Mexico's Credit Outlook Downgraded

MEXICO CITY (Reuters) – Mexico's outlook was downgraded to negative from stable by Moody's (NYSE:MCO) Ratings on Thursday. The major credit rating agency highlighted institutional and policy weakening, which poses risks to the economy and government accounts.

Concerns Raised by Moody's

Moody's pointed out several issues contributing to the outlook downgrade:
– Growing government spending and a widening fiscal deficit.
– A recent constitutional overhaul of the judiciary that threatens to erode checks and balances.

The agency expressed concern that this judicial overhaul could weaken economic and fiscal strength. According to Moody's, the quality of institutions in Mexico is low compared to rating peers, particularly in terms of rule of law and corruption control. They will assess if further deterioration in policy frameworks and judicial independence could hinder the government's ability to tackle rising credit challenges.

Additionally, Moody's cited contingent liabilities from the heavily indebted state-owned oil company Pemex as factors that could complicate the government's financial situation.

Economic Assessment

Despite these concerns, Moody's affirmed Mexico's sovereign debt ratings at Baa2, citing robust economic strength supported by a diverse economy and potential nearshoring advantages.

Mexico's finance ministry responded to the downgrade, stating that the ratings agency lacked updated information on the proposed 2025 budget and the government’s fiscal policy and projections.

Rating Expectations

S&P Global Ratings also commented on Mexico’s economic outlook, stating it expects cautious macroeconomic management in the next two years, but warned of potential challenges, especially regarding trade with the United States. They noted that Mexico's current 'BBB' rating could be lowered if government debt and deficits worsen, particularly concerning support for Pemex and state-run power firm CFE (EBR:CFEB).