The rating agency Moody’s kept Mexico’s A3 rating unchanged but lowered the outlook from stable to negative, on fiscal and economic challenges to achieving consolidation objectives and stabilize debt ratios.
Key Quotes from Moodys:
“Moody’s Investors Service has today affirmed Mexico’s A3 issuer and government bond ratings and changed the outlook to negative from stable. The government’s senior secured and senior unsecured government bond ratings were affirmed at A3, as were the senior unsecured MTN and senior unsecured shelf program ratings at (P)A3.”
“The principal driver of Moody’s decision to change the outlook to negative from stable is the rising fiscal and economic challenges that the authorities face in achieving further fiscal consolidation. At the time that the structural reforms were adopted, Moody’s expected that fiscal consolidation, coupled with much stronger real GDP growth (above 3%), would lead to a stabilization in the debt burden.”
“However, a combination of the oil price shock and the slower than expected growth have undermined the economic outlook. Moody’s forecasts only moderate growth of around 2.5% for 2016 and 2017, which will challenge the government’s fiscal consolidation efforts.”
“Lower growth and a low oil price environment will reduce fiscal revenues. While fiscal reform has improved the structure of fiscal revenues, heightening resilience to oil price shocks by strengthening tax collection, Moody’s forecasts that overall federal government revenues will decrease to 18.5% of GDP in 2016 from 19.3% in 2015 (…) Moody’s forecasts a federal government deficit of 2.5% of GDP for 2016 and a gradual decline through 2018 when the deficit is likely to narrow to 2% of GDP.”
“The negative outlook reflects the risk, which Moody’s believes is balanced to the downside, that lower growth and revenues and heightened pressures on expenditures cause the debt burden to continue to rise beyond that horizon.”
“The second driver of the outlook change is the risk that contingent liabilities crystallize on the government’s balance sheet in the form of government support to PEMEX, further undermining fiscal consolidation efforts.”
“Financial challenges at PEMEX from lower oil prices have increased the likelihood that government liquidity support will be needed (…) However, the adjustment measures face significant challenges. In the meantime, PEMEX’s deficit stemming from operating and capital expenditures and debt service needs is likely to persist through 2018.”
“Over the coming one to two years, Moody’s will evaluate the progress achieved on fiscal consolidation and the implementation of expenditure cuts at PEMEX to confront liquidity pressures.”
“Moody’s would stabilize Mexico’s A3 rating were it to conclude that the measures needed to contain government expenditures and PEMEX-related contingent liabilities, even in a low growth environment, will be taken so as to allow fiscal consolidation to proceed as planned.”
“Upward pressure on Mexico’s rating could result from higher than expected growth driven by continuing structural reform efforts, which would result in the creation of fiscal buffers by the government, and a faster than expected reversal of the upward trend in government debt metrics.”
(Market News Provided by FXstreet)