Reforms to Cement Country´s CompetitivenessWed, 02/24/2016 - 14:45
Q: In your opinion, what role did the Energy Reform play in raising the credit rating of Mexico?
A: Fitch Ratings was the first ratings agency to increase Mexico’s credit rating prior to the implementation of the reforms. For some time, we have been questioning not only the high dependency on oil revenues in the public finances, but also the double effect that comes with this high reliance and the drop in oil production. The production of oil has consistently dropped and the public finance from oil revenues has been a major barrier in the ratings we have attributed to sovereign risk. The Energy Reform is not the solution to all these problems, but rather the combination of all reforms has been oriented to address different areas of opportunity. A new legal environment is a step in the right direction, but addressing the implementation of all these different critical reforms is essential. We cannot put labor and education reforms to one side, since these will have a deep and significant impact in the formation of human capital. In addition, if Mexico aspires to grow by 5%, the Financial Reform will be its backbone in this endeavor.
Q: What impact does your credit rating have on the development of a project, and what process is followed with companies that are being rated for the first time?
A: Ultimately, our opinions put a price on the financing of any energy project. There are certain risks attached to any kind of project, ranging from legal, engineering, and contracting, to construction risks. Fitch Ratings provides an opinion on the credit risk attached to a project and this is reflected in the interest rates; for instance, the higher the risk, the higher the interest rate. When we release our ratings, we give investors an idea regarding the real risk and the projected cost. In the past, in the global markets companies would be rated using public information, even if the company did not request a rating.
In the 1990s and early 2000s companies were rated with information that was available in the market, and next to the rating, Public Information (PI) was attached. This meant that the company did not participate or provide any information and it was still rated. In Mexico, this was not the case, and here we cannot initiate the rating process without a contract from a company with a formal request. It is an active participation between both parties. This gives companies more freedom to participate in the credit rating process.
Q: How are you collaborating in order to map out the business plans and the evolution of risks of CFE and PEMEX? A: We have met with both entities to begin tracing their evolution and plans in accordance with the new legal framework. There is a clear intention to increase productivity of these two companies and undoubtedly they will face several challenges. We are in a transition period, so the implementation of the reforms at this stage is crucial because it will impact the competitiveness of Mexico. When considering the amount of FTAs this country has with other nations, it is clear that Mexico must be competitive and support its national production base so it can compete with foreign players.
Foreign investors are looking beyond elements of risk, to aspects such as insecurity, and investing heavily on new productive projects across several Mexican states. With the backbone of FTAs there are many global entities ready to seize business opportunities. One of the byproducts of these reforms is a strong legal framework, which will cement Mexico’s competitiveness in the global markets.