S&P Lowers Mexico Sovereign Outlook to Negative on AMLO Oil Plan

(Bloomberg) -- S&P Global Ratings lowered its outlook for Mexico’s sovereign debt to negative from stable, saying the nation’s shift to limit private sector involvement in energy could lower economic growth prospects.

Other developments that have shifted investor confidence - such as the cancellation of a $13 billion airport project for Mexico City that was already underway - could also cut into gross domestic product and contribute to higher contingent liabilities for Mexico, the ratings company said in a statement.

Mexico’s new leftist President Andres Manuel Lopez Obrador put a reform on ice that allowed private oil drilling and instead is seeking to strengthen state-owned energy company Petroleos Mexicanos, including through building a new refinery. The outlook shift for Mexico’s BBB+ rating follows a two-notch downgrade by Fitch ratings for Pemex, which is heavily indebted.

“The new strategy for the energy sector places an added burden on” Pemex, according to the S&P statement. “There is a risk that poorer-than-expected economic growth and greater centralization of political decision-making could weaken macroeconomic stability amid difficult policy trade-offs and potentially affect institutional effectiveness.”

The outlook shift implies a one-in-three chance the rating will be downgraded over the coming year. Other policy shifts flagged by S&P as potential risks include the administration’s plan to change the law on public consultations to allow for more frequent public votes on a wider variety of issues, potentially injecting greater uncertainty about policies. It also notes the introduction of new federal coordinators to oversee the allocation of federal transfers to state governments introduces further changes in fiscal federalism.

S&P added that it expects Lopez Obrador’s administration to pragmatically implement economic policies that balance social priorities with the need of macroeconomic stability.

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