Mexico’s exposure to embattled state oil company Petróleos Mexicanos (Pemex) continues to generate concern at central bank Banxico, according to the minutes of a recent meeting of the governing board to discuss monetary policy.

The bank’s board stressed “the uncertainty around Pemex’s credit rating,” according to the minutes of a mid-Decemer meeting that were made public on Thursday. 

Last June, Fitch Ratings downgraded Pemex debt to junk status, while Moody’s Investors Service revised its outlook on the state energy giant to negative from stable.

One Banxico board member warned in regard to Pemex that the “challenges of great transcendence persist, whose solution is still pending,” while another board member said there was a “latent” risk of a downgrade to junk status by another major credit rating agency.

Banxico’s four governors and its secretary, along with finance secretary Arturo Herrera Gutiérrez and undersecretary Gabriel Yorio González, were present at the meeting. 

Pemex’s 2019-2023 business plan has been widely panned by analysts as insufficient to reverse declines in oil and gas production, and replenish reserves.

“Pemex is, in effect, a revenue agency masquerading as an oil company, and it will continue being so,” Mayer Brown LLP’s Jose Valera, partner, told NGI’s Mexico GPI in a recent interview, explaining that Pemex functions as “an alter ego for the treasury in the financial markets.

“That’s why…when push comes to shove, and if the rating agencies are going to threaten to downgrade Pemex to junk status, I would expect that the government would turn the implicit guarantee [of Pemex debt] to an explicit guarantee, because the government, in effect, is funding itself through Pemex.”

Another Banxico board member offered a more optimistic perspective, arguing that the risk premium for Pemex bonds “has diminished substantially due to the support of the federal government, operations to refinance and repurchase debt, and the increase in oil production.”

Pemex reported crude oil output of 1.68 million b/d in November, up 2.4% sequentially, but down 0.3% year/year.

A majority of board members agreed on the necessity of strengthening the credit profiles of Pemex and the sovereign, “as well as fulfilling the fiscal goals for 2019 and the objectives of the 2020 budget.”

A board member highlighted that “one credit rating agency, whose position will be crucial to define the future of Pemex’s investment grade, has reiterated the negative outlook of the company’s rating, in light of the corresponding rating of [Mexico’s] sovereign debt, the deterioration of Pemex’s credit profile, and the perception that the company’s investment spending will be insufficient to replenish its crude reserves in 2019 and 2020.”

This member added that Pemex’s “continued dependence on budgetary support from the federal government is unsustainable.”

Pemex’s business plan calls for crude output to reach 2.7 million b/d in 2024, a level not seen since 2008.

The plan pledges for natural gas production to reach 4.91 MMcf/d, up from 3.7 MMcf/d reported in November.

Pemex, widely cited as the world’s most indebted oil company, reported net debt of 1.9 trillion pesos, or about $99.9 billion at the current exchange rate, as of the end of September.