Moody’s warned that the fiscal strategy that the next Mexican administration will present will be key to Mexico’s sovereign rating.
Mexico’s aforementioned rating is at “Baa2/stable outlook”, which is a medium level of Investment Grade, since July 2022.
The agency’s outlook for the rating is pessimistic, admitted sovereign analyst Renzo Merino.
But he stressed that there is no risk of losing the Investment Grade.
Participating in the annual Moody’s Inside, Mexico seminar, he explained that “it will be very difficult for the government to reduce the fiscal deficit by three points of GDP next year, when there are already prospects for lower economic growth.” The fiscal deficit is at 6% of GDP and he considers it difficult to achieve a three-point reduction, as the outgoing government proposed.
On the other hand, there is the impact of the economic slowdown on income generation. The Organization for Economic Cooperation and Development (OECD) recently cut its GDP expectations for Mexico by eight-tenths of a point, for this year and next, to 1.4% and 1.2%, respectively.
A more moderate economic activity limits the capacity to generate public income, which in a context of rigid spending, will complicate the process of the Mexican situation and generate a risk of deterioration in the situation.”
Additionally, he noted that in the event that the next government absorbs Pemex’s debt, via some legal change, “there may also be a deterioration in the reputation of the sovereign issuer, which may further aggravate the situation.”
He said that with two years in a stable perspective, it is time to review the sovereign rating.
Regarding the reform to the judicial power recently approved by the majority of the ruling party, he warned that one of the main vulnerabilities of Mexico’s sovereign rating is institutional weakening.
With the implementation of the reform, an erosion of the checks and balances between the Executive and Legislative branches is anticipated, the latter dominated by the ruling party and related parties, he commented.
The risk is that this erosion may limit respect for contracts, limit impartiality in the resolution of legal conflicts, affect the business environment and regulatory stability. In short, impartiality may occur in judicial resolutions.
Pemex and its large debt
In the same panel, the analyst for Pemex, Roxana Muñoz, warned that each year of the last six-year term, the government allocated 9,000 million pesos to financial support for the oil company.
In the absence of a reform, this budget may rise to 20,000 million, she warned. Despite not having the specific strategy of the government that will come to power next week, regarding the financial management of the state-owned companies, the sovereign analyst of Moody’s said that they have two scenarios regarding the management that will be given to the oil company.
The first assumes that the government absorbs the debt via guarantees; the second a legal change to absorb it as its own, which would have an impact on the sovereign rating as it would take the debt above 50% of the GDP (today it is at 46% of the Product) and the third
Elections in the US, another factor
At the same event, the official vice president of senior credit at Moody’s, Ariane Ortiz Bollin, spoke of the impact that the electoral result in the United States will have on Mexico and Latin America.
The electoral process in the main commercial partner will take place on November 5, and she assured that there are still no conclusive perspectives on which of the two candidates can win.
In any of the scenarios, there will be a review of the North American Trade Agreement (T-MEC), whose negotiation tables start next year.
The expert considered that Mexico will have less room for maneuver than other Latin American economies to establish its position regarding China. If Donald Trump wins, the pressure on Mexico will be directed at the country limiting the passage of Central American migrants to the United States, she said.
The analyst warned that the virtual victory of Donald Trump could impact the sovereign rating because investment flows would be reduced if his proposal to impose tariffs on exports goes ahead.
Source: eleconomista
