Mexican Corporates Face Challenging Investment Environment

Mexican corporates rated by Fitch have recovered from the 2020 decline due to the pandemic and in some cases emerged in better shape. On March 30, 2022, the rating outlook distribution for Fitch’s rated Mexican corporates was 82 percent with Stable Outlook, 10 percent with Positive Outlook and 6 percent in Negative Outlook. The remaining 2 percent were rated “CCC” or lower and have no outlook. This situation is significantly better than YE 2020 when 67 percent of issuers held Stable Outlooks, 27 percent had Negative Outlooks, 4 percent had Positive Outlooks and 2 percent were CCC or below. The stabilization of some rating outlooks reflects better than expected performance during the pandemic, faster than anticipated recovery during 2021 and the transition of negative rating outlooks into downgrades. Fitch’s ratio of downgrades/upgrades for 2021 improved to 0.5x from almost 7.0x in 2020, the highest in 10 years.

Nevertheless, Mexican companies continue to face a difficult business environment that has become gloomier in recent years. Fitch revised downward its forecast for Mexico’s GDP growth in 2022 to 2.0 percent from 2.8 percent. The main factors behind this assumption are higher inflation, supply chain disruptions and increased political and regulatory risks. Currently, Mexico is in the lower curve of contagions related to COVID-19; as of April 15, 2022, 61 percent of the population had received a complete initial vaccination protocol, and 66 percent are partly vaccinated. Fitch’s base case incorporates a continued return to mobility and does not expect a national lockdown similar to 2Q20.

A rebound in industrial activity, mainly in manufacturing, fueled by the US–Mexico–Canada Agreement (USMCA), has supported Mexico’s economic recovery since 2H20. However, a recent global shortage of semi-finished products and raw materials, along with transportation and supply disruptions, has slowed Mexico’s industrial momentum. Moreover, challenges to the business climate from increased political and regulatory risk create investment uncertainty. The median CAPEX/depreciation ratio for Mexican corporates rated by Fitch declined in recent years. The ratio was 1.5x in 2018 and fell to 0.8x in 2020 during the pandemic. Fitch calculated a recovery for the ratio in 2021 to 1.2x and expects a similar level in 2022, as the business and political environments will deter higher levels of CAPEX and some companies are directing expansion plans outside Mexico.

Companies with geographic revenue diversification abroad and export-oriented companies will perform better than those concentrated in the domestic market, Fitch believes. This view reflects the dynamism of the US economy and the boost it gives to Mexican export-related sectors, as well as the US infrastructure bill signed in November 2021, which could trigger an increase in exports and transportation services. Increased nearshoring, e-commerce and logistics requirements are catalysts for the positive momentum.

But the country still needs infrastructure investment to support and promote a sustained, profitable growth. Private and foreign companies continue in a wait-and-see mode, as the electric contra-reform initiatives discouraged private companies’ investment appetite. Aside from the large infrastructure projects promoted by the Mexican president, Andres Manuel Lopez Obrador (AMLO), namely Mexico City’s Felipe Angeles Airport, the oil refinery in Dos Bocas, Tabasco, and the Maya Train in the southeast, there are no significant investment projects under development.

Fitch believes that Mexican companies are well positioned in financial terms to navigate the current environment. The median total adjusted debt/EBITDAR ratio for Fitch’s publicly-rated Mexican corporates is expected to improve in 2022 to around 3.0x, from 3.3x in 2020 and 3.1x in 2019. Net adjusted debt/ EBITDAR in 2022 is expected to close at 2.0x, compared with 2.2x in 2020 and 2.5x in 2019.

Liquidity profiles remain sound, with no major maturities in 2022 and 2023. Cash to short-term debt was 1.5x in 2021, slightly lower than 1.8x in 2020. While most companies face refinancing risk in the medium to long term, Fitch expects issuers will seek opportunities to refinance in advance, as most maturities are bullets and are concentrated more in capital markets than in bank debt. The ability of Mexican issuers to reduce leverage depends largely on boosting operating results; however, some companies started to repay debt, rather than refinance.

Key concerns for Mexican corporates are increased regulatory and political risks, inflation, interest rates and FX volatility. On March 30, 2022, Mexico’s annual inflation reached 7.45 percent, the highest in 13 years. Accordingly, Mexico’s central bank has increased its reference interest rate seven times during the past year (from 4.0 percent to 6.5 percent). Lastly, the recent increase in COVID-related contagions in Asia is a factor to be monitored.