The implications for Mexico of Moody's change in the sovereign rating outlook

Moody's has changed its outlook for Mexico's credit rating from stable to negative, saying it sees a weakening in the government's policymaking and institutional framework.

The rating agency says this raises the risk of impacts on public finances and economic growth, and, among other factors, it highlighted that the recent reform of the judicial branch threatens to erode the system of checks and balances, which could affect Mexico's economic and fiscal strength.

The agency affirmed the issuer and senior long-term unsecured debt ratings at 'Baa2'. 

Moody's also said the probability of state oil company Pemex's contingent liabilities materializing on the government's balance sheet has increased, while the sustainability of the company's long-term debt has not been restored, making it a fiscal risk.

Mexico is two notches off losing its investment grade rating with Moody's and S&P, while it is one away from losing it with Fitch Ratings.

BNamericas spoke to James Salazar, deputy director of economic analysis at CI Banco, about the implications for the country of the change in the sovereign rating outlook in the short, medium and long term.

“What Moody's did was basically just change the outlook from stable to negative. Stable is when you have a balance of pros and cons in which neither of the two seems to dominate. The fact that you make an adjustment to negative outlook implies that the factors that may be contrary or that could eventually increase the risk of default dominate a little more,” Salazar said.

In the short term, the analyst said the impacts are very limited and what could be observed, as usually happens in these cases, are implications for the exchange rate. “The fact that your rating is slightly worsened translates into risk aversion and exchange rate pressures,” he said.

However, Salazar clarified that this was not the case this time, or the impact on the financial markets was very limited, because in general terms, Moody's making this adjustment falls within the base scenario handled by most analysts. "The fact that they haven't changed the rating is good news," he said.

In the medium term, the analyst said the negative outlook indicates that the rating could be lowered in the next review, but this scenario is not a given either.

“Mexico still has the possibility of regaining a stable outlook in the next review… The reality is that no one knows what the impact of the reforms to the judiciary will be,” Salazar said.

"What Moody's is doing is anticipating that this may eventually lead to less investment confidence and, therefore, less economic growth and, with it, lower public and tax revenues, which would deteriorate the public finances and, therefore, the ability to pay... But Mexico has the possibility in the medium term of recovering a stable outlook," he added.

Finally, the higher risk of a debt rating downgrade would mean an increase in the cost of borrowing in the medium term and would translate into greater volatility in financial markets.

“In the long term, the risk of losing the investment grade increases… with this adjustment in the outlook, the possibility of this happening increases, but there are still many things missing for that to happen,” he said.

Budget impacts

On Friday, finance minister Rogelio Ramírez de la O presented his 2025 budget to the lower house.

Analysts focused their attention on the estimated figure for the structural fiscal deficit, which could also increase the risk of Mexico losing its investment grade. The estimate fell from 5.9% to 3.9%.

Salazar believes that, in general terms, the estimate of the deficit meets the expectation that the government would send signs of fiscal consolidation, although he admitted that the assumptions on which the authorities are justifying these metrics may be very optimistic, especially regarding GDP.

“As of today, there are no analysts who believe that GDP can grow by 2-3%. We will see, because these adjustments in the deficit are justified by the fact that you will have good budget and tax revenues due to relatively favorable GDP growth, which will be complicated, but we will give it the benefit of the doubt,” he said. “It complies with what we wanted to hear about beginning to show signs of consolidation and returning the public balance metrics to more manageable levels.”

According to Salazar, it is likely that both Fitch and S&P will issue their opinions on Mexico in the coming days. The negative scenario would be that Fitch lowers its rating outlook.

The analyst had anticipated that only if the estimated structural deficit remained above 5.9% could it cause an agency to issue a downgrade to the credit rating, but at above 3.5%, as it finally remained, it could cause some rating agency to modify its outlook.