Moody’s changes Mexico’s outlook from stable to negative; judicial reform puts fiscal soundness at risk, says the rating agency.
Moody’s changed the outlook on Mexico’s government ratings from stable to negative and affirmed the issuer ratings and long-term senior unsecured debt ratings at “Baa2.”
Moody’s change is due to the perception of weakening policymaking and an institutional environment that risks undermining fiscal and economic results.
It explained that the deterioration in debt affordability and the greater rigidity of public spending make fiscal consolidation difficult, following the increase in the public deficit observed this year of more than 5.0 percent of GDP.
In this regard, it argued that, despite the commitment to reduce the fiscal deficit in the coming years, this is limited as a result of a series of reforms implemented or announced by the current government.
On this last point, it maintained that there are risks in the recently approved reform in the Judiciary. He said it has the potential to materially alter checks and balances, as well as the business operating environment in the country.
He recalled that his assessment of the quality of institutions in Mexico is already low relative to its rating peers, so they will assess whether further deterioration of the regulatory framework and the independence of the judicial system could limit the government’s ability to deal with growing credit challenges.
“In turn, beyond the weakening in 2024-2025 in the sovereign’s debt metrics, fiscal strength could decline more than we currently anticipate and weigh on Mexico’s credit profile,” he warned. His scenario is that the Government will only gradually reduce the deficit in the coming years.
In this scenario, the Mexican government debt burden is expected to rise to over 45 percent of GDP in 2025 from 40 percent in 2023 and could continue to rise to 50 percent in 2027-2028 if more material consolidation does not occur.
In addition, the Mexican government considered that there is a greater probability that contingent liabilities arising from Petróleos Mexicanos (Pemex) will materialize on the government’s balance sheet.
On the other hand, “the affirmation of the rating reflects our view that Mexico’s credit profile continues to benefit from solid economic strength that will continue to be supported by the diversity of the economy, as well as by the potential benefits of reshoring,” it added.
At the same time, modest macroeconomic imbalances thanks to a history of relatively prudent fiscal and monetary policies also supported the rating not being modified.
On the other hand, Moody’s Ratings also flagged the review of the USMCA in 2026 as an additional risk, particularly if modifications to the rule of origin, labor specifications, and other US trade policies toward Mexico were to change in a way that would durably limit the country’s exports.
TYT Newsroom
