Moody’s Downgrades Mexico’s Outlook: Fiscal Concerns Mount

Moody’s Ratings has changed Mexico’s government credit outlook from stable to negative. This shift comes just before the Finance Ministry presents the 2025 Economic Package to Congress.

The rating agency kept Mexico’s credit rating at Baa2, citing concerns about the country’s fiscal and economic future. The change stems from a weakening political and institutional framework.

Moody’s believes this could harm Mexico’s fiscal and economic results. The agency points to rising debt costs and less flexible public spending as obstacles to fiscal improvement.

These factors make it harder to reduce the public deficit, which has grown this year. Mexico’s long history of low deficits is now at risk. The government’s ability to maintain fiscal discipline faces new challenges.

A proposed constitutional reform could weaken the judicial system’s checks and balances. This might negatively impact Mexico’s economic and fiscal strength.

The Finance Ministry will send the 2025 Economic Package to Congress on November 15. This will be the first budget under President Claudia Sheinbaum’s leadership.

Analysts and investors are focusing on the fiscal deficit. The Finance Ministry expects the 2024 deficit to be close to 6% of GDP. Sheinbaum aims to reduce the deficit to between 3% and 3.5%.

Mexico’s Economic Outlook

Finance Minister Rogelio Ramírez de la O plans to achieve this through austerity measures. These include spending cuts at state-owned oil company Pemex and the Federal Electricity Commission.

The Finance Ministry responded to Moody’s action with a statement. They highlighted that Mexico’s sovereign debt rating remains unchanged.

The ministry noted that the outlook change reflects concerns about potential institutional weakening. This could affect the business climate and economic results.

Mexico’s debt rating still sits two levels above speculative grade. The country maintains investment grade status with all eight rating agencies that evaluate its debt.

However, Moody’s warns that recent reforms could significantly alter the country’s checks and balances. The agency also expressed concern about the government’s ability to address growing credit challenges.

They cited Mexico’s low institutional quality compared to peers, particularly in rule of law and corruption control. In addition, Moody’s will assess if further deterioration in the regulatory framework could limit the government’s fiscal options.

Moody’s Concerns Over Mexico’s Fiscal Challenges

Moody’s doubts the government’s ability to achieve significant fiscal consolidation. They point to a series of implemented or announced reforms as limiting factors.

The agency predicts that Mexico’s debt metrics will weaken in 2024-2025. This could further diminish the country’s fiscal strength and weigh on its credit profile.

The government’s budget situation has worsened in 2024, with the deficit exceeding 5% of GDP. Moody’s notes that authorities face limited options to adjust fiscal accounts.

This is due to increasingly rigid spending structures, reduced financial buffers, and a narrow revenue base. Moody’s baseline scenario expects only gradual deficit reduction in coming years.

They project public debt to rise above 45% of GDP in 2025, up from 40% in 2023. It could approach 50% by 2027-2028 without more substantial consolidation efforts.

The agency also highlights the weakening debt affordability. The interest-to-revenue ratio reached 15% in 2023, up from 10% pre-pandemic. Moody’s expects this to remain between 15% and 16% in the near future.

Lastly, Moody‘s sees an increased likelihood of contingent liabilities from Pemex affecting the government’s balance sheet. The oil company’s long-term debt sustainability remains unresolved, posing ongoing fiscal risks for the government.