Mexico's government aims to give $7.3 billion in tax relief to heavily indebted state oil company Pemex, according to a document seen by Reuters on Thursday, in an effort to cool fears over its financial viability and the impact on the wider economy.
Pemex, burdened by $106 billion of financial debt, is teetering on the brink of losing its investment-grade rating.
That scenario could be disastrous for Pemex as investors whose mandates stipulate they must hold assets of investment-grade quality find themselves forced to sell billions of dollars of its bonds. This would push Pemex's debt financing costs higher.
The internal document detailed a tax relief of 138.7 billion pesos ($7.28 billion) over 2020 and 2021, saying the government would propose the changes on Sept. 8 when it presents its proposal for the 2020 budget.
Pemex said the tax reductions would be achieved by lowering the profit-sharing tax to 54% by 2021 from 65%. The tax relief would amount to 47.1 billion pesos in 2020 and 91.6 billion pesos in 2021.
"Pemex faces a high tax load, as such Mexico's government has decided to modify its tax regime to lighten it. This modification will be done gradually over the coming years so as to not create fiscal instability for the government," the document stated.
Ratings agencies Fitch and Standard & Poor's cut Pemex's standalone assessment earlier this year and put it on negative outlook, inching the firm closer to a financial cliff.
Fitch now rates Pemex's long-term foreign debt at BBB-, while Moody's puts it at Baa3 - both one level above a junk rating. At least two of the three ratings agencies would have to downgrade Pemex to junk to trigger forced selling of its bonds.
Fitch, Moody's and S&P were not immediately available for comment on what implications the measures would mean for Pemex's rating.
The agencies have been on high alert over Mexican President Andres Manuel Lopez Obrador's plans to have the state oil firm build a $8 billion refinery.
Earlier this month the government announced plans to ease Pemex's debt woes, including $2.5 billion in debt refinancing plus the renewal of credit lines with three banks and a gradual tax cut.
Those measures include two extended lines of credit with the banks worth up to $5.5 billion. Though ratings agencies have said that the plans were not enough to ease Pemex's financial problems.
(Reporting by Ana Isabel Martinez; Additional reporting by Stefanie Eschenbacher and Anthony Esposito; Editing by Frank Jack Daniel, Cynthia Osterman and Lisa Shumaker)