Mexico faces 50-50 risk of downgrade, Moody’s warns
Mexico was doing so well.
After being put on notice for a possible downgrade by Moody’s Investors Service last year amid concerns over its fiscal accounts and the health of financially troubled state energy company Pemex, the government made progress reining in spending and overhauling the oil giant and the ratings agency was seeing a brighter picture.
But with Donald Trump about to take office in the US, Mexico is not out of the woods – indeed, there’s about as much chance at the moment of a downgrade as there is of the status quo.
“The balance of risks at the moment continues to be balanced. We think there’s as much probability that Mexico can revert the negative outlook as that we downgrade – it depends on what happens … and how effective Mexico’s response is,” Jaime Reusche, Moody’s analyst for Mexico, told reporters on a conference call.
Given the “unchartered territory” ahead for Mexico if Mr Trump follows through on his threats – which include slapping “big” border taxes on companies manufacturing in Mexico and exporting to the US, renegotiating the North American Free Trade Agreement and barricading the border with a wall – Mexico faces a tough path to an upgrade.
“We’d have to see the process of fiscal consolidation being maintained all year and debt stabilising,” Mr Reusche said. He noted that weak political institutions – a polite way of alluding to Mexico’s large corruption problems – were a drag on the country’s sovereign rating. Mexico is currently rated by Moody’s at A3 with a negative outlook, and the agency expects to take a decision on whether to alter that outlook in the coming year.
Going into 2017 – without the Trump factor – Mr Reusche said Mexico’s financial authorities had proved their commitment to sound fiscal management. “What has changed is the nature of the risks. We’re in unchartered territory,” he said.
He expected a lot more volatility ahead for internal flows, investment and the peso currency – which again breached 22 to the dollar on Thursday, on the eve of the Trump inauguration.