Moody's sees Mexico’s decision to DIY new refinery as a costly mistake

Mexican President Andrés Manuel López Obrador earlier rejected the bids of foreign engineers for an $8bn new oil refinery, and assigned the project to the state-owned oil company, Pemex. But rating agency Moody's believes this decision will likely cost at least $2 billion to $4 billion more than the government estimates due to its "limited know-how."

Last week, Mexican President Andres Manuel Lopez Obrador said the refinery, slated to be built at the Gulf coast port of Dos Bocas for $8 billion, will break ground early next month and be completed by May 2022. The ratings agency described the decision to build the refinery without private sector expertise as one that would be "costly."

"Given the government's (and Pemex's) lack of experience in building refineries, the project is likely to end up costing more and taking longer than the government anticipates, placing further strains on fiscal resources," Moody's said in a statement.

The project, one of Lopez Obrador's top priorities, has been repeatedly criticized by investors and ratings agencies due to concerns it will divert funds away from Pemex's more profitable exploration and production business.

Moody's said the decision raised further questions about the predictability of the government's decision-making, pointing to the negative reaction to Lopez Obrador's cancellation of a part-built $13 billion new Mexico City airport last October. "His government's pledge to maintain fiscal responsibility appears increasingly in tension with its ambitious social and infrastructure spending agenda," Moody's said.

The implications for Mexico's credit profile will partly depend on whether it continues to undermine market confidence, hurting its economic prospects, the agency added. The leftist president has defended the project as needed to make Mexico more self-sufficient in production of gasoline, and wean the country off growing fuel imports.

Earlier on Monday, Lopez Obrador unveiled a new financial package with major banks designed to improved Pemex's balance sheet and head off a fresh ratings downgrade of the firm. The measures include $2.5 billion in debt refinancing, and a renewal of $5.5 billion worth of credit lines.

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