New York, March 31, 2016 -- Moody's Investors Service has today affirmed Mexico's A3 issuer
and government bond ratings and changed the outlook to negative from stable.
The government's senior secured and senior unsecured government
bond ratings were affirmed at A3, as were the senior unsecured MTN
and senior unsecured shelf program ratings at (P)A3.
The key drivers of today's rating action are the following:
1) Subdued economic performance and continued external headwinds will
challenge the government's fiscal consolidation efforts and increase the
risk that rising debt ratios will not stabilize over the rating horizon.
2) Contingent liabilities in the form of possible government support to
PEMEX, given liquidity pressures at the state-owned oil producer,
could further undermine the fiscal consolidation process.
The negative outlook balances the strong commitment of the authorities
to achieving fiscal consolidation and containing liquidity pressures at
PEMEX against the challenges from subdued economic activity, the
low oil price environment and implementation risks to the authorities'
announced measures for limiting spillover effects from PEMEX into the
government's balance sheet.
Mexico's long-term local currency country risk ceilings remain
unchanged at Aa3. The foreign currency bond ceiling and the foreign
currency bank deposit ceilings are also unchanged at A1 and A3,
respectively. The short-term foreign currency bond and deposit
ceilings remain at P-1 (Prime-1) and P-2 (Prime-2),
respectively. These ceilings reflect a range of undiversifiable
risks to which issuers in any jurisdiction are exposed, including
economic, legal and political risks. These ceilings act as
a cap on ratings that can be assigned to the foreign and local-currency
obligations of entities domiciled in the country.
RATINGS RATIONALE
RATIONALE FOR THE OUTLOOK CHANGE
-- FIRST DRIVER: FISCAL AND ECONOMIC CHALLENGES TO
ACHIEVING CONSOLIDATION OBJECTIVES AND STABILIZING DEBT RATIOS --
The principal driver of Moody's decision to change the outlook to negative
from stable is the rising fiscal and economic challenges that the authorities
face in achieving further fiscal consolidation. At the time that
the structural reforms were adopted, Moody's expected that
fiscal consolidation, coupled with much stronger real GDP growth
(above 3%), would lead to a stabilization in the debt burden.
However, a combination of the oil price shock and the slower than
expected growth have undermined the economic outlook. Moody's
forecasts only moderate growth of around 2.5% for 2016 and
2017, which will challenge the government's fiscal consolidation
efforts.
Lower growth and a low oil price environment will reduce fiscal revenues.
While fiscal reform has improved the structure of fiscal revenues,
heightening resilience to oil price shocks by strengthening tax collection,
Moody's forecasts that overall federal government revenues will
decrease to 18.5% of GDP in 2016 from 19.3%
in 2015. In response, the authorities have begun implementing
expenditure measures to reduce the federal government deficit from 2.8%
of GDP in 2015. Moody's forecasts a federal government deficit
of 2.5% of GDP for 2016 and a gradual decline through 2018
when the deficit is likely to narrow to 2% of GDP.
Federal government debt reached 34.4% of GDP in 2015 from
27.9% in 2011. Moody's estimates that debt
to GDP will continue to increase gradually, but will likely stabilize
at around 37% of GDP in 2018. A debt burden of that order
of magnitude would be consistent with an A3 rating. However,
the negative outlook reflects the risk, which Moody's believes
is balanced to the downside, that lower growth and revenues and
heightened pressures on expenditures cause the debt burden to continue
to rise beyond that horizon.
-- SECOND DRIVER: CONSOLIDATION OBJECTIVES FACE RISKS
FROM PEMEX CHALLENGES --
The second driver of the outlook change is the risk that contingent liabilities
crystallize on the government's balance sheet in the form of government
support to PEMEX, further undermining fiscal consolidation efforts.
Financial challenges at PEMEX from lower oil prices have increased the
likelihood that government liquidity support will be needed. PEMEX
is implementing an expenditure adjustment of MXN100 billion ($5.7
billion or 0.5% of GDP) in 2016 and plans to increase operational
efficiency over the medium term to ensure the sustainability of the company's
finances. However, the adjustment measures face significant
challenges. In the meantime, PEMEX's deficit stemming
from operating and capital expenditures and debt service needs is likely
to persist through 2018.
While not Moody's base case, should the state-owned
oil producer be unable to finance this deficit in the capital markets,
the sovereign would likely provide financial relief to ensure that PEMEX
can cover its debt service payments and, potentially, its
capital expenditures. Given the size of those financing needs,
Moody's believes that the fiscal impact of support could more than
offset any progress achieved on fiscal consolidation, preventing
a stabilization of government debt ratios by 2018, and pushing federal
government debt above 40% of GDP.
WHAT COULD MOVE THE RATING UP/DOWN
Over the coming one to two years, Moody's will evaluate the
progress achieved on fiscal consolidation and the implementation of expenditure
cuts at PEMEX to confront liquidity pressures.
Moody's would stabilize Mexico's A3 rating were it to conclude
that the measures needed to contain government expenditures and PEMEX-related
contingent liabilities, even in a low growth environment,
will be taken so as to allow fiscal consolidation to proceed as planned.
Upward pressure on Mexico's rating could result from higher than
expected growth driven by continuing structural reform efforts,
which would result in the creation of fiscal buffers by the government,
and a faster than expected reversal of the upward trend in government
debt metrics.
Conversely, downward pressure on Mexico's rating could result
should stalled fiscal consolidation efforts, and the crystallization
of contingent liabilities from PEMEX or indeed from the broader public
sector, cause federal government debt ratios to continue to rise
beyond 40%. In that event, Moody's would evaluate
the clarity and credibility of the government's plans to address
the further rise in debt and the lower growth likely to be associated
with it, and assess the rating consequences of the lower than expected
economic and fiscal strength which that environment would imply.
GDP per capita (PPP basis, US$): 17,950 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.5% (2015 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.1%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -2.8%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.6% (2015 Actual)
(also known as External Balance)
External debt/GDP: 32.9% (2014 Actual)
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 29 March 2016, a rating committee was called to discuss the rating
of Mexico, Government of. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have decreased. The issuer's fiscal
or financial strength, including its debt profile, has decreased.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Jaime Reusche
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's changes Mexico's outlook to negative from stable; affirms A3 rating
