La Jornada: Moody’s lowers Mexico’s rating

Moody’s lowered Mexico’s credit risk rating by one notch, from Baa2 to Baa3, to place it just one level above the so-called “investment grade”, the limit that marks the possibility of falling into default.

At the same time, the financial firm changed the outlook for the country’s public debt from “negative” to “stable,” which implies that in a next review – within 12 to 18 months – it will remain as it is now.

Moody’s made this announcement a week after another of the large rating agencies, Standard & Poor’s, changed the outlook on sovereign debt from “stable” to “negative”, which increases the probability that that agency will downgrade its rating for Mexico in the next 18 months.

Debt valuation determines the probability that governments and companies will default on their obligations. At Mexico’s level, the risk of default is marginal, but by reducing the rating, the cost of financing (the interest rate at which debt is contracted) can increase.

Two of the three main agencies (the third is Fitch) now place Mexico one step away from losing investment grade. Moody’s Baa3 level converges with Fitch’s BBB- stable, while S&P maintains the rating just one notch above, at BBB.

The cut, according to Moody’s, is due to the sustained weakening of the fiscal position, that is, the differential between income and expenditure of the federal government, the increase in public debt and pressures on the budget related to financial support for Petróleos Mexicanos (Pemex).

He highlighted that fiscal deterioration has accelerated since 2024 and could continue due to spending rigidity, the limited tax base and recurring financial support for Pemex.

These factors, he explained, have reduced the government’s ability to stabilize debt in an environment of low economic growth.

He explained that despite efforts to reduce the fiscal deficit, there are other priorities, such as energy sovereignty and a redistributive spending model, that have weakened the foundations of fiscal policy.

Furthermore, they have contributed to an increase in the deficit and a deterioration in debt metrics faster than expected.

“Mexico’s fiscal position has weakened relative to its Baa-rated peers and its vulnerability to fiscal shocks has increased, particularly because we expect economic growth to remain moderate in the short term,” commented the financial institution.

However, the Baa3 rating takes into account Mexico’s strength, supported by a large, diversified economy and preferential access to the US market, which provides a durable anchor for trade and investment opportunities.

He indicated that the authorities’ initiatives linked to investment could support a gradual improvement in economic performance in the medium term.

The stable outlook indicates that further weakening of the fiscal position will be gradual and will be partially offset by macroeconomic stability, as Mexico does not face structural imbalances that amplify fiscal risks. “The authorities retain a demonstrated capacity to adjust monetary and macroeconomic policies in response to shocks,” he highlighted.

Regarding Mexico’s ceilings in local and foreign currency, he highlighted that there are no transfer and convertibility risks.

Limited margin and time

Víctor Gómez Ayala, chief economist at Finamex, said the government has limited room and time to change the trajectory of its ratings through structural measures, before the three agencies worsen their forecasts.

“While the stable outlook limits the immediate impact, fiscal consolidation is incomplete, economic growth is insufficient to alleviate debt arithmetic, and Pemex’s liabilities are an unresolved issue,” he noted.

He highlighted that although Moody’s does not anticipate an imminent second cut, in the short term there is no certainty that the debt will be less than 55 percent of GDP or that Pemex’s contingent risk will decrease.