Shelly Shetty Highlights Factors Affecting Mexico’s Credit Profile
Shelly Shetty, Fitch’s Director of Sovereign Ratings for Latin America, has warned that Mexico’s sovereign rating could be higher if not for Petróleos Mexicanos (Pemex) being part of the federal government’s contingent liabilities. The current sovereign rating is “BBB-” with a Stable outlook.
Who is Shelly Shetty?
Shelly Shetty is a seasoned credit analyst at Fitch Ratings, specializing in sovereign ratings for Latin America. Her expertise and insights are crucial for understanding Mexico’s credit profile and the factors influencing it.
Why is Pemex Relevant?
Petróleos Mexicanos (Pemex) is Mexico’s state-owned petroleum company, responsible for exploration, production, refining, and marketing of oil and natural gas. Its financial struggles directly impact Mexico’s sovereign rating due to the government’s contingent liabilities.
Pemex’s Impact on Mexico’s Credit Profile
Shetty explained that Pemex’s weak credit profile and high financial dependence on the government weigh heavily on Mexico’s sovereign credit profile. These factors, combined with institutional weakness, are reflected in Mexico’s sovereign rating.
- High Debt Levels: Mexico’s debt-to-GDP ratio is nearly 6%, which is significantly higher than its peers with similar ratings.
- Fiscal Consolidation: The current government’s commitment to fiscal consolidation is acknowledged by Fitch, as they inherited a challenging fiscal position from the previous administration.
- Uncertainty and Sensitivity Factors: Shetty highlighted pressures on federal government spending related to Pemex’s contingent liabilities as negative factors affecting Mexico’s sovereign rating. Other concerns include a more severe and prolonged shock to tariffs, further weakening the economy, and a greater deterioration of fiscal accounts due to the lack of a long-term revenue generation strategy.
Current Economic Context and Challenges
Shetty discussed the prevailing uncertainty due to both internal and external events, which has led to a weak economic outlook.
- Weak Growth and Recession: Mexico is expected to experience a “weak recession” and slow growth next year, as the country navigates the renewal of its trade agreement with the United States under the T-MEC framework.
- Trade Policies and Migration: Shetty emphasized that the U.S. government’s migratory policies will have economic repercussions in Mexico. The uncertainty surrounding trade policies and migration from the U.S. contributes to the weak economic outlook.
- Nearshoring Opportunities: Despite infrastructure challenges, Mexico maintains advantages in nearshoring due to its proximity to the U.S., manufacturing base, and ongoing efforts to improve infrastructure, energy, and the rule of law.
Key Questions and Answers
- What is the current sovereign rating for Mexico? The current sovereign rating for Mexico is “BBB-” with a Stable outlook, according to Fitch.
- How does Pemex affect Mexico’s credit profile? Pemex’s weak credit profile and high financial dependence on the government weigh heavily on Mexico’s sovereign credit profile.
- What are the key sensitivity factors affecting Mexico’s sovereign rating? Pressures on federal government spending related to Pemex’s contingent liabilities, a more severe and prolonged shock to tariffs, and greater deterioration of fiscal accounts due to the lack of a long-term revenue generation strategy are negative factors affecting Mexico’s sovereign rating.
- What is the current economic outlook for Mexico? Mexico is expected to experience a “weak recession” and slow growth next year, amidst uncertainty surrounding the renewal of its trade agreement with the United States and U.S. migratory policies.
