S&P Outlook a Warning, Not a Downgrade: Franklin Templeton

S&P Global Ratings' revision of Mexico's sovereign credit outlook to negative from stable is a call to action for the federal government to adopt more decisive fiscal measures, according to Franklin Templeton, though the asset management firm does not expect the country to lose its investment-grade status.

"We would not expect Mexico to lose its rating, in fact, in our scenario that is not seen, but it is undoubtedly a wake-up call for more forceful measures to be taken in the coming years to improve," said Nadia Montes de Oca, Senior Investment Strategist, Franklin Templeton.

S&P confirmed Mexico's long-term foreign currency sovereign rating at BBB and local currency rating at BBB+, while maintaining short-term ratings at A-2. The agency modified the outlook to negative on the grounds that fiscal results have been weaker than expected, with net public debt forecast to rise to approximately 54% of GDP by 2029 from 49% in 2025, and the general government deficit projected at 4.8% of GDP in 2026.

Montes de Oca noted that Mexico's government debt increased in 2024, reaching a peak driven by election-related spending. Despite subsequent measures to reduce it, the effects have not yet materialized at the pace the rating agency expected. She noted that the fiscal deficit stood at approximately 5.8% of GDP before declining to 4.1%, with a target of reaching 3.5%. 

"Mexico is finding that consolidation process more difficult than anticipated," she said. "That is what the rating agency is observing in its report, along with the support being provided to PEMEX, which continues to see declining production."

S&P identified continued substantial financial support to PEMEX and CFE as a factor that aggravates fiscal rigidity, alongside the risk of unexpected deterioration in Mexico's trade relationship with the United States. "If this does not improve , if debt and the deficit do not come down and the PEMEX support issue persists, this could deteriorate further," Montes de Oca said.

Franklin Templeton's Base Scenario

Franklin Templeton Mexico assigns a 70% probability to a base scenario in which the Mexican economy rebounds to close 2026 with growth of 1.3% and inflation of 4.5%. The firm expects the sovereign credit rating to remain stable, though with volatility linked to the USMCA review, and anticipates that the outcome of the trade agreement review will ultimately favor Mexico, with its negotiating partner adopting a pragmatic policy stance.

In a negative scenario, assigned a 20% probability, the firm foresees a deterioration in the bilateral relationship with the United States driven by migration, security and drug trafficking disputes.

Structural Pressures Confirmed by S&P and UBS

The S&P outlook change and Franklin Templeton's assessment align with findings from a separate UBS Chief Investment Office report, which described Mexico as facing a structural low-growth equilibrium. UBS reported that annual growth slowed to 0.6% in 2025 from 1.4% in 2024, constrained by reduced public infrastructure spending and USMCA uncertainty. The firm projects a modest recovery to 1.4% in 2026 but warns risks remain to the downside, with mandatory social spending and PEMEX-related liabilities pushing the debt-to-GDP ratio toward 55% by 2027 and interest payments absorbing approximately 17% of government revenues.