Moody's Cuts Mexico to Baa3, Debt to Hit 55% of GDP

Moody's Ratings downgraded Mexico's sovereign credit to Baa3 on May 21, 2026 projecting public debt will reach 55% of GDP by 2028, up from 40% in 2023, driven by structural fiscal deficits, rigid redistributive spending, and sustained financial support for PEMEX and CFE. The downgrade, Mexico's third by Moody's since 2020, signals rising borrowing costs and tighter financing conditions for public and private sector stakeholders, with an 18-month window before a potential negative outlook reassessment. S&P Global Ratings had previously revised Mexico's outlook to negative, with net government debt forecast to climb to 54% of GDP by 2029.

Mexico's public debt could reach 55% of gross domestic product by 2028, Renzo Merino, Vice President and Senior Credit Analyst, Moody's Ratings said. A projection that accompanied the agency's decision on May 21, 2026, to downgrade Mexico's sovereign credit rating one notch to Baa3, placing the country at the lowest rung of investment grade, just one step above speculative status.

"Our current forecast in the base scenario is that the federal government's debt burden will approach 55% of gross domestic product by 2028," Merino said.

The pace of debt accumulation underpins the agency's concern. Mexico's government debt stood at 40% of GDP in 2023 and had already climbed to nearly 50% by 2025, a rise of more than 10 percentage points in two years. The fiscal deficit remained elevated at almost 5% of GDP in 2025, only modestly lower than 5.3% in 2024.

"In recent years, we have been concerned about the deficit-reduction capacity of the Mexican government, as there have been breaches of the parameters of the institutional fiscal policy framework since 2023," Merino said.

Mexico has fiscal rules approved in 2006 and 2023, both of which have been breached in terms of expenditure controls and structural balance requirements, mechanisms designed to stabilize the debt burden. Merino added that the predictability and credibility of fiscal adjustment is "also somewhat more limited" under the current parameters.

"Despite efforts to reduce the fiscal deficit, other policy priorities such as energy sovereignty and a redistributive spending model have weakened the pillars and effectiveness of fiscal policy, contributing to larger deficits and a faster deterioration of debt indicators than anticipated," Moody's said.

The move marks the third downgrade of Mexico's sovereign rating by Moody's in recent years. The agency first lowered the rating from A3 to Baa1 in April 2020, followed by a downgrade to Baa2 in July 2022. The new Baa3 rating aligns Moody's with Fitch Ratings, which currently rates Mexico at BBB-, also one level above speculative grade.

PEMEX, Pensions, and the Interest Burden

Merino identified PEMEX support, pensions, and rising interest payments as areas where fiscal adjustment is structurally constrained. The government provided approximately US$35 billion, or 1.9% of GDP, to PEMEX in 2025 and has budgeted an additional US$14 billion, or 0.7% of GDP, in 2026. Moody's expects further support in coming years absent a material improvement in the company's operations.

"When we see that economic growth will remain limited, we still assign a high probability that the government will continue supporting PEMEX," Merino said.

The interest burden tells a parallel story. The federal government currently spends roughly 17% of its revenues on debt interest paymentsM  up from between 10% and 11% in 2021. Merino attributed the increase to a higher deficit being financed in a higher interest rate environment. "This not only limits the capacity to reduce the fiscal deficit, but also to direct resources to other priorities that are necessary in a developing country like Mexico, whether in social terms, education, health, security, or infrastructure spending," he said.

Fiscal consolidation, Merino added, will be considerably more gradual than the government anticipates, with the debt burden continuing to rise in the coming years.

An 18-Month Window

Carlos López, Director, Tendencias Económicas y Financieras, noted that the downgrade had been anticipated but emphasized the urgency of addressing structural vulnerabilities. "They are giving us an 18-month window. They want to know what spending will look like in 2027 and 2028. If Mexico does not change by the end of next year, they will place us on a negative outlook, and that is where we could face real problems," López said.

Moody's lowered its real GDP growth forecast for Mexico to below 1.0% for 2026 and 1.3% for 2027, implying average growth of around 1% over 2024–27, well below Mexico's long-term average of 2%. The agency acknowledged structural advantages, including preferential access to the US market, but flagged high economic informality, insecurity, and infrastructure bottlenecks as constraints on long-term expansion.

Mexico's Ministry of Finance dismissed concerns over further rating downgrades in the next 18 months, emphasizing the fundamental strength, diversification, and resilience of the Mexican economy. The ministry said Moody's assessment explicitly recognized Mexico's long-standing record of prudent monetary and macroeconomic policy management, noting the country maintains limited external vulnerabilities, with no major macroeconomic imbalances or signs of financial stress in the private sector or the balance of payments.

Broader Rating Context

Moody's’ decision did not occur in isolation. S&P Global Ratings had revised Mexico's credit outlook from stable to negative weeks earlier, citing persistent fiscal weakness, rising debt levels and stagnant economic growth, signaling a heightened risk of a sovereign downgrade within the next 24 months. S&P projects the general government deficit to remain at approximately 4.8% of GDP in 2026, with net government debt forecast to climb from 49% of GDP in 2025 to 54% by 2029.

The pressure extended to state enterprises. S&P revised the outlooks on PEMEX and CFE from stable to negative, the first such move in nearly four years, citing the persistent large-scale financial support the federal government extends to both companies as a driver of the sovereign's weakening credit profile. "The continued substantial fiscal support for PEMEX and CFE will likely aggravate Mexico's fiscal rigidities," S&P said.

Financial analysts at Banco Base warned that if two of the three major rating agencies ultimately downgrade Mexico to junk, institutional fund managers, bound by investment mandates, could be forced to sell Mexican bonds, triggering capital outflows and sharply higher borrowing costs.