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Pemex drains reserves of quick fixes as cash crunch looms

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Facing a New Year cash crunch, Pemex is running out of quick fixes to cover debt payments, and analysts warn that life-saving reforms are needed to the tax structure of the world’s most indebted oil company.

Mexico’s state oil company recently cashed in government notes earmarked to help plug vast pension liabilities. With that, it bought itself a breather from a $2bn debt payment due in January.

But even after that financial manoeuvre, which has raised $4.8bn, Mexico’s biggest company will probably still have to issue debt in January and to require further state aid in 2021.

“It’s a bigger and bigger hole,” said Simon Waever, strategist at Morgan Stanley.

“Oil production isn’t rebounding and the government doesn’t have as many revenues to play with,” he said. “Unless they are lucky and production picks up, they will need to consider other ways. A broader tax reform is the most realistic solution.”

Once a lucrative cash cow for the Mexican state, Pemex now limps from handout to handout from a government whose own resources were under severe strain even before Covid-19 pushed Mexico into its worst recession in a century.

Pemex is trapped in a Catch-22: most of its earnings go to the government in tax, leaving it too little to invest in boosting production and forcing it to use debt to finance capital spending.

Since the government has vowed not to increase Pemex’s $110.3bn debt mountain, the company has had to keep going cap in hand for help.

“Pemex’s situation is much worse than everyone in the markets thinks,” said one former senior official.

“They’re burning through cash at the speed of light.”

Pemex’s tax burden has been reduced from 65 per cent in 2019 to 58 per cent this year and is set to fall to 54 per cent in 2021. It last year funded only 11 per cent of the national budget, roughly a quarter of its contribution to government coffers in 2008.

But the government’s own dwindling sources of income, and its need to husband resources to fund priority social programmes, means it will not yet entertain the comprehensive tax reform that Pemex needs to survive.

Pemex in mid-November swapped 129bn pesos ($6bn) in untradeable promissory notes given by the government for standard sovereign debt, and then cashed that in.

The promissory notes, a form of government IOU, had been intended to help reduce pension liabilities that Gonzalo Monroy, an energy analyst, reckons will widen from $77bn in 2019 to $84bn in 2020.

“They haven’t said how they monetised the bonds. Foreign ownership went up significantly [in November] so either they just sold them abroad [in the market] or, and I think more likely, they entered a repurchase agreement with foreign banks where they exchanged these new liquid government bonds with foreign banks and the foreign banks gave them cash with the promise that Pemex would buy them back in future,” said Mr Waever.

“They’re very good at finding creative ways [to refinance Pemex] and this is yet another one,” he added.

­Pemex has tapped the promissory notes once before. Aaron Gifford, emerging markets sovereign analyst at T Rowe Price, said he believed Pemex had now exhausted them, boosting unfunded pension liabilities.

Still, by using sovereign debt, Pemex sent a signal of government backing to the markets.

Pemex’s debt has no explicit government guarantee. However, President Andrés Manuel López Obrador, an energy nationalist, has made clear he would do whatever it takes to rescue a company he remembers as a motor of national development from his youth in the southern oil state of Tabasco.

In another piece of assistance, the energy ministry recently imposed new rules on fuel imports, slashing import permits to five years from 20 years in a move that Mexico’s antitrust commission said would hamper private investment in the sector.

Pemex raised $6.5bn in 2020 but faces $6bn in debt maturities in 2021.

Greg Magnuson, an analyst at Neuberger Berman, said the latest debt operation “could be a prelude to a return to market to address short-term maturities in the new year”.

Mr Waever at Morgan Stanley expects Pemex to issue $10bn during the year, with a $5bn sale in January.

A bond sale would probably go down well: Pemex debt was downgraded to junk this year, making it an attractive high yield in a negative interest rate world. Current yields on its benchmark bonds maturing in 2027 hovered around 5.4 per cent, a sharp decline from roughly 8 per cent at the start of November.

But analysts agree Pemex needs more than quick fixes.

“The ability to continually implement ad hoc, one-time support measures is going to diminish over time,” said Patti McConachie, a senior analyst at asset manager Columbia Threadneedle.

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She saw just a “limited window” before the government would have to implement “sustainable change” for Pemex.

However, Mr López Obrador has vowed not to implement tax changes in the first three years of his government as he seeks to keep his party’s legislative majority in midterm elections next June.

Rating agency Moody’s Investors Service estimates Pemex has $10bn in negative cash flow and will somehow need to come up with nearly $15bn next year.

But Mr Gifford said that could be lower — a “manageable” $10bn to $11bn — if the company rolled over debt and kept production and investment flat. Data from CNH, the regulator, show Pemex’s production slumped 6 per cent from January to October.

“They’re going to need support very soon in 2021,” cautioned the former official.

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Emerging Markets

Regulators close ranks on crypto

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Regulators are continuing to step up their scrutiny of cryptocurrencies, with central banks and South Korea’s tax authorities demonstrating fresh concerns.

In a report published on Wednesday, the Bank for International Settlements, the global body for central banks, argues that digital tokens such as bitcoin have few redeeming features and “work against the public good”. It also dismissed stablecoins — a link between crypto and conventional assets — as an “appendage” to traditional money.

Perhaps unsurprisingly, the BIS did endorse the development of digital currencies backed by central banks, saying they could be a tool to achieve greater financial inclusion and lower the high costs of payments. “Central bank digital currencies . . . offer in digital form the unique advantages of central bank money: settlement finality, liquidity and integrity,” it said.

In contrast, bitcoin wasted energy and cryptocurrencies were “speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes”.

South Korea has acted against the financial crime of tax evasion, with more than Won53bn ($47m) of bitcoin, ethereum and other cryptoassets confiscated from 12,000 people. Officials said it was the largest “cryptocurrency seizure for back taxes in Korean history” and noted that local exchanges had allegedly been used to conceal assets because they did not collect the resident registration numbers of account holders. Many of South Korea’s 60 crypto exchanges are battling to meet regulatory conditions to operate beyond September.

This week’s #techAsia newsletter asks whether the death knell is being sounded for cryptocurrencies. That could be the case in China, where it is scaling up tests of its official digital renminbi, and appears serious about stamping out the crypto industry on its soil. Bitcoin fell below $30,000 on Tuesday following the latest regulatory crackdown, but it has recovered to be worth more than $34,000 today.

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2. SoftBank not a ‘one-man show’, says Son
Masayoshi Son has told shareholders that SoftBank will not prioritise short-term trading gains as the company behind the world’s most aggressive technology fund was grilled over governance failures after the collapses of Greensill and Katerra. At its annual shareholder meeting, the 63-year-old billionaire founder defended the Japanese conglomerate’s governance structure, saying the board was not “Masayoshi Son’s one-man show”.

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China bolsters ties with Myanmar junta despite international condemnation

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Trade and diplomatic ties between Myanmar and China are normalising in the face of intense domestic opposition and international condemnation of the military junta that seized power in February.

Beijing has strengthened relations with Myanmar’s military leaders despite a series of violent attacks against Chinese business interests in the country after Aung San Suu Kyi’s government was toppled.

Yun Sun, an expert on Myanmar-China relations with the Stimson Center, a US think-tank, said Beijing had already made a “fundamental assessment” that Myanmar was moving into another prolonged period of military rule.

“I think the Chinese can see that this military coup is successful and is here to stay,” she added.

The resumption of state-level engagements and economic activity signals that Myanmar is reverting to its traditional economic reliance on China. The country has used its larger neighbour as a buffer against international sanctions and divestment by foreign investors, who have announced plans to quit the country or shelved projects.

Since the coup, 875 people have been killed by the junta and 6,242 arrested, according to the Assistance Association of Political Prisoners (Burma), a human rights group. The country’s economy and public services were severely disrupted by mass protests in the three months that followed the putsch, and have only partially recovered.

The resumption of bilateral trade will fuel the widespread suspicion among anti-coup resistance groups that China was prepared to support the new military regime.

The cumulative value of China’s imports from Myanmar for the first five months of the year was $3.38bn, up from $2.43bn in 2020 and $2.56bn in 2019, before the coronavirus pandemic, according to official Chinese customs data.

Exports to Myanmar for the same period have not recovered to the same extent, however. By the end of May, goods valued at $4.28bn had been shipped to Myanmar, compared with $4.56bn and $4.79bn in the two previous years.

In a further sign of strengthening diplomatic relations, Chen Hai, China’s ambassador to Myanmar, met coup leader and military commander-in-chief Min Aung Hlaing in Naypyidaw, the capital, in June. In a subsequent statement, Chen referred to Min Aung Hlaing as the leader of Myanmar.

China was among the countries that abstained in a UN general assembly vote last week calling on the international community to halt the flow of arms to Myanmar and release Aung San Suu Kyi and other political detainees. 

Beijing had good relations with the government of the deposed leader, who is in detention facing multiple criminal charges. However, it has refrained from criticising the military, fanning anger among the mass protest movement that sprang up after the coup. 

Beyond being Myanmar’s biggest trading partner, China also has strategic infrastructure investments in the country, including energy pipelines that give Beijing a critical link to the Indian Ocean.

James Char, a Myanmar expert at the S Rajaratnam School of International Studies in Singapore, said many people in Myanmar still blamed the Chinese government and business interests for complicity in supporting the military’s decades of rule before the transition to democracy.

“The Chinese, themselves, are very clear about [public sentiment in Myanmar],” Char said.

Attacks on China-linked businesses in the wake of the coup culminated in an explosion at a Chinese-backed textile factory west of Yangon on June 11, according to reports from local Myanmar media, as well as junta-controlled information services and Chinese state media.

Beijing’s wariness of inflaming Myanmar protesters would probably slow Chinese direct investments and the resumption of planned larger-scale developments that formed part of President Xi Jinping’s Belt and Road Initiative, analysts said.

Additional reporting by Sherry Fei Ju in Beijing



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Australia calls Great Barrier Reef warning politically motivated

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Australia has labelled a draft decision by the UN’s World Heritage Committee to include the Great Barrier Reef on its “in danger” list as politically motivated.

The committee, which is chaired by Tian Xuejun, China’s vice-minister for education, and selects Unesco World Heritage sites, proposed adding the world’s largest collection of coral reefs to the danger list because of the damaging impact of climate change and coastal development.

The designation could ultimately lead to the reef losing its World Heritage status, although officials said listing was intended to prompt emergency action to safeguard a living structure that stretches 2,300km along Australia’s eastern coast.

But Sussan Ley, Australia’s environment minister, said the government had been “blindsided” by the committee’s finding and alleged there was a lack of consultation and transparency. She added that Canberra would challenge the draft decision.

“When procedures are not followed, when the process is turned on its head five minutes before the draft decision is due to be published, when the assurances my officials received and indeed I did have been upended, what else can you conclude but that it is politics?” she said.

That the World Heritage Committee is chaired by a senior Chinese official has stoked suspicions in Canberra that it had been singled out over its diplomatic and trade clash with Beijing.

China-Australia relations have soured following Canberra’s call last year for an inquiry into the origins of Covid-19 and Beijing’s imposition of tariffs on Australian wine and barley imports.

Ley said she and Marise Payne, Australia’s foreign minister, had already spoken with Audrey Azoulay, Unesco director-general, to complain about the draft decision.

But scientists downplayed the suggestion that the “in danger” listing was politically motivated. Three mass bleaching events in five years demonstrated the need for the government to do more to tackle climate change, they said.

“I’m seeing some press coverage saying this is all a plot by China not to buy wine, lobsters and to screw the Barrier Reef. I think that’s pretty far-fetched given that the draft decision released overnight will be voted on by 21 countries,” said Terry Hughes, professor of marine biology at James Cook University.

The controversy will heap further international pressure on Canberra, which has been pressed by the US, UK and others to commit to a national target of net-zero emissions by 2050.

In a draft decision due to be voted on next month, the committee urged Canberra to “provide clear commitments to address threats from climate change, in conformity with the goals of the 2015 Paris Agreement, and allow to meet water quality targets faster”.

It noted the loss of almost one-third of shallow-water coral cover following a “bleaching” event in 2016 — a process linked to warmer than normal water that can lead to a mass die-off of coral.

The row over the “in danger” listing occurred at a difficult time for Australia’s conservative coalition, which is embroiled in internal squabbling over climate policies.

On Monday, Barnaby Joyce, a climate sceptic and supporter of coal mining, ousted Michael McCormack to become leader of the National party, the junior coalition partner to the Liberal party, and Australia’s deputy prime minister. Joyce is expected to oppose any move to commit to net zero by 2050.

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