• Fiscal reform helps nation cushion company's drop in revenue
  • State-controlled company accounts for 20% of national budget

Mexico’s efforts to reduce energy subsidies and broaden its tax base is helping to insulate its credit rating as state-controlled oil producer Petroleos Mexicanos confronts a plunge in crude prices, according to Standard & Poor’s.

The fiscal changes enacted in 2014 have helped cushion the blow from a drop in revenue from Pemex, which has accounted for about 20 percent of the national budget, according to Victor Herrera, the managing director for Latin America at S&P in Mexico City. He cited measures including the end of a gasoline subsidy and efforts to bring more workers into the formal economic system.

"We don’t see pressure now as the government has so far reacted to contain this blow," Herrera said in a telephone interview. "Everyone was criticizing the fiscal reform a few years ago, but look at how it’s helped us cushion this drop."

Finance Minister Luis Videgaray has said Mexico is considering pumping cash into the company, and President Enrique Pena Nieto removed Pemex’s chief executive officer last week, giving his replacement the task of cutting costs and improving productivity after 12 straight quarterly losses. Moody’s Investors Service placed Pemex under review for a possible downgrade last month, citing the risk for oil prices to decline further.

S&P last month downgraded Pemex’s stand-alone credit profile, which refers to the rating the company would receive if it didn’t have the financial support of the federal government, to BB. That’s two levels below investment grade. S&P said then that “the stable outlook on the company mirrors that on the sovereign” and also affirmed Pemex’s investment grade BBB+ rating for foreign-currency debt.

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