price has already fallen, that difference is what we economists say, the interest rates are rising because the risk is rising. The price goes down, the rate goes up. The price goes down, the implicit return goes up. That's what's going on behind us when we say, the interest rates have gone up, the interest rates actually go up or down, but because the BONOS prices go up or down, right? Right. So, we have these two debt universes, right? More or less than 100%, the 80% is sovereign, right? The government, which is a very good part in pesos and another part in dollars, and we have the Pemex debt, which is above all in dollars. Why the Pemex debt is above all in dollars? Because its income is in dollars. Because its income is above all due to the crude sale. So, it makes sense that you have your passives in the same currency that has your entry flows. Of course. So, now, and here comes the relevant issue. In the measure in which Pemex is deteriorated, and in the measure in which the markets are convinced, and it's a message that has been very insistent in the current administration, that they will always support Pemex, in some way, the deterioration in the Pemex finances is translated into greater pressure on public finances. Hey, Alexis, there's a question here. It's not like a perverse incentive. If I have a company, whatever you want, if I have a company and I get bonuses to finance it, or whatever you want, and I know that someone suddenly comes out there and announces in the middle and says, "No, I'm going to help Valeria. I'm going to help Valeria." Regardless of what happens with Valeria, I'm going to be there and I'm going to support it. So, that wouldn't imply, or it wouldn't translate, that I'm going to say, "I'll do whatever I want." Because at the end of the day, someone's going to support me and someone's going to sell me out and someone's going to pay my debts in case I can't. It doesn't generate this implicit or explicit support, because we don't know what it is, because it's said, but at the end of the day it's not established contractually. It doesn't generate perverse incentives. Completely, Valeria. Precisely because of that, we've never seen a fund reform in Pemex. Pemex is, as you say, a company that can't break because someone's backing it up. So, it's a company that has incentives to reform, to become more efficient, to start earning money, etc. It turns out to be a problem for the other. In Pemex's case, it's a problem for the company. Yes, but look, perverse incentives here, as you say, are, but they also go all over the place. They go to the government, they go to Pemex, because Pemex doesn't have an incentive to reform, to become more efficient, and the government doesn't have an incentive to do it with Pemex. For the government, and this is something that happened for many years, the government charges Pemex taxes, but not on its utilities, as any company would do, it charges them on its brutal sales. Imagine that Tiel Sats will charge you taxes on what you sell, not on your utility, yes? So, it means that Pemex, for many years, has been owed to pay taxes, yes? Here in Mitodeuda, I pay the government for my sales, I have losses, but the public finances look very nice, that is to say, the government... Yes, because we are rolling it all the time. Of course, of course. So, that happens. And then, also here, because there are always three, the investors come. And the investors say, "Hey, let's see, I already know your game, but it suits me." It suits me because you're paying me a higher return, because you supposedly don't have the government's guarantee, so you're not paying me what the government owes me, you're paying me more. So, if you think about it like this, you're all happy, right? That Mexican continuity, right? Of course, that's the end of the day of paying this debt. It's the one who pays, right? But Pemex doesn't have to do anything. The government has, let's say, a mechanism to sweep the trash under the carpet and not to be seen. And the investors are getting a very good return. Look, to put it in numbers, currently, the Pemex bonds are in dollars, the same bond, but of Pemex than of the government, which, as we've talked about today, should be very similar. The Pemex bond pays 4% more in dollars than what the government pays. -So... -It sounds like a good deal. -Of course. -For the investor, -not for Pemex, right? -And it's very perverse. And yet, look, Pemex is not able to put bonds. What's happening, and back to what you mentioned at the beginning, Pemex has certain benefits from its debt. They benefit from bonds, just like any big company that makes bonds. It has very high benefits, like $7,000,000 or $8,000,000 this year, -in what's left of this year. -Yes. And Pemex, if it refinances them, it'll have to refinance them more expensive than the government. What's happening today is that the government gives that money to Pemex. The government emits it from debt, on the other hand, and gives that dollar to Pemex. So, the total debt, you know that the total debt includes Pemex more than the government, it's not increasing. But if it's decreasing Pemex, it's increasing the government's debt. -Because it doesn't happen to the other one. -Of course, of course. The government passes it from one bag to another. Look, this probably, from a point of view, is strictly financial, it's not that bad. Well, no, it doesn't sound bad, you're debting a smaller bag, you're solving a small problem from time to time. It doesn't sound bad. It doesn't sound bad, but you're still breaking the boat. -Of course. -You're still breaking the problem. And the snowball doesn't make it grow. Exactly. So, look, for me as an analyst, what worries me the most is that all of this is that this little game could continue indefinitely. I mean, everyone talks about how Pemex will have to restructure their debt, etc. You know what? If the government tries to restructure Pemex's debt, it's very likely that it will be able to do it. It's very likely that they'll say, "You know what, Pemex? I pay your benefits every year. With this, in three or four years, Pemex's debt will go down to $50,000,000,000,000 from the $100,000,000 that's right now. $50,000,000,000,000 is already an appropriate level of debt. That debt emits the government. The total debt, at least on that side, doesn't go up. So, if you see, it's still the same happy story, right? -Of course. -But with a problem that only continued to grow, because Pemex, in this scenario that I presented to you, it wouldn't change structurally, it wouldn't stop losing money. So, my concern is that the markets or, in general, let us go with the idea that Pemex's problem was solved when Pemex's problem was only patented, right? So, I think that's it. I think that something that hasn't happened until today is that there hasn't been a strong pronunciation by the new administration, by the elected president, on Pemex's issue. I hear more and more, Alexis, that if the ball has been patented, why can't we continue doing it? And that posture seems to me to be delicate. Of course, because you also know that, let's see, how many hospitals we don't have because we've done this. -I mean, what happens is that... -Yes, we don't see the light, right? Of course, right? How many schools would we have? How much would we be spending more in education, in health, in security, right? Well, a lot, but we don't see it, right? Because all this goes through Pemex's path, right? And what I would say is very sad, is that this administration that comes, made a fiscal reform, and made a fiscal reform to pay Pemex, right? With all the deficit that we bring in spending, in health, in education, in many things, that that new money, so to speak, that new tax, went to pay Pemex. -Well, yes. -I think it would be a tragedy. So maybe it's not so bad that the market starts to get a little harder with this situation, right? Well, yes, they start to charge the bad administration a little bit more, and the bad management, beyond this implicit or explicit response, because I don't know what it is that the government is giving, and I don't know either what it's going to be, what it's going to give the virtual president elected, although everything seems to indicate that they will continue, well, more or less in the same line. Alexis, as always, it's a pleasure to talk to you in Feras y Manzanas, we keep talking about debt bonus, Pemex, because everything seems to indicate that this is not going to be more than growing. Alexis, as always, thank you very much. -I would like to give a hug. -We'll be hearing soon. Financial Education, BBVA, presented... Feras y Manzanas, with Valeria Moll. The podcast where the economy counts. Listen to this and all of our podcasts on www.zuenapunto.mx, Spotify, Google and Apple Podcast.