The entity expresses open concern about Mexico's governance, emphasizing that "it is already relatively weak, with the World Bank's Global Governance Indicator score at the 32nd percentile, which is well below the 'BBB' median of the 58th percentile." .
The rating agency Fitch Ratings published this Thursday its risk rating for Mexico, which remained in the BBB- range with a stable outlook.
According to the firm, Mexico's rating is supported by a prudent macroeconomic policy framework, stable and solid external finances and a public debt/GDP ratio that Fitch projects will remain below the 'BBB' median.
On the negative side, said rating is limited "by weak governance indicators, a history of moderate long-term growth performance and fiscal risks related to Pemex's contingent liabilities and increasing budgetary rigidities."
SHEINBAUM VICTORY
Fitch's analysis highlights how Claudia Sheinbaum, of the current MORENA party, won the presidential elections of June 2, 2024 in a landslide, becoming the first female president of Mexico, with 59% of the votes, more than 30% by above his closest competitor, Xóchitl Gálvez, and the largest margin of victory in a Mexican presidential election since 1982.
"The results indicate broad political continuity and solidify MORENA's broad political support (...) Preliminary election results suggest that the party, together with its allies, can obtain sufficient legislative support to pass constitutional amendments. (...) These results have encouraged outgoing President López Obrador's push to advance 20 constitutional reform initiatives, which were presented in February 2024. His goal is to present six of them (including judicial reform) to Congress for approval in September, the last month of his mandate," summarizes the agency's statement
Regarding the proposed constitutional amendments, Fitch highlights that the reform package includes modifications to the judicial branch.
"The reforms would replace presidential selection of local Supreme Court justices, magistrates, and district judges with election by popular vote. We believe these reforms would generally negatively affect Mexico's institutional profile, but it is too early to assess the potential severity. before its approval and implementation. Mexico's governance is already relatively weak, with the World Bank's Global Governance Indicator score at the 32nd percentile, which is well below the 'BBB' median of the 58th percentile," warns the entity.
On the other hand, they anticipate a general government deficit of 5.4% of GDP in 2024 and 4.0% in 2025, compared to 3.6% in 2023 and an average of 2% of GDP during 2015-2019.
"The 2024 budget included a Non-Financial Public Sector fiscal deficit exceeding 5% of GDP, the highest point in more than three decades. The incoming administration will inherit a significant deficit caused by increased social spending and higher costs of debt," says Fitch.
While the incoming administration aims to reduce the deficit to levels consistent with a stable debt-to-GDP trajectory, Fitch believes uncertainty remains over how and how quickly this will be achieved, which may only become clearer once the propose the budget for 2025.
"Political appetite for reform to improve tax collection remains unclear. We anticipate public debt to rise to 49% of GDP in 2024 from 46% in 2023, although it will remain well below the 'BBB' median. 55%. Our projections indicate a gradual increase in the medium term to 52.8% in 2026," the report emphasizes.
SUPPORT FOR PEMEX
Regarding state support for the oil company Pemex, Fitch does not expect any change in the government's willingness to financially support Pemex during the Sheinbaum administration.
"The incoming administration has expressed its intention to maintain Pemex's dominant position in the Mexican oil market, both upstream and downstream . This will likely require continued federal transfers unless there is a significant improvement in the company's operational efficiency or a reduction in its debt burden. Support was substantial during the AMLO administration (approximately 4% of GDP between 2019 and 2023), effectively transferring liabilities from Pemex's balance sheet to the federal government," the rating agency indicates.
The 2024 proposal specifies support measures for Pemex in the budget for the first time.
"Its inclusion improves transparency and underscores the government's commitment to ensuring Pemex's liquidity. We hope that Pemex will receive unwavering financial support from the government and that it will continue to be included as an item in subsequent budget years, although the incoming government has not indicated clearly its plans in this regard" highlights the statement.
ECONOMIC ACTIVITY
Concerned about a possible weakening of economic activity, Fitch in its analysis projects that real GDP growth will slow to 2.0% in 2024 from 3.2% in 2023, before falling further to 1.8% in 2025.
"We anticipate economic activity to rebound over the remainder of this year following a weaker economy during the first quarter. Fitch expects a combination of a slower U.S. economy, a tighter fiscal stance as the new administration takes over charge and a restrictive monetary policy stance will result in a slight slowdown in growth next year. Fitch expects that nearshoring will offer Mexico important opportunities to improve its participation in the global supply chain and diversify its manufacturing capacity, although the relocation of production is a gradual process," they warn.
Regarding the upcoming US elections, the agency recognizes that they are a source of uncertainty, for example, due to former President Trump's stated intention to impose a universal 10% tariff on all US imports.
"Increased trade tensions in such a scenario could leave Mexico vulnerable, given that 80% of its exports are destined for the United States. Immigration will continue to be a point of friction between the two countries, and a major limitation could affect the remittance flows to Mexico, which were 3.5% of GDP in 2023," concludes the Fitch statement.
