Mexico Downgraded to Baa1 by Moody’s on Weak Growth Outlook
The long-anticipated downgrade comes after a year of economic contraction and persistent uncertainty.
(Bloomberg) -- Mexico received a long-anticipated downgrade by Moody’s Investors Service after a year of economic contraction and persistent uncertainty.
The nation’s sovereign debt was downgraded one notch to Baa1 with a negative outlook, the rating firm said in a statement. Mexico has held a solid A3 investment-grade rating since 2017, but Moody’s lowered the country’s outlook from stable to negative in June 2019.
“Mexico’s medium term economic growth prospects have materially weakened,” analyst Ariane Ortiz-Bollin wrote in the decision. “The continued deterioration in Pemex’s financial and operational standing is eroding the sovereign’s fiscal strength.”
Moody’s also cut Pemex’s rating two notches to Ba2, well into junk levels, fueling concerns that the state oil company’s bonds could be in line for a forced sell-off. The outlook on Pemex’s rating remains negative.
The decision follows a downgrade by Fitch Ratings Inc. on Wednesday to BBB-, the lowest investment grade score, and a downgrade by S&P Global Ratings on March 26 to BBB.
Mexico has been in a precarious position since the election of President Andres Manuel Lopez Obrador in 2018. He canceled an airport project in Mexico City before even assuming office, buffeting markets and ushering in a year and a half of persistent uncertainty that has weighed on the country’s economic prospects. In 2019, Mexico’s gross domestic product contracted 0.1%, the product of a dismal investment climate domestically and global trade uncertainties.
Mexico’s Finance Ministry sought to downplay the rating cut.
“The institutional and economic foundations of our country are solid,” the ministry said in a statement. “In their evaluations, the rating agencies reiterate that the country has a highly credible and prudent fiscal policy record.”
Additional pressure was put on the sovereign rating by state oil company Petroleos Mexicanos, better known as Pemex. While the company doesn’t have an official government debt guarantee, investors worried that an effort to support the firm with continuous capital injections could undermine Mexico’s fiscal position.
Still, Lopez Obrador’s government staved off a downgrade by defying market expectations and maintaining fiscal prudence. The government posted a primary budget surplus in 2019, only the third time Mexico has done so in a decade.
But in the lead up to the downgrade, Mexican markets got hammered by a slide in global oil prices and fears of a continued spread of the coronavirus.
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