Mexico's next government, to be elected this June 2, faces three main risks to the sovereign credit rating, including the possibility that higher fiscal deficits lead to higher public debt, Fitch Ratings said.

Mexico's next government, to be elected this June 2, faces three main risks to the sovereign credit rating, including the possibility that higher fiscal deficits lead to higher public debt, Fitch Ratings said in an interview with Reuters.

Mexican President Andrés Manuel López Obrador (AMLO) largely kept Mexico's public finances in order during his first five years in office while pursuing sweeping budget austerity policies, even during the peaks of the pandemic.

But it is estimated that  in 2024 --his last year at the helm of Latin America's second-largest economy-- the fiscal deficit will increase to 5.9% of GDP, as measured by Public Sector Financial Requirements, as AMLO seeks to complete major infrastructure projects.

"If fiscal deficits remain consistent with an accelerated increase in public debt, that could affect Mexico's sovereign rating," said Carlos Morales, director of sovereign debt at Fitch Ratings.

This represents an increase compared to the deficits of 4.3% of GDP in 2023 and 2022.

"It is a step in the wrong direction, it is a fairly high deficit that could entail long-term risks (...) If this continues in the coming years, during the next administration, that would definitely be a negative credit," he claimed.

However, Morales stressed that as construction and spending on AMLO's flagship infrastructure projects come to an end, he expects the larger fiscal deficits to be temporary.

Morales said the other two main risks that could have negative implications for the credit rating would be policies that harm Mexico's economic growth or the possibility of a deterioration in governance and the rule of law.

On the other hand, if economic growth proves stronger, smaller fiscal deficits lead to a reduction in public debt, or there is improved governance and rule of law, that would be positive for the credit rating.

The future president of Mexico will also have to deal with Pemex, which for years has been a concern for public finances as it is largest indebted energy company in the world.

"What has happened is that Pemex's debt has been stabilized, but in deterioration or to the detriment of the federal government's fiscal accounts (...) our expectation is that government support will continue in the next administration regardless of who wins the elections," he said.

In December, Fitch affirmed Mexico's sovereign rating at "BBB-", with a "stable" outlook.