How Four of the Largest State-Owned Enterprises in Latin America Weathered the Aftermath of the 2014-2016 Commodity Price Slump
The 2014-2016 collapse in commodity prices, particularly of oil, was one of the largest drops in global commodity prices in the last four decades. The abrupt end of the so-called commodity super-cycle was a big blow for many Latin American countries, which rely heavily on revenues derived from commodities . Previous IMF research has analyzed the economic implications of the recent commodity boom and bust for the region .
However, spillover effects from commodity price shocks on state-owned enterprises (SOEs)—which are government-owned entities created to carry out commercial activities on the government’s behalf— have been often overlooked.
How have the region’s largest SOEs, which are in Brazil, Chile, Colombia, and Mexico, weathered the collapse in commodity prices? We have analyzed the evolution of their fundamentals and business plans and identified some remaining vulnerabilities and challenges to these firms’ outlook.
State-owned enterprises and credit ratings
A common characteristic among several state-owned enterprises in Latin America is their reliance on commodities as well as their systemic importance for the economy and government revenue. Despite these commonalities, their operating metrics, ownership structures, and business strategies vary significantly.
Some of the region’s largest state-owned enterprises—that is Mexico’s Pemex, Brazil’s Petrobras, Colombia’s Ecopetrol, and Chile’s Codelco—suffered the brunt of the commodity price slump. Amid growing concerns for these state-owned enterprises’ financial situation, credit rating agencies downgraded their ratings despite maintaining sovereign credit ratings, except for Brazil and Chile, as the chart shows.
The larger downgrade of Petrobras’ rating in absolute terms and relative to the sovereign is consistent with the sharp increase in its credit default swap (CDS) spreads. This not only reflected the effects of the slump in oil prices, but also idiosyncratic problems faced by that company during that period.
To investigate the association between commodity prices and risk premia more systematically, we estimated the response of sovereign as well as SOE CDS spreads to a negative commodity price shock in a vector autoregression (VAR) framework as the chart below shows.
Results suggest that spreads for Petrobras and Pemex indeed are more responsive to a commodity price bust as compared to other SOEs in the region and compared to its own sovereigns. At the same time, the deterioration in sovereign spreads in Brazil and Mexico following a sudden reduction in oil prices comes mainly as a result of higher state-owned enterprises’ credit default swap spreads.
While these results are in line with the data presented in the first chart, the sensitivity of state-owned enterprises’ spreads could also depend on market liquidity. In this regard, Pemex and Petrobras debt instruments are significantly more liquid than Ecopetrol and Codelco and are almost as liquid as their respective government bonds. The importance of these companies’ transfers to the government could also play a role in the magnitude of spillovers from commodity shocks.
How strong is the link between these SOEs and their governments?
To varying degrees, all of these companies represent a major source of revenue for their corresponding government (see chart below). Although the contribution to their government’s budget has declined for some of these companies (Pemex and Codelco), all of them are expected to continue having a key role in their respective government’s finances and agenda.
This implies that the probability of government support, if needed, will also remain elevated. Looking at the difference between rating agencies’ baseline credit assessment—a measure of the risk profile without sovereign support— with the final rating outcome, markets perceived that Pemex is most likely to receive support from its government in case of need as the chart shows, followed by Chile’s Codelco. Further strengthening of these companies’ fundamentals will be key to improve both firm and sovereign credit profiles.
State-owned enterprises’ evolution
On the wake of the commodity price collapse, and amid substantial currency depreciation, leverage ratios in the four SOEs deteriorated markedly in 2015-16 (as Panel 1 from the chart shows). This occurred on the back of ballooning debt, mostly denominated in foreign currency, and asset valuation losses.
Except for Pemex, these firms successfully reduced their leverage ratios in 2017-18 by stabilizing debt levels, or even reducing them—as seen in the case of Petrobras—by repaying maturing debt. The reduction in liabilities was necessary to offset the asset valuation losses—mainly on plants and equipment— owing to persistently low commodity prices (see Panels 2 and 3). In contrast, the deterioration on both sides of the balance sheet of Pemex translated into a worsening of its equity position (see Panel 4).
Recent improvements in these companies’ operating metrics come on the back of commendable efforts to increase efficiency through asset sales and optimization of expenditures. As a result, cash generation indicators have improved (particularly in Pemex), and EBITDA margins in these companies are at their highest levels in several years (see chart on financial indicators).
Like most commodity producers worldwide, Codelco, Pemex, Petrobras, and Ecopetrol have all had to slash planned capital expenditures to adjust spending to lower cash flows and subdued sectoral prospects. Of the four companies, Petrobras has been the only company capable of increasing production last year, thanks in part to previous large investments in the prolific pre-salt oil fields, which now represent about 50 percent of its production.
Since production activity naturally depletes reserves, there is a need to increase investments in exploration and to overhaul existing fields, to maintain current production levels. However, production prospects for the three oil producing firms is clouded by the complexity of the prospective projects, as these are in deep and ultra-deep-water areas or rely on unconventional resources.
More governance, efficiency, and profitability
On top of collapsing prices and revenues, recent corruption investigations have threatened some of these state-owned enterprises’ ability to raise financing and have been a major obstacle for structural reforms in these companies. However, many of these firms have put together clear codes and guidelines on publishing information about governance policies and practices (Codelco and Petrobras provide such information on their websites).
Nevertheless, transparency can be further strengthened with more detailed disclosure of quasi-fiscal spending and procurement contract awards, both high-risk areas of mismanagement. It would be also important to improve oversight and reporting on the state-owned enterprises’ operations.
The recent experience also demonstrates that these companies can improve their efficiency and profitability with well-designed business plans. The rebound in Petrobras credit profile on the back of restructuring and refocusing of its business strategy, even with regulatory changes in fuel prices that increased competition in some of its business segments, suggests that other SOEs could follow similar strategies, strengthen their fundamentals and continue to contribute to the economy and government finances.
While there is a need to increase investment to support production in all four SOEs, some of them should first strengthen their own financial fundamentals before embarking on ambitious investment projects.
With commodity prices expected to be far from the record-high levels observed earlier in the decade, continued efforts on improving these firms’ governance and performance will remain critical to the ongoing and much needed fiscal consolidation efforts of the respective sovereigns.