07 June 2019 by jbchevrel
Fridays follow one another but don't look alike… Last Friday, I commented on Mexico risk hit after President Trump came out with a 5% tariff on all Mexican goods to counter illegal migrants, potentially incrementally increased by +5% steps all the way up to 25%. Today, President Trump said that there is a good chance that the US will make a deal with Mexico: “If we are able to make the deal with Mexico, & there is a good chance that we will, they will begin purchasing Farm & Agricultural products at very high levels, starting immediately.” Net net, Mexico CDS is little changed (+3 bps) over the past week. Trade is indeed not the only factor in the equation. The giant PEMEX saw its CDS widen +27.5bp (vs sovereign +5bp) today, after Fitch downgraded it by one notch to junk (BB+). The market's move shows Fitch isn’t expected to be the only agency to downgrade the name. Another downgrade from either S&P or Moody’s would take PEMEX bonds out of indices, leading to a forced sell-off from IG-only investors. Pemex's EBITDA had fell -14% YoY in Q1-2019 to $6B, despite the fact that oil was roughly flat. The main driver was a decline by -12% YoY of the production. Liquidity was tightening, meanwhile, with cash -18% YoY to $3.4B, vs an amount of undrawn credit available under $6.5B + MXN 32.5B bank lines declined to 2.6 + 25.5 vs 6.4 +26.2 in Q4-2018. A $8B sovereign funding still has to materialize, also. As far as local economic data is concerned, the CPI came down -0.3% MoM in May, core inflation stood at +0.2% MoM. That was mainly driven by the +0.3% MoM move in merchandise prices, adding to increases in food, beverages and tobacco.