Despite the circumstances, there is no risk of losing the Investment Grade.

Moody's rating agency warned that the fiscal strategy to be presented by the next Mexican administration will be key to Mexico's sovereign rating.

Mexico's rating is “Baa2/stable outlook”, which is a medium level of Investment Grade, since July 2022.

The agency's outlook for the rating is pessimistic, admitted sovereign analyst Renzo Merino. But he stressed that there is no risk of losing the Investment Grade.

Participating in the annual Moody's Inside Mexico seminar, he explained that "it will be very difficult for the government to reduce the fiscal deficit by three points of GDP next year, when there are already prospects for lower economic growth." The fiscal deficit is at 6% of GDP and he believes it will be difficult to reduce it by three points, as the outgoing government has proposed.

On the other hand, there is the impact of the economic slowdown on income generation. The Organization for Economic Cooperation and Development (OECD) recently cut its GDP expectations for Mexico by eight-tenths of a point, for this year and next, to 1.4% and 1.2%, respectively.

"A more moderate economic activity limits the capacity to generate public revenue, which in a context of rigid spending, will complicate the process of the Mexican situation and generate a risk of deterioration in the situation."

Additionally, he noted that in the event that the next government absorbs Pemex's debt, via some legal change, "there may also be a reputational deterioration for the sovereign issuer, which could further aggravate the situation."

He said that with two years of stable outlook, it is time to review the sovereign rating.

Regarding the reform of the judicial power recently approved by the majority of the ruling party, he warned that one of the main vulnerabilities of Mexico's sovereign rating is institutional weakening.

The reform is expected to erode the checks and balances between the executive and legislative branches, the latter being dominated by the ruling party and related parties, he said.

The risk is that this erosion may limit respect for contracts, limit impartiality in the resolution of legal disputes, affect the business environment and regulatory stability. In short, impartiality in judicial decisions may be present.

PEMEX AND ITS HUGE DEBT

On the same panel, Pemex analyst Roxana Muñoz noted that each year of the last six-year term, the government allocated 9 billion pesos (US$ 464 million) to financial support for the oil company.

In the absence of reform, this budget could rise to 20 billion (US$ 1.032 billion), he warned. Despite not having a specific strategy for the government that will take power next week, regarding the financial management of the state-owned companies, the sovereign analyst of Moody's said that they have two scenarios regarding the management that will be given to the oil company.

The first assumes that the government absorbs the debt via guarantees; and the second, a legal change to absorb it as its own, which would have an impact on the sovereign rating as it would take the debt above 50% of GDP (today it is at 46% of GDP).

US ELECTIONS, ANOTHER FACTOR

At the same event, Ariane Ortiz Bollin, senior vice president of credit at Moody's, spoke about the impact that the election results in the United States will have on Mexico and Latin America.

The electoral process in the main trading partner will take place on November 5, and he said that there are still no conclusive prospects as to which of the two candidates can win.

In any of the scenarios, there will be a review of the North American Free Trade Agreement (T-MEC), whose negotiation tables begin next year.

The expert considered that Mexico will have less room to maneuver than other Latin American economies to establish its position vis-à-vis China. If Donald Trump wins, the pressure on Mexico will be directed at the country limiting the passage of Central American migrants to the United States, she considered.

The analyst warned that Donald Trump's virtual victory could impact the sovereign's rating because investment flows would be reduced if his proposal to impose tariffs on exports goes ahead.