Mexican Corporates Face Headwinds From Different Fronts

In the regional and global context, Mexican corporates are well positioned to navigate current challenging business conditions; however, a prolonged inflationary environment, coupled with higher financing costs, may limit the companies’ ability to pass-through these effects to final customers, affecting profitability and cash flows. While liquidity and refinancing risks are not present in 2023 for Mexican corporates, debt maturities increase in 2024 and beyond and access to different financing alternatives (bank loans, local and foreign debt markets) will be key for corporates credit quality.

Mexican corporates rated by Fitch performed better than expected during 2022 due to a recovery in demand volumes, ability to pass-through cost increases to final prices and normalization of working capital requirements. These factors translated into positive operating cash flow generation that was used in capital expenditures (CAPEX), resume dividend payments and to keep net debt levels relatively stable. 

For 2023, Fitch-rated Mexican corporates face headwinds from different fronts. Lower GDP growth due to an expected mild recession in the US, high inflation and interest rates as well as government policies represent the main challenges ahead. Sectors that are more exposed to these factors are non-food retailing, telecom, building materials, auto parts, durable goods and energy. Among the most resilient sectors in this environment are industrial real estate and food retailing.

Fitch forecasts a mild US recession in 2023 that will have a direct negative impact on Mexico, given the strong trade, remittances and tourism linkages between both countries. Fitch expects GDP growth of 0.2% in 2023 for the US and 1.4% for Mexico, below the estimated 2022 figures of 1.9% and 3.0%, respectively. Exports represent more than 30% of Mexico’s GDP and manufacturing is almost 90% of total exports.

On the other hand, nearshoring momentum continues as the main driver for foreign and local investments in Mexico, particularly in the manufacturing sector. For the first nine months of 2022, foreign direct investments (FDI) in Mexico grew 29.5% compared to the same period in 2021, according to the Ministry of Economy. The manufacturing sector had the highest share of FDI with 36.3%, followed by transportation and storage with 14.5%.

Inflation slightly eased to 7.8% in December 2022 compared to 8.7% in September 2022, but higher than 7.4% in 2021. For 2023, year-end inflation is forecasted to be around 4.5%, still above the range established by the Bank of  Mexico of 3% +/- 1%. 

The Mexican central bank increased interest rates by 500bps to 10.5% in 2022, which adds pressure to corporates’ financing costs and cash flows. To cope with this pressure, consumer products companies are raising prices but risk lower volumes. Meanwhile, manufacturing export companies are negotiating raw materials and energy costs indexed to prices on a case-by-case basis to protect profitability.

The Mexican government’s policies, particularly electricity law initiatives, discouraged private and foreign investment amid a high level of business uncertainty. The government favors more state intervention in the energy sector. The US and Canadian governments began a consultation process under the US–Mexico–Canada Agreement, alleging that recent energy and electricity policy decisions contravene the trade agreement. This could lead to a potential increase in tariffs on Mexican exports to its partners in North America, which in turn, may affect competitiveness and future investments in the country.

Mexican corpoRates’ CAPEX investments in 2022 continued to recover from historic lows in 2020, but are still below historical levels. Estimated median CAPEXx to depreciation is expected to reach 1.4x in 2022, from low levels of 1.2x in 2021 and 0.8x in 2020. However, this figure is lower than the 1.5x observed before the pandemic. Moreover, Fitch projections indicate a median for this ratio of around 1.2x over the next few years, reflecting a cautious view from Mexican companies.

Mexican companies are positioned to withstand cash flow pressure. Median net adjusted debt/EBITDAR in 2023 is expected to be 1.9x, which would be a slight increase from the forecast of 1.8x for 2022. Liquidity profiles remain sound. Median projected cash/short-term debt for 2023 is expected at 2.4x, similar to a forecast of 2.5x for 2022. Although most companies face refinancing risk in the medium to long term, we expect issuers will seek opportunities to refinance in advance. 

International debt markets were mostly muted during 2022; on the other hand, the Mexican local debt market remained open for most of the year. Mexican companies were very active and accessed this market mainly for refinancing needs, proving its size and depth. However, investor appetite is reserved for high-rated issuers and benchmark-sized debt issuances. Fitch expects that the local market will continue open and accessible for recurrent and new issuers, albeit at a higher cost than in 2021 and 2022.

The rating outlook distribution for Fitch’s rated Mexican corporates at the end of 2022 was 83% with a Stable Outlook, 12% with a Positive Outlook and 4%  with a  Negative Outlook. The remaining 1% was rated “CCC” or lower and has no outlook. This situation is similar to YE 2021 when 82% of issuers held Stable Outlooks, 10% had Positive Outlooks, 6% had Negative Outlooks, and 2% were CCC or below. Fitch’s ratio of downgrades/upgrades for 2022 improved to 0.3x from 0.5x in 2021. The agency views a more balanced ratio for this year.