New York, June 05, 2019 -- Moody's Investors Service ("Moody's") has today
changed the outlook on the Government of Mexico's ratings to negative
from stable. Concurrently, Moody's has affirmed the
A3 foreign-currency and local-currency issuer ratings.
Moody's also affirmed Mexico's A3 foreign-currency
and local-currency senior unsecured ratings, the A3 local-currency
senior secured rating, the (P)A3 foreign-currency and local
currency MTN senior unsecured ratings, and the (P)A3 foreign-currency
senior unsecured shelf rating.
Moody's decision to change the outlook to negative on Mexico's A3
ratings reflects the rating agency's concern that the policy framework
is weakening in two key respects, with potential negative implications
for growth and debt. First, unpredictable policymaking is
undermining investor confidence and medium-term economic prospects.
Second, lower growth, together with changes to energy policy
and the role of PEMEX, introduce risks to Mexico's medium-term
fiscal outlook, notwithstanding the government's near-term
commitment to prudent fiscal policy.
The A3 rating affirmation balances the country's large and diversified
economy, its high fiscal strength and low susceptibility to event
risk, against ongoing challenges related to weak growth rates,
weaker-than-peers institutional strength and a large informal
sector.
Mexico's long-term foreign-currency bond ceiling remains
unchanged at A1, and the long-term foreign-currency
bank deposit ceiling remains unchanged at A3. With regard to the
short-term foreign-currency ceilings, the bond ceiling
remains unchanged at P-1, and the deposit ceiling at P-2.
The local-currency country ceilings for bonds and bank deposits
remain unchanged at Aa3.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE
LESS PREDICTABLE POLICYMAKING IS ADVERSELY AFFECTING ECONOMIC GROWTH PROSPECTS
AND INTRODUCING MEDIUM-TERM RISKS TO MEXICO'S FISCAL OUTLOOK
According to Moody's, the predictability and effectiveness of economic
policymaking in Mexico is weakening. Mixed messages, unexpected
policy announcements and reversals, such as the government's
recent lack of clarity on the use of the Stabilization Fund for Budgetary
Revenues, are introducing elements of policy uncertainty and unpredictability,
which are weighing on investor sentiment and growth prospects.
Inability to articulate and execute a clear set of policies has eroded
the credibility of the administration's economic program.
Lack of policy coherence, which has undermined economic sentiment
and investor confidence, is having a detrimental impact on Mexico's
economic prospects.
Moody's anticipates a challenging year for Mexico's economy
and expects growth to slow to 1.5% in 2019 from 2%
in 2018 with risks tilted to the downside given a persistent weakness
in private investment. Moreover, Moody's believes that
the government's mixed messages and unclear policy signals will
continue to negatively affect business confidence and investment prospects.
Consequently, the rating agency's current view regarding Mexico's
medium-term economic prospects differs from the base case scenario
assumed at the time of its decision to stabilize the outlook a year ago.
At the time, Moody's expected the economy to expand by over
2% in 2019, and by nearly 3% in 2020 and beyond.
Now, the rating agency expects sluggish economic activity to carry
into 2020 with growth subdued at around 1.8%. And
looking further ahead, the balance of risks in the coming years
is tilted to the downside, as lower investment is likely to constrain
growth prospects beyond 2020. Lower medium-term growth would
erode the economy's resilience to shocks, which supported
sovereign creditworthiness in previous years.
Weaker growth prospects in the coming years, combined with the prominent
role assigned to PEMEX in the context of the country's new energy
policy, is also raising concerns regarding the trajectory of government
debt. The expanded mandate assigned to PEMEX by this administration,
the precarious financial health of the state-owned oil company
and its increasing difficulties in accessing capital markets suggest that
the company's ongoing financial support needs may be substantial
and therefore material from a sovereign credit standpoint.
So far this year, the government has pledged a multi-year
total of $7 billion (0.6% of GDP) on a cumulative
basis to the national oil company -- excluding previously pledged
transfers from the Stabilization Fund for Budgetary Revenues -- via
a capital injection, an exchange of promissory notes owed to it
by the sovereign (which is a below-the-line operation that
does not have an impact on fiscal performance), and a reduction
in its tax burden. Increased questions among financial investors
about PEMEX's new business model have led to materially higher funding
costs. This has restricted the company's ability to access
markets, increasing the need for sovereign support, and putting
additional pressure on the fiscal accounts. Providing recurrent
assistance to PEMEX for meeting its financing needs could result in a
fiscal cost of 1%-2% of GDP on a yearly basis over
the next five years if the company is unable to tap market funding.
As a result, the government is likely to face increasingly challenging
trade-offs in the coming years between its stated intention of
maintaining a conservative fiscal stance on the one hand, and,
on the other, the need to support PEMEX and the government's
desire to expand social programs and public infrastructure spending.
A low growth environment will further complicate the government's
ability to meet its fiscal goals by weakening its revenue intake.
While federal government debt has been broadly stable at around 35%
of GDP in recent years, lower growth and the tension between policy
priorities may lead to a rise in debt ratios in the coming years that
could erode the country's fiscal strength.
RATIONALE FOR AFFIRMING THE RATINGS AT A3
The rating affirmation reflects Mexico's large and diversified economy,
which is the second largest (after China) among 'A' category
peers, its lack of major macroeconomic imbalances, and its
high fiscal strength, which is broadly aligned with 'A'-rated
peers. Weak growth rates and weaker-than-peers'
institutional strength remain credit challenges. Mexico's
track record of prudent macroeconomic policymaking has enabled it to face
shocks over the past decade, including the oil price shock and trade
agreement renegotiations with the US, while anchoring domestic and
foreign investor confidence.
Moreover, the A3 rating is also supported by a healthy banking system
and an improved government revenue structure that has curtailed its dependence
on oil income as a result of the steady increase in tax revenues due to
the 2014 tax reform.
WHAT COULD CHANGE THE RATING UP
Although a rating upgrade is unlikely in the near future, a return
to a stable outlook could result from regained confidence in the government's
ability to lay out and implement predictable policies. Much higher
and sustained growth, combined with a material strengthening of
the government's balance sheet could over time lead to an upgrade
of Mexico's rating.
WHAT COULD CHANGE THE RATING DOWN
Further evidence that medium-term growth is in decline, whether
as a result of policies that actively undermine growth or because of continued
policy unpredictability, would put downward pressure on the rating.
Increasing fiscal deficits that cause the debt trajectory to shift upward,
whether due to financial support to PEMEX or for any other reason,
could also lead to a downgrade. The horizon over which these trends
might materialize is uncertain. While policy action or inaction
could lead Moody's to conclude that these risks will crystallize,
a period of up to 18 months may be needed to assess the credit consequences
of the uncertainties and tensions inherent in government policy and their
interaction with investor sentiment.
GDP per capita (PPP basis, US$): 20,602 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2% (2018 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 4.8%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -1.8%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.8% (2018 Actual)
(also known as External Balance)
External debt/GDP: 36.4% (2018 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 31 May 2019, a rating committee was called to discuss the rating
of the 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 institutional
strength/framework has decreased. The issuer's fiscal or financial
strength, including its debt profile, has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating 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
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
