Key Points:
- Fitch’s Director of Soberan Latin America Analytics warns of a Mexican economic recession mid-year due to uncertainty from internal changes and US trade relations.
- Mexico’s commitment to fiscal consolidation has received a positive rating from Fitch, which recently confirmed Mexico’s sovereign rating at “BBB-/stable outlook,” the lowest investment-grade level.
- The analyst questions whether Mexico can maintain its successful tax efficiency strategy amidst slower economic growth.
- Mexico’s sovereign credit rating has dropped two notches in five years, reflecting deterioration in the institutional framework and public finances to support state-owned enterprises like Pemex.
Context and Impact:
Shelly Shetty, Fitch’s Director of Soberan Latin America Analytics, recently highlighted that Mexico is on track for a recession by mid-year and will experience slow growth until the US trade agreement, specifically the T-MEC renegotiation, is confirmed. The uncertainty stems from two primary factors: internal changes affecting the judicial system and business operations, as well as global trade relations with the United States.
Mexico’s Fiscal Consolidation and Sovereign Rating
Despite the looming economic challenges, Fitch acknowledges Mexico’s commitment to fiscal consolidation. This dedication has led to a positive rating from Fitch, which confirmed Mexico’s sovereign rating at “BBB-/stable outlook” in May. This is the lowest investment-grade level, indicating that Mexico’s public finances and institutional framework need improvement to support state-owned enterprises.
Tax Efficiency and Slower Growth
Shetty expressed concerns about whether Mexico can sustain its successful tax efficiency strategy amidst the expected slower economic growth. The success of this approach hinges on maintaining a robust institutional framework and public finances, which are currently under scrutiny.
Pemex’s Impact on Mexico’s Credit Rating
Over the past five years, Mexico’s sovereign credit rating has dropped two notches, mirroring the deterioration of its institutional framework and public finances to backstate-owned enterprises, notably Petróleos Mexicanos (Pemex).
The current sovereign rating, “BBB-/stable outlook,” even incorporates the highest level of government financial support for Pemex. The analyst emphasized that Pemex’s presence has “contaminated” the overall public debt, turning it into a source of contingent liabilities.
Key Questions and Answers
- Question: What factors are causing uncertainty in Mexico’s economic outlook?
- Question: How has Mexico’s fiscal consolidation been rated by Fitch?
- Question: Can Mexico maintain its successful tax efficiency strategy amidst slower economic growth?
- Question: How has Pemex impacted Mexico’s credit rating?
Answer: The uncertainty stems from internal changes affecting the judicial system and business operations, as well as global trade relations with the United States due to the T-MEC renegotiation.
Answer: Despite economic challenges, Fitch acknowledges Mexico’s commitment to fiscal consolidation and recently confirmed its sovereign rating at “BBB-/stable outlook,” the lowest investment-grade level.
Answer: Shetty expressed concerns about whether Mexico can sustain its successful tax efficiency strategy amidst the expected slower economic growth, as it depends on a robust institutional framework and public finances.
Answer: Over the past five years, Mexico’s sovereign credit rating has dropped two notches due to the deterioration of its institutional framework and public finances supporting state-owned enterprises, including Pemex. The current rating, “BBB-/stable outlook,” incorporates the highest level of government financial support for Pemex.
