Pemex's problems aggravated by unfair tax burden, says Mexican Deputy Finance Minister

Pemex's problems aggravated by unfair tax burden, says Mexican Deputy Finance Minister

Bonds Debt Corporate & Sovereign Strategy Economy & Policy Fixed Income Mexico

The worsening financial condition of Mexico’s state-run oil giant Pemex was exacerbated in recent years by an unfair tax structure that placed additional burden on the company to make up for the government’s poor tax collection, Mexican Deputy Finance Minister Arturo Herrera said Tuesday during LatinFinance’s finance summit in Mexico City.

“Actually, the problem of Pemex is hiding a different problem, a problem of tax collection by the federal government,” Herrera said. “The tax treatment of Pemex was extremely favorable to the federal government.”

To address that issue, the government is looking to overhaul the tax structure in a “stepwise fashion,” Herrera continued. Reducing the taxes Pemex pays would allow the company to use the funds to make investments in production and exploration that would fuel its growth, said Herrera. To plug in the holes set to be generated by less onerous taxation of Pemex, the government has already started to increase tax collection and has closed a $1 billion “loophole” in the current fiscal year, said Herrera.

The administration is also slated to unveil a plan to tax the digital economy, although it is not clear how much revenue can be collected by doing that, said Herrera.

As far as the private investments with Pemex go, President Andres Manuel López Obrador “does not mind” signing agreements with the private sector and is open to a “second round” of partnerships but wants these investments to materialize, said Herrera. Out of the contracts signed in the last two years, only around 15% of the expected investment has come to fruition.

“Some of these contracts were signed when the price of Mexican barrel was $100 and then it went down all the way to $44... [so] companies stopped doing investments because market conditions changed. But from the point of view of certain people in the government, [these investments] just didn’t happen,” said Herrera.

Mexico currently only collects 13% of GDP in taxes, said Herrera.

In February, the government of Mexican President Andrés Manuel López Obrador announced a bailout package for Pemex that totaled more than $5 billion. It included a capital infusion from the government, tax relief and steps to alleviate some of the company’s pension obligations. 

Meanwhile, Herrera said Tuesday’s report that the Mexican economy contracted by a seasonally-adjusted 0.2% in the first quarter wouldn’t affect the government’s economic plans. He said the finance ministry had already anticipated that growth would be weak. Mexico’s GDP was 2% in 2018 and sharply decelerated in the final quarter. In early April, the government cut its 2019 GDP forecast to 1.6% from 2%.