Monday, June 17, 2024

Mexico one step away from losing investment grade rating

Fitch Ratings cut Mexico’s sovereign rating on Wednesday to just one notch above non-investment grade due to fears that the coronavirus pandemic will cause a “severe recession” in the Mexican economy.

Mexico’s rating is now BBB- with a stable outlook.

“The economic shock represented by the coronavirus pandemic will lead to a severe recession in Mexico in 2020,” Fitch said in a statement, adding that a recovery starting in the second half of the year “will likely be held back by the same factors that have hampered recent economic performance.”

The Mexican economy contracted 0.1% last year, the first decline since 2009, the year of the world financial crisis when GDP fell 5.3%.

Fitch is forecasting the economy will contract by at least 4% this year but noted that “given the nature of the crisis there is a higher than usual level of uncertainty around our forecasts, and the balance of risks is firmly to the downside.”

It said that the extent of the contraction and the scope for recovery will depend on two factors: the performance of the economy in the United States, Mexico’s largest trading partner, and the duration of the “virus shock” domestically.

Fitch is also predicting that government debt will increase to 4.4% of GDP, adding that the level would be “higher than implied by the most recent budget review” and that there is “little scope for consolidation in 2021.”

“Consolidating public finances once the [coronavirus] crisis is over and returning debt/GDP to a sustainable path will prove challenging in Fitch’s view,” the rating agency said.

It said that factors that held back investment prior to the coronavirus crisis, “including weak governance and ad hoc government policy interventions,” are likely to persist once it is over.

The rating agency also said that the state oil company, currently saddled with debt of US $105 billion or 9% of GDP, “remains a key risk factor, particularly in view of the sharp fall in oil prices.”

On a positive note, Fitch said that “the credible monetary policy framework built around a flexible exchange rate and inflation targeting remains a rating strength and will help the economy absorb the external shock.”

The ratings agency also said that it expected trade to help the economy to recover, noting that the new North American trade agreement, the USMCA, is scheduled to take effect in the middle of the year. That will relieve uncertainty that has prevailed since 2016, Fitch said.

The newspaper El Financiero reported that Fitch’s downgrading of Mexico’s sovereign rating only had a moderate impact on the peso, which was trading at about 24.2 to the United States dollar early on Thursday afternoon.

The cut came after S&P Global Ratings downgraded Mexico’s sovereign rating to BBB from BBB+ in the last week of March.

Alonso Cervera, chief Latin America economist for Credit Suisse, said that he believed that it won’t be long before Moody’s, the third major rating agency, also cuts its rating for Mexico.

Mexico’s current sovereign rating with Moody’s is A3, four notches above non-investment grade.

Source: El Financiero (sp) 

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