S&P Global Ratings cut its sovereign credit score for Mexico by one notch to “BBB,” saying shocks from the spread of COVID-19 and an oil price rout would harm the country’s already grim economic outlook.
In their statement, S&P also said that Mexico would remain on credit watch negative, reflecting the possibility that its rating could be cut a second time within a year or two.
“Prolonged poor fiscal performance and a resulting rising debt burden, or the risk of potentially weak policy implementation, could lead us to lower the rating,” S&P analysts Lisa Schineller and Joydeep Mukherji wrote in the decision.
For Mexican President Andres Manuel Lopez Obrador — who is already contending with an economic slump, the virus, and a steep decline in business confidence — the S&P decision is yet another in a long list of setbacks.
While the downgrade was widely expected after Mexican assets fell, it confirms just how dire the situation is for an economy that some experts see contracting near 6 percent, a similar scenario to the Tequila Crisis of the mid-1990s.
“While we were surprised by the timing, we were not surprised by the downgrade itself and the negative credit watch,” Emso Asset Management senior portfolio manager Jens Nystedt said. “It shows the growth and fiscal challenges Mexico is facing and those have been made worse by the likely impact of the COVID-19 virus.”
Nystedt added that while Mexico’s investment grade rating is not yet at risk, state oil company Petroleos Mexicanos’ (Pemex) might be over the next few months. It has already been downgraded to junk by Fitch, and Moody’s Investor Service has it on negative watch to lose investment grade.
Despite the government’s strict adherence to fiscal discipline, it is the poor economic prospects that analysts worry could lead to further credit downgrades in the future.
“The probability of another downgrade to materialize in the next 12 to 24 months is not low,” BBVA strategist Claudia Ceja said. “Another downgrade would depend on the ability to implement public policies amid the risks that the economy will keep on facing.”
Mexico’s peso reversed gains and fell 1.4 percent to 23.2630 per US dollar after the downgrade.
The S&P analysts also mentioned potential increases in contingent liabilities from Pemex, which has been hammered by the oil price plunge this year.
Investors have long feared that the Mexican sovereign would need to do more to support the company as it struggles under a debt burden of more than US$100 billion.
In the decision, S&P highlighted the shift in energy policy under Lopez Obrador, which the analysts said has increased the country’s reliance on the oil company.
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