New York, April 17, 2020 -- Moody's Investors Service, ("Moody's") has
today downgraded the Government of Mexico's long-term foreign-currency
and local-currency issuer ratings to Baa1 from A3. The outlook
remains negative.
The key drivers behind the rating downgrade are:
1) Mexico's medium term economic growth prospects have materially
weakened
2) The continued deterioration in Pemex's financial and operational
standing is eroding the sovereign's fiscal strength, which
is already pressured by slower revenue growth due to a weaker economy
3) Weakened policymaking and institutional capacity
The Baa1 takes into account the country's large and diversified economy,
the lack of major macroeconomic imbalances, and its fiscal strength,
which despite deteriorating, is comparable to that of Baa1-rated
peers. The credit profile is also supported by a healthy financial
system and a sound monetary policy setting.
The negative outlook reflects the risk that economic and fiscal strength
deteriorate beyond what is captured in a Baa1 rating due to ongoing uncertainties
related to policy direction in the medium term and policy responses that
have been insufficient to effectively address both the country's
economic challenges and Pemex's continued financial and operating
problems.
Moody's also downgraded Mexico's long-term foreign-currency
and local-currency senior unsecured debt ratings to Baa1 from A3,
the senior unsecured MTN ratings to (P)Baa1 from (P)A3, and the
foreign-currency senior unsecured shelf rating to (P)Baa1 from
(P)A3.
All of Mexico's long-term country risk ceilings were revised down
by one notch. Its long-term local-currency bond and
bank deposits ceilings were revised down to A1 from Aa3, and the
long-term foreign-currency bond ceiling to A2 from A1.
The short-term bond foreign-currency ceiling remained unchanged
at Prime-1. Moody's also lowered the long-term foreign-currency
bank deposits ceilings to Baa1 from A3 and the short-term foreign-currency
bank deposits ceiling was maintained at Prime-2.
RATINGS RATIONALE
RATIONALE FOR THE RATING DOWNGRADE TO Baa1
MEXICO'S MEDIUM TERM ECONOMIC GROWTH PROSPECTS HAVE MATERIALLY WEAKENED
Moody's expects medium term growth to remain depressed, even
when removing this year's severe economic contraction due to the
coronavirus shock, with the economy growing at best 2% on
average in 2021-23. This represents a marked deterioration
from the 2.7% average growth rate Mexico reported between
2010-19.
When Moody's upgraded the ratings to A3 from Baa1 in 2014,
the rating agency expected at that time that the implementation of a broad
range of structural reforms would lead to an increase in Mexico's
potential growth north of 3%. Since then, however,
implementation has been uneven at best, with the energy reform being
de facto reversed and other reforms not yielding the anticipated impact
on total factor productivity and potential growth, in some cases
due to poor execution.
Economic policy decisions and mixed policy messages under the current
administration have materially altered business sentiment and will likely
continue to dampen private sector investment in the coming years,
further lowering Mexico's medium term growth prospects. The
first policy decision was the cancellation of Mexico city's new
airport in October 2018, a political decision that dismissed clear
warnings about negative economic ramifications. The lack of clarity
over the role private investment will have in the electricity sector also
poses risk to investment in renewable projects and natural gas pipelines,
since the government has yet to define an agenda. More recently,
the government's cancelation of a large brewery project already
under construction was considered a strong blow to investor confidence
by business chambers in Mexico.
In 2020, the global pandemic will cause significant disruption to
the country's economic landscape, through both external and
domestic channels. Moody's expects growth to contract sharply
in the second quarter of this year, given the interruptions in the
supply channels, the sharp decline in external demand coming from
the US and the domestic impact of social quarantine measures. Mexican
manufacturing exports and tourism will be hit particularly hard.
Although there is considerable uncertainty at this time on both the severity
and duration of the shock, the economy should begin a gradual recovery
sometime in the second half of this year, according to the rating
agency. Government policy response to date is providing limited
liquidity and income support to businesses and households and therefore
offering little in countering the severity of the shock. Measures
announced so far to address the coronavirus shock are not large in scope
nor in magnitude, representing less than 1% of GDP.
THE CONTINUED DETERIORATION IN PEMEX'S FINANCIAL AND OPERATIONAL
STANDING IS ERODING THE SOVEREIGN'S FISCAL STRENGTH
The government's change in Pemex's business model is adding
to the severe financial and operational challenges of the company.
The government has discontinued and reversed many aspects of the energy
reform of 2014. In the absence of private sector investment to
help Pemex increase production and maintain reserves, support is
coming from the government. The current oil price shock has further
impacted Pemex's profitability and increased its liquidity needs,
adding to the need for ongoing sizable support that is pressuring government
finances.
Moody's believes that given Pemex's negative free cash flow
and upcoming debt obligations, supporting the company in 2020-22
for liquidity purposes will cost the sovereign up to 2% of GDP
each year during that period. If in addition the government were
to decide to provide the support needed to increase capital expenditures
required to meet current oil production targets and fully replace reserves,
the overall level of support would rise to up to 3% of GDP each
year, according to the rating agency. Even though the government
is cutting government spending to try to adhere to fiscal targets,
the impact of higher support to Pemex, anemic government revenues
amid weaker GDP growth and rising interest burden will lead to higher
fiscal deficits and increased debt ratios. Under Moody's
baseline scenario, the debt burden is likely to increase 10 percentage
points to 46.2% of GDP bu 2022 from 36.4%
of GDP in 2019. If the impact of the coronavirus outbreak is more
severe and the government responds with increased fiscal measures,
debt burden would likely rise beyond the 50% mark by 2022,
and even more so if in addition the government were to fully fund PEMEX's
capital expenditure needs.
While we currently do not expect the government to help the company meet
both its debt obligations and capital expenditure needs, lower government
support implies that Pemex's oil reserves will likely continue to
fall as they are unlikely to be fully replaced. This poses medium
term risks for the sovereign as it would negatively affect oil-related
government revenues (currently 14% of the total).
WEAKENED POLICYMAKING AND INSTITUTIONAL CAPACITY
The third factor informing today's rating action is Moody's
view that the quality of policymaking and the institutional capacity to
respond to shocks, elements which the rating agency considers a
governance factor under its ESG framework, have weakened.
Economic policy decisions over the last year and a half and mixed messages
are dampening business sentiment and investment prospects. In addition,
conflicting social, fiscal and energy sector policy objectives will
make it increasingly difficult for the authorities to sustain the current
policy stance over time, leading to uncertainty about the potential
sovereign credit consequences of future policy shifts, according
to the rating agency. Government measures intended to support Pemex,
for instance, have been piecemeal and insufficient to effectively
address the company's longstanding financial and operational challenges,
which give rise to the risk of abrupt policy changes.
In Moody's view, broad based salary and benefit cuts across
government ministries have weakened the government's administrative
capacity. Combined with the significant reduction in budget and
governance changes to some autonomous regulatory institutions, Moody's
believes that the country's institutional capacity has been eroded,
impacting the capacity to respond and manage shocks effectively and reducing
the predictability of the regulatory framework.
RATIONALE FOR A NEGATIVE OUTLOOK
The negative outlook captures the risk that the absence of effective measures
to address the country's economic challenges and contain the contingent
liability stemming from Pemex could erode economic and fiscal strengths
beyond what is contemplated by the downgrade to Baa1. In Moody's
view, the policy response has become less predictable and the spectrum
of possible economic and fiscal policy outcomes has widened.
Mexico's economic contraction in 2020 could be even deeper and the
recovery could take longer than what Moody's anticipates.
If the pandemic worsens, pressures to increase government spending
would add to the deteriorating fiscal and debt dynamics. Legislative
as well as state and local elections in 2021 increase the risk that the
federal government will boost spending ahead of the elections.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental risks are not material to Mexico's credit profile.
While some Mexican states in the coasts are exposed to extreme weather
effects that may impact the finances of sub-sovereign states via
reduced tourism, and disaster-relief and preparedness expenditure,
they carry limited risk to the sovereign credit profile.
Social risks are material for Mexico. Moody's considers the coronavirus
outbreak to be a social factor under its ESG framework, given the
substantial implications for public health and safety. The coronavirus
crisis is likely to weigh significantly on employment levels in the short
term, increasing social needs and therefore pressure on the government's
finances. Moreover, like other middle-income countries
in Latin America, Mexico will be faced with a steadily ageing population
in the coming decades. This ageing, in the context of a social
security system that is both not universal and underfunded, will
result in social demands that future administrations will have to contend
with.
Governance risks are material for Mexico and, as noted above,
a weakening policy framework and reduced administrative capacity contributed
to today's rating action. A deterioration in the decision
making process is leading to economic policies that affect investment
prospects and limit the government's ability to respond to shocks.
While the strength of key institutions such as the Central Bank supports
macroeconomic stability, Mexico has scored poorly on institutional
factors for more than a decade, as measured by the Worldwide Governance
Indicators, with control of corruption and rule of law among its
weakest areas.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
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 consistent policies and improve growth
prospects in the medium term. A credible plan towards Pemex that
would reduce the risk of recurrent and substantial government support
to the company, while addressing the challenges facing the sector,
would also support a return to stable outlook.
Further evidence that medium-term growth is in decline would put
downward pressure on the rating. Rising fiscal deficits that cause
the debt trajectory to shift upward beyond what we anticipate in our baseline
scenario, whether due to recurrent financial support to PEMEX,
a material increase in government spending or given a substantial decline
in government revenues, could also lead to a downgrade. A
continued deterioration in the policy framework would also add negative
pressure to the rating.
GDP per capita (PPP basis, US$): 20,616 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.1% (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: -1.9% (2018 Actual)
(also known as External Balance)
External debt/GDP: 36.6% (2018 Actual)
Economic resiliency: baa2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 14 April 2020, 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 materially decreased. The issuer's
fiscal or financial strength, including its debt profile,
has materially decreased. Other views raised included: The
issuer's institutions and governance strength, has deteriorated.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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.
NATIONAL SCALE RATINGS
Moody's will shortly publish an update to its National Scale Rating (NSR)
map for Mexico to reflect the downgrade of the government's long-term
issuer rating. The only change will be that the Baa1 Global Scale
Rating will now map to a range of Aaa.mx to Aa1.mx,
where previously it only mapped to Aa1.mx. Moody's NSRs
are ordinal rankings of creditworthiness relative to other credits within
a given country, which offer enhanced credit differentiation among
local credits. NSRs are generated from Global Scale Ratings (GSRs)
through correspondences, or maps, specific to each country.
However, unlike GSRs, Moody's NSRs are not intended to rank
credits across multiple countries. Instead, they provide
a measure of relative creditworthiness within a single country.
The full maps can be accessed through the "Index of Current and Superseded
Compendia of National Scale Rating Maps by Country".
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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.
Ariane Ortiz-Bollin
VP-Senior Analyst
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
