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UPDATE 1-Moody's downgrades Pemex, warns refining expansion to be loss-making

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(Adds comment from Moody's)

MEXICO CITY, July 27 (Reuters) - Ratings agency Moody's on Tuesday downgraded Mexican state oil giant Pemex by one notch to Ba3, sending the loss-making company's debt deeper into so-called junk territory as it criticized its plans to expand refining capacity.

Pemex, which has more than $100 billion in financial debt, in recent years has seen multiple downgrades and last year became the world's largest “fallen angel,” a borrower whose credit rating descends from investment grade to junk.

Pemex relies heavily on government funding and could sink even further into junk territory if Mexico's under-pressure sovereign credit rating is downgraded, Moody's added in a statement.

Moody's said the latest rating downgrade stemmed from "high liquidity risk and increasing business risk as the company faces high debt maturities while it expands its refining capacity and production."

Mexican President Andres Manuel Lopez Obrador, a leftist oil nationalist, has staked his reputation on reviving Pemex, which has been a powerful symbol of Mexican self-reliance since its creation in 1938.

He wants to lift output at domestic refineries and is building a large plant in his home state of Tabasco, despite criticism that the measures do not make financial sense for a company such as Pemex.

"Such strategy will generate higher refining operating losses in the short and medium term," Moody's said.

A combination of declining output, crushing tax obligations and a hefty payroll burden have gradually weakened the company, which is a major source of federal budget revenues.

Moody's said Pemex has been successful in reverting production and reserves declines in the last two years and added this trend will continue in 2021. However, Moody's said it expects Pemex's cash flow generation and credit metrics will "deteriorate further in the next three years as the company increases fuel production, while grappling with limited capital investment ability, high debt maturities, and volatile oil and fuel prices." (Writing by Drazen Jorgic; Editing by Sandra Maler and Leslie Adler)

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