Fitch Downgrades Mexico

Trade tensions and oil: these are the reasons rating agency Fitch downgraded Mexico’s sovereign debt to BBB. It was an insult of sorts to a country that has cleaned its house, politically, and has a relatively strong economy.

Mexico does suffer from the aging infrastructure of its huge state-owned oil company Pemex. That aging has made it harder to take Mexico’s proven reserves (it ranks 19th in the world in this category) and turn them into capital.

Mexico also faces what could be an ugly trade war with the United States. Tariffs on Mexican goods coming into the United States could rise to as much as 25%, which would cripple its economy.

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The Fitch comments:

Fitch Ratings has downgraded Mexico’s Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) to ‘BBB’ from ‘BBB+’ and revised the Outlook to Stable from Negative.

The downgrade of Mexico’s IDRs reflects a combination of the increased risk to the sovereign’s public finances from Pemex’s deteriorating credit profile together with ongoing weakness in the macroeconomic outlook, which is exacerbated by external threats from trade tensions, some domestic policy uncertainty and ongoing fiscal constraints.

And:

Future developments that could individually, or collectively, result in negative rating action include:

–A weakening in the consistency and credibility of the macroeconomic policy framework;
–Sustained macroeconomic underperformance, characterized by continued weak GDP growth outturns that result in a deterioration of key credit metrics;
–A trend increase in the government debt burden.

Mexico’s relatively new government will need to deal with one more headache.

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