Mexico May Give Pemex Yet Another Tax Break

Mexico could further ease the fiscal burden on its state oil firm Pemex, the world's most indebted oil company, as the government looks to stop years of production declines.

"With Pemex, for example, we are constantly or periodically lowering taxes so they have more funds," Mexican President Andrés Manuel López Obrador said at his regular briefing on Monday, as carried by Bloomberg. "And we can lower them more," López Obrador added.

Since leftist populist president López Obrador took office at the end of 2018, the government has continuously supported the state oil firm by lowering its tax burden and favoring Pemex and other state energy companies over the private sector and foreign companies. López Obrador came to power with the promise to increase state support for Pemex and make the state-run major the pillar of a turnaround for the country's declining oil production. Pemex continues to be the world's most indebted oil company with some $113 billion in liabilities.

The Mexican government has been moving ahead with a comprehensive revamp of the country's energy market aimed to virtually undo all the reforms implemented by the previous administration and re-establish state-owned companies as the dominant players in the field. López Obrador is also strongly favoring fossil fuels and a key role for Pemex in the market.

Over the past three years, Mexico's government has reduced the tax burden for Pemex by lowering the so-called profit-sharing rate—the tax the firm pays to the government—three times. In 2019, the profit-sharing duty was 65 percent, but it was subsequently cut to 58 percent in 2020, to 54 percent earlier this year, and to 40 percent in September.

The lower tax rates for Pemex, however, mean lower government revenues, which is a concern for rating agencies.

While affirming Mexico's sovereign rating at BBB- last month, Fitch Ratings said it "views the debt of state oil company Pemex (equivalent to 9% of GDP) as a contingent liability of the sovereign."  

"Fitch expects the federal government will continue to financially support PEMEX (BB-/Stable) as a priority of this administration has been to strengthen the role of Mexico's state-owned energy companies," the rating agency said in November.

By Tsvetana Paraskova for Oilprice.com

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