Overview of HR Ratings’ Mexico Credit Outlook Change
Mexican credit rating agency HR Ratings has stabilized its outlook for Mexico’s sovereign credit rating, moving from negative to stable. This change reflects the improvement in key fiscal metrics that HR Ratings evaluates.
Background on HR Ratings and its Relevance
HR Ratings is a Mexican credit rating agency that assesses the financial health of Mexican entities and institutions. Its ratings are widely recognized within Mexico and carry significant weight in the country’s financial markets. Given its local expertise, HR Ratings’ assessments are often considered crucial for investors and policymakers alike.
Previous Negative Outlook and Key Concerns
For 11 months, starting from November of the previous year, HR Ratings maintained a negative outlook on Mexico’s sovereign credit rating. The primary concern was the weak economic growth, which posed a risk to fiscal consolidation.
- Mexico’s sovereign rating was at “BBB+”.
- The negative outlook indicated a potential downgrade in the federal government’s payment capacity or an improvement in its credit profile within 6 to 12 months.
Current Stabilized Outlook and Fiscal Metrics
In a recent communication, HR Ratings analysts highlighted the improvement in key fiscal metrics:
- The debt-to-GDP ratio is projected to be 52.2% by the end of 2025, down from the previously estimated 54% in November.
- The agency emphasized that there are no planned modifications to tax revenues, such as the Income Tax (ISR) or Value-Added Tax (IVA).
However, HR Ratings identified potential risks that could again affect the outlook or even the sovereign rating, including the outcome of the T-MEC trade agreement review with the United States and Canada.
Fiscal Challenges and Policy Implications
HR Ratings pointed out that the public sector has limited room for further fiscal consolidation, as tax revenue modifications are not being considered.
- Rising debt servicing costs are reducing resources available for productive investments in the country.
- Current expenditure is heavily committed to subsidies and transfers, limiting the government’s capacity to invest in productive areas.
The agency expects the debt-to-GDP ratio to remain above Hacienda’s projected levels in its General Criteria for Economic Policy for the upcoming year, considering factors like potential currency depreciation.
Credit Rating Comparison Across Agencies
Mexico’s sovereign rating varies among HR Ratings and the three major global rating agencies. Despite having the same investment-grade reference, the ratings differ in their strength:
- HR Ratings: “BBB+/Stable” – the highest rating among the four agencies, indicating three notches above investment grade.
- Moody’s: “Baa2/Negative Outlook” – two notches above investment grade, signaling a solid investment-grade rating but with a one-level higher risk of a downgrade.
- S&P: “BBB/Stable” – placing Mexico’s sovereign emissions at the second rung of investment grade.
- Fitch: “BBB-/Stable” – indicating no risk of downgrade or reduction in the next 6 to 12 months.
Key Questions and Answers
- What is HR Ratings’ current outlook for Mexico’s credit? The outlook has been stabilized, indicating no immediate risk of a downgrade in Mexico’s credit capacity.
- What were the primary concerns leading to the previous negative outlook? The main concern was weak economic growth, which posed a risk to fiscal consolidation.
- What are the key fiscal metrics that improved Mexico’s outlook? The debt-to-GDP ratio is projected to be lower than previously estimated, and there are no planned modifications to tax revenues.
- What potential risks could affect Mexico’s credit rating again? The outcome of the T-MEC trade agreement review with the US and Canada, as well as rising debt servicing costs, are identified risks.
