AMLO Crisis Response Dismays Investors, Raises Junk Rating Risks

(Bloomberg) -- Mexico stands to lose the investment-grade credit rating it earned almost two decades ago as investors assess the government’s sluggish response to the coronavirus.

President Andres Manuel Lopez Obrador unveiled plans on Sunday to boost public works and offer low-interest loans while creating 2 million jobs in nine months. The moves contrast with governments across Latin America that plan spending packages to deal with the crisis. Peru deployed one equal to 12% of its gross domestic product.

“It’s definitely feasible” that Mexico goes to junk at some point, said Edwin Gutierrez, the head of emerging-market sovereign debt at Aberdeen Asset Management in London. He called the new measures “pretty underwhelming.”

Lopez Obrador has publicly resisted fiscal stimulus and ruled out bailouts for companies most affected by the virus. One result: The peso reached an all-time low of 25.8 per dollar in early trading on Monday. Sovereign bonds maturing in 2029 slid 8.4% since the start of the year, just a tad better than the 9.8% decline in the global EM index.

While Mexico’s peso edged higher on Monday, rising for the first day in three, bonds, stocks, and the currency lagged regional peers. A government spokesman didn’t have an immediate comment.

A Citigroup survey showed 74% of the investors who participated expect Mexico to be downgraded again this year. Strategists from firms including Bank of America and Banco Bilbao Vizcaya Argentaria SA say the Latin American nation may eventually fall into junk.

The president’s slow response “will make Mexico lose its investment grade faster,” while the downside risks for an economic recovery next year have increased, said Carlos Capistran, an economist at Bank of America in New York. “This will speed up the cuts by rating agencies.”

Tumbling oil prices have compounded Mexico’s woes, helping explain why economists on average expect the economy to contract by 5% this year. It’s also added to financial struggles faced by state-owned Petroleos Mexicanos, better known as Pemex, which has more than $100 billion in debt.

“There’s the potential for contingent liabilities from Pemex, as Pemex simply doesn’t have market access,” Gutierrez said.

S&P Global Ratings cut Mexico’s rating by one notch to BBB on March 26, saying shocks from the spread of coronavirus and an oil price rout will harm the nation’s already grim economic outlook. The nation has held an investment grade since 2002 but is now just two notches above junk.

Gutierrez said it’s time for Mexico to start spending on a broad fiscal stimulus, following the lead of nations around the world that are planning deficits to finance rescue packages.

In a Thursday note, Bank of America’s Capistran predicted an 8% contraction in the nation’s gross domestic product, a pace beyond even the global financial crisis and Mexico’s Tequila Crisis of the mid-1990s.

Lopez Obrador “didn’t announce anything, really,” said Mexico-City based BBVA analyst Claudia Ceja. “Making it clear that an austerity policy will be maintained will hardly be something that favors a speedy recovery.”

BBVA expects Mexico to lose its investment grade within the next two to four years.

Looming over those expectations is the question about whether Lopez Obrador would even be able to organize an appropriate response.

“One problem I see in Mexico is the highly ideological lens that the administration adopts, which is very dogmatic about the fiscal target and resistant to help the private sector,” said Gustavo Rangel, ING’s chief Latin America economist, after Sunday’s announcement. “A well-designed fiscal stimulus that aims to provide a bridge in this moment of poor liquidity for both households and businesses will likely improve the country’s medium to longer-term outlook.”

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