Standard & Poor’s lowered its credit rating outlook for Mexico from stable to negative yesterday, stating that there was a one-in-three chance of a downgrade over the coming year.
The ratings agency maintained Mexico’s sovereign rating at investment grade status of BBB+ but said in a statement that President López Obrador’s plans to reduce the role of private enterprise in the energy sector and increase spending on the debt-laden state oil company raised concerns for government finances.
“The new strategy for the energy sector places an added burden on the already highly indebted government-owned energy company Petróleos Mexicanos [Pemex],” S & P said.
“The combination of Pemex’s weak financial profile and a more active role in the energy sector could raise the risk of higher contingent liabilities for the sovereign,” it added.
There are fears that the US $5.5 billion bailout of Pemex won’t be enough and that the government will have to fund additional rescue packages, which would further impact on its own financial health and increase borrowing costs.
S & P also said that “poorer than expected” economic growth and increased centralization of decision-making under López Obrador could weaken Mexico’s macroeconomic stability.
Growth is expected to slow further this year, according to forecasts by the Bank of México, the International Monetary Fund and private financial institutions.
In its fourth-quarter report, the central bank said this week that an investment slowdown and recent fuel shortages, rail blockades and strikes were among the reasons why it reduced its 2019 growth forecast to between 1.1% and 2.1% compared to a prediction of 1.7% to 2.7% in its previous report.
S & P said that it could return its credit rating outlook to stable within the next year but stressed that the government needs to manage the economy effectively, maintain moderate fiscal deficits and boost investor confidence.
The rating agency’s revised outlook comes a month after Fitch Ratings downgraded Pemex’s credit rating to just one level above junk status.
The state oil company contributes around 15% of total government tax revenue but has debt in excess of US $100 billion and its oil production has declined for 14 consecutive years.
Output is expected to dip further this year, although statistics show that Mexico’s six refineries have increased fuel production and crude processing capacity this month in comparison with January.
López Obrador has vowed to decrease Mexico’s dependency on petroleum imports and rescue not just Pemex but the entire energy sector.
Announcing the government’s rescue package on February 15, the president stressed that if Pemex needs more funding to reduce its financial burden and strengthen its capacity to invest in exploration and production, “there will be more support.”
Responding to a question about Standard & Poor’s revised outlook, López Obrador told reporters in Chihuahua today that he was unconcerned.
“We’re going very well . . . If the country is growing, we’re fine and in a good mood . . .”
Source: Reuters (en), El Financiero (sp), El Heraldo de México (sp)
