Pemex Isn't Mexico's Only Debt Problem as States Owe $28 Billion

  • States have boosted debt level to highest in two decades
  • Moody's has cut the outlook for almost all states to negative

Mexico’s debt-laden oil producer has largely dominated investors’ attention in recent months because of the threat it poses to the government. But that’s not the only potential debt crisis facing the nation.

States including Veracruz, Nayarit and Zacatecas are drowning in red ink after racking up about $28 billion in obligations, the most in two decades. Their finances are about to deteriorate even further as many governors ratchet up spending to bolster their chances of winning elections in June, according to Moody’s Investors Service analyst Francisco Vazquez. On April 1, the ratings company lowered the outlook for all but one of Mexico’s 31 states to negative.

“A state crisis is coming,” said Rodolfo Navarrete, a Mexico City-based analyst at Vector Casa de Bolsa, and the most accurate Mexico economic forecaster according to data compiled by Bloomberg. “I expect state governments will look for more financing, either by trying to increase transfers from the federal government or by raising bank debt. This will increase public-sector debt,” which could affect the nation’s credit rating.

Mexico is already at risk of a downgrade after Moody’s cut its rating outlook to negative on March 31, citing concerns it will have to provide financial support to its oil company. This could compromise the government’s own finances: Petroleos Mexicanos, which has more than $87 billion of debt, has reported 13 consecutive quarterly losses amid plunging oil prices and output. 

State debt doesn’t represent a meaningful risk because it totals only about 3 percent of gross domestic product, compared with 11 percent of GDP for Pemex, the Finance Ministry said in an e-mailed response to questions.

Some still see risks. “The states are way in over their heads,” said Luis Maizel, who helps manage $5.5 billion of assets as co-founder of LM Capital Group in San Diego. “It’s one of the biggest problems Mexico has right now that a lot of people have been ignoring.”

Mexico’s peso gained 0.6 percent to 17.4409 per dollar at 12:47 p.m. in New York.

Like many states in Mexico, Veracruz also is contending with soaring security costs stemming from drug-related violence. In addition, it faces criminal complaints alleging Veracruz faked the return of 4.8 billion pesos ($270 million) to its treasury, according to Mexico’s federal auditor, which in February rated it the least transparent state in the country. Thirteen other states are accused of similar violations, and while Mexico passed a law this year to improve states’ handling of finances, Moody’s says it won’t have much impact in the short term.

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