Mexico’s state oil company has become the world’s largest “fallen angel,” a borrower whose credit rating is downgraded from investment to junk.

After Fitch Ratings downgraded the company to junk status on Friday, Moody’s Investors Service did the same soon after, lowering the company’s rating from Ba2 to Baa3. 

The downgrades, not unexpected, will likely trigger the sell-off of billions of dollars in bonds by investors mandated to hold assets of investment quality.

“It’s likely that next week we will see strong outflows from Pemex bonds,” said Luis Gonzali, a portfolio manager at asset manager Franklin Templeton.

Moody’s said the government’s responses had been “insufficient to effectively address both the country’s economic challenges and Pemex’s continued financial and operating problems” and cited decisions by President López Obrador such as cancelling the new Mexico City airport and his response to the coronavirus pandemic.

The director of a financial think tank blamed financial mismanagement and López Obrador’s reversal of the previous government’s efforts to reopen the oil and gas industry.

“Over the next days, this will likely cause an outflow of capital and a depreciation of the peso,” said Jorge Sánchez of Fundef. “It’s also a serious blow to the public finances of Mexico, and ends up showing that governments are not good administrators.”

“Mexico is in an economic crisis.”

On Thursday, Pemex chief financial officer Alberto Velázquez told the news agency Reuters: “We believe that in the short term we will achieve the metrics required to improve our creditworthiness. The most important thing is that we are convinced that what we are doing is right.”

The downgrade is not likely to have any impact on Mexico’s economic policy. The president has consistently criticized the ratings agencies for their downgrades and accused them of failing to take into account the elimination of corruption and fuel theft.

He said early last year that “investors with ethics know very well that Pemex is a solid company because now it’s being managed with honesty.”

Finance department officials said the government can still access international and domestic financing with favorable conditions.

Source: Reuters (en), El Financiero (sp)