Mexico and Pemex: A co-dependent relationship
The Mexican government and its state-owned oil company Pemex are deeply intertwined in a long-standing, co-dependent relationship. Pemex remains a strategic and political asset, central to Mexico’s energy policy and national identity. In return, the government has provided continuous financial support through capital injections, tax relief, and lessened profit sharing duty to keep the company afloat despite its declining oil production and rising debt. This support has come at a fiscal cost, often crowding out growth and productivity enhancing investment. At the same time, Pemex remains a key source of revenue and employment for the government, making it politically difficult to pursue fundamental reform. This mutual reliance creates a fiscal bind: the government cannot afford to let Pemex fail but sustaining it in its current form limits Mexico’s long-term fiscal flexibility.
On 22nd of July, the Mexican government unveiled new funding for Pemex through a special purpose vehicle that enjoys sovereign backing1. On 28th of July, this much anticipated issuance, in the format of P-CAPs (pre-capitalised securities2), launched with a size of $12bn at a price of treasury plus 170bps maturing in 2030. The market reaction to the transaction has been positive, with a strong rally in in the bonds of Pemex following its initial announcement. This paper examines Mexico’s fiscal trajectory under former President López Obrador (AMLO) and current President Claudia Sheinbaum, with a focus on assessing whether a sustainable solution for Pemex is emerging.
Mexico’s fiscal and policy challenges
Mexico initially responded to the 2020 pandemic with fiscal restraint under President AMLO, reflecting his commitment to fiscal consolidation. However, fiscal discipline weakened ahead of the 2024 election, with rising electoral spending, flagship projects, and support to Pemex pushing the deficit to 5.7% of GDP, which resulted in debt-to-GDP rising above 50% of GDP3. See Chart 1: Mexico, Public Debt, Gross, Total, Outstanding Federal Sector, Dollars, in % of GDP.
CHART 1: MEXICO, PUBLIC DEBT, GROSS, TOTAL, OUTSTANDING FEDERAL SECTOR, DOLLARS, IN % OF GDP
As of January 1, 2024.
Source: Mexican Ministry of Finance & Public Credit
Pemex remains a heavy fiscal burden; capital injections totalled about 3% of GDP during President AMLO’s term, and the profit-sharing duty on the company was reduced from 64% in 2019 to 30% in 20244. Social spending and wage hikes had political backing but strained the fiscal. Social spending, in the form of subsidies and transfers, now makes up almost 40% of total government expenditure, while public capital expenditure has declined in recent years5. See Chart 2: Expenditures and Current Spending.
CHART 2: CAPITAL EXPENDITURE AND CURRENT SPENDING
As of May 31, 2025.
Source: Central Bank of Mexico
Looking ahead, it is our view that President Sheinbaum faces a tough challenge to reduce the fiscal deficit below 4% amid slowing growth and restrictive monetary policy. She must balance social spending and support to Pemex with much-needed investment to ease infrastructure and energy bottlenecks, which are critical steps to capturing potential nearshoring gains. Fiscal reform, especially a Pemex overhaul, has been lacking. President AMLO side-lined the 2013 energy reform, suspending new private bids and limiting private roles to service contracts. Though Sheinbaum shows openness to Public Private Partnerships, clear policy direction on private investment in energy remains yet to be seen.
We will need to wait to assess the 2026 budget proposal and its line- item support to Pemex, which will be officially presented to the congress in early September 2025. The $12bn P-CAPs issue, on top of standard government funding, presents an increase in Mexico sovereign risk for EM investors to digest, but the transaction received healthy demand with final order size reaching over $23bn6. This new issue will increase Mexico sovereign’s weight in the widely followed JP Morgan Hard Currency Sovereign index (EMBIG) by approximately 68bps to around 10.62%, while for the diversified index (EMBIG Diversified) weight will increase by 9bps to around 5.00%. Looking ahead, we expect an increase in sovereign and Pemex-related issuance from Mexico. Addressing near-term funding concerns and ensuring Pemex’s short-term stability could provide President Sheinbaum with greater flexibility and political capital to pursue structural reforms.
A fix for Pemex?
Pemex Eurobonds underwent a strong rally on 22nd of July when the Mexican government unveiled new P-CAP funding for the company. Its USD denominated bonds maturing in 2033 jumped by around approximately 3 points on the day the new funding arrangement was announced, and a further point the following day, as the market welcomed the liquidity support from the Mexican sovereign7. The newly established SPV issued $12bn of Eurobonds to raise funds to purchase US Treasuries, and Pemex will be able to borrow these Treasuries from the SPV and use them to access liquidity through repo transactions with banks.
If in the future Pemex has insufficient liquidity to unwind its borrowings and return the Treasuries to the SPV, which could impair the SPV’s ability to fulfil its repayment obligations to Eurobond holders, the Mexican government would instead provide the SPV with Mexico 2030 Eurobonds8. The structure of the transaction effectively allows Pemex to raise financing with an implicit sovereign guarantee, as non-payment by Pemex obliges the sovereign to deliver its own bonds to the SPV, but is structured to keep debt off the sovereign’s balance sheet and protect its credit rating by creating only a contingent liability.
The provision of new liquidity to Pemex will help the company meet its sizeable debt service requirements, which includes $28bn of short-term debt and $23bn payable to suppliers (as of Pemex’s Q2 25 financials). However, the company’s financial and operational challenges remain severe, as indicated by significant spread pick-up Pemex bonds continue to offer over the Mexican sovereign, which is approximately 250bps even after the announcement of this transaction (see chart 3). Such a large differential is atypical in emerging market quasi sovereigns, particularly when the sovereign shareholder is investment grade rated (Mexico is rated Baa2/BBB/BBB-).
CHART 3: PEMEX VS MEXICO CDS SPREADS
As of July 23, 2025.
Source: Bloomberg
The disconnect between the credit spreads of Mexico and Pemex has not always been in place, prior to 2014 the two credits largely traded in lockstep, as is more usual for quasi-sovereigns, with Pemex providing only a modest additional spread over its parent (the 5YR CDS differential between Mexico and Pemex averaged 23bp between 2005-2014) (see chart 3). However, the two credits began to significantly diverge in 2015, when sharply lower oil prices saw Pemex’s EBITDA slump by 70% which severely constrained its cash flow, particularly as the Mexican government continued to use the company as a cash cow (in 2015 Pemex transferred 1.3x its EBITDA to government, according to S&P).
CHART 4: PEMEX CREDIT RATING HISTORY
As of January 1, 2025.
Source: Moody’s, S&P, Fitch
Deeply negative cash flow in the lower oil price environment of 2015 onwards resulted in rapid debt accumulation and undermined Pemex’s operational performance due to insufficient investment in existing and new fields. In turn, as its standalone credit profile rapidly deteriorated, Pemex’s credit ratings were repeatedly downgraded at Moody’s and Fitch, from a high of A3/BBB+ to a low of B3/B+. While S&P has continued to rate Pemex investment grade, just one notch below Mexico at BBB, on assumed sovereign support, the market has traded in agreement with Moody’s and Fitch with Pemex bonds at times trading more than 500bp over those of Mexico (on a standalone basis S&P assess Pemex at CCC+). Reflecting the liquidity support provided by the P-CAP transaction, Fitch upgraded Pemex by two notches to BB on 1 August 2025, but its assessment of Pemex’s standalone credit profile stands at just ccc, underscoring its underling credit challenges.
CHART 5: PEMEX ANNUAL PRODUCTION
As of January 1, 2024.
Source: Pemex
CHART 6: PEMEX NET LEVERAGE
As of January 1, 2024.
Source: S&P, Pemex
Underscoring the extent of the deterioration in Pemex's credit profile, between 2014 and 2024 its annual oil and gas production declined by 30%, to 2.5 MMboepd9 (Chart 5), and its net debt spiralled to $92bn, up 33% (Chart 6). Although Mexico has already provided significant budgetary support in recent years to help stabilise Pemex, providing sufficient funding to ensure continued debt service and for some reduction to net debt (from a peak of $113bn in 2020), the company’s financial sustainability remains precarious. In 2024, according to S&P, Pemex’s EBITDA/interest coverage was just 1.2x, undermining its ability to fund investment and improve production levels (capex in 2024 was 28% below its 2014 level). Last year Pemex reported a net loss of $43bn and EBITDA stood at only $9bn (S&P adjusted), a figure that is dwarfed by its total financial debt of $99bn, long-term employee benefit liabilities of $72bn, and $23bn owed to suppliers (as per Pemex’s Q2 25 financials).
CHART 7: EM QUASI-SOVEREIGN SPREAD TO SOVEREIGN
As of July 25, 2025.
Source: Bloomberg
CHART 8: PEMEX AND MEXICO SPREAD OVER US TREASURIES
As of July 25, 2025.
Source: Bloomberg
Boosting production, profitability and cash flow will be essential if Pemex is to meet its colossal financial obligations, absent a full bailout by the Mexican government, which we believe appears unlikely for now given the negative consequences that could have for the sovereign's credit rating. We expect the additional liquidity support that Mexico has provided to ensure that Pemex spreads remain anchored and do not return to the wides seen in 2023 of more than 500bp over the sovereign, absent an oil price crash (see chart 8). However, it should be noted that Pemex spreads have already rallied considerably since the election of President Sheinbaum last year, by more than 100bps, thanks to her clear indications that support would be forthcoming for the company. In order for a further significant rally in spreads, and for Pemex to transition to the typical 0-100bp spread-over-sovereign seen for quasi-sovereigns in other emerging markets (Chart 7), an incredible financial and operational transition of the company will need to be delivered. President Sheinbaum has indicated that the government is working on a plan to overhaul the operations of Pemex and reshape Mexico's hydrocarbon sector, including allowing private investment to boost production. However, until Pemex is able to reap the benefits of such potential changes, it will remain extremely dependent upon continued financial support from Mexico, with the latest form of support merely being a sufficient step to ensure the near-term stability of the firm, with a high probability that further such transactions will be required in future.
Conclusion
The successful $12 billion P-CAPs issuance signals continuous commitment by the Mexican government to Pemex balance sheet reorganisation while maintaining sovereign credit stability. Strong demand for the deal and the recent rally in Pemex bonds reflects growing confidence in President Sheinbaum’s pragmatic approach to fiscal management and her openness to operational reform. Nevertheless, the recently reported Q2 25 results by Pemex show that production levels y/y were lower again and free cash flow remains strongly negative, pointing to the company’s ongoing structural challenges. The current strategy offers a clear path to near-term stability as we anticipate additional P-CAPs structure issuance, and potential long-term improvement if hydrocarbon sector reforms are instigated. For investors, this evolving policy landscape, combined with supportive technicals and improving sentiment, creates a more constructive outlook for both Pemex and Mexican sovereign credit. Continued progress on reform and private sector engagement could create a compelling case and gradually narrow the long-standing wider spread between Pemex and the sovereign relative to other quasi sovereigns.
1 “Mexico announces debt sale to fortify Pemex’s trouble finances”, Reuters, 22 July 2025
2 P-CAPs are structured securities that gives a company access to debt funding that sits off the balance sheet in a trust until the company needs it.
3 Source: International Monetary Fund
4 “Mexico's lower house OKs major tax cut for indebted state-run Pemex”, Reuters, 20 October 2023
5 Source: Banco de Mexico
6 “Mexico pulls in $12 billion to prop up indebted oil producer Pemex”, Reuters, 30 July 2025
7 “Mexico seeks Up to $10 Billion in Debt Sale to Back Pemex”, Bloomberg, 22 July 2025
8 “Mexico in $12bn Offering”, Cleary Gottlieb, 29 July 2025
9 Million barrels of oil equivalent per day.
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