S&P Reduces Mexico’s Investment GradeBy Gabriela Mastache | Fri, 03/27/2020 - 11:02
Standard & Poor’s reduced Mexico’s sovereign rating from “BBB+” to “BBB” and maintained the country’s perspective as negative. According to the rating agency, the reduction is the result of the expected negative effects that COVID-19 will have on the economy, as well as the expected economic contraction of up to 2.5 percent of the national GDP.
The negative perspective on the country’s economic performance leaves the door open for another reduction in its rating between the next 12 and 24 months, depending on the measures the government takes to palliate the economic crisis. According to S&P, Mexico will experience an economic contraction for the second year in a row. The agency expects the country will experience a modest recovery in 2021, with growth not above 2 percent of the GDP.
The “BBB” grade means that the country “exhibits adequate protection parameters.” However, it can face a weaker payment capacity to meet “financial commitments” in light of unexpected conditions or economic circumstances. Though the current circumstances are temporary shocks, the Mexican economy has been experiencing weak performance since 2019, which will only worsen following the COVID-19 pandemic and the fall in international oil prices.
Other considerations from the rating agency include the lack of certainty that the government has provided for the private sector and their investments. Even if the government opened up the energy sector for a broader participation of the private sector, for S&P, the current international oil prices would make it harder for investors to participate in these sectors.
PEMEX’s investment grade was also reduced, from “BBB+” to “BBB,” which means that the Mexican oil company maintains a middle level of investment. The reduction is also de result of declining oil and gas prices, which would endanger the execution of PEMEX’ business plan. Moreover, a lower cashflow will limit the financial capabilities and the investment needs of the company.
S&P acknowledged that the government has committed to have a balanced budget and to not engage in debt. However, it considers that the current economic and social conditions are reducing the government’s maneuvering space and could lead it toward a budgetary deficit.