A salesperson works in a shop window during the start of the gradual reopening of commercial activities in downtown Mexico City.EDGARD GARRIDO / Reuters
After the Secretary of the Treasury, Arturo Herrera, presented to the Mexican Congress his budget proposal for next year, conversations between analysts and observers of the economy returned about the risk that Mexico would lose its investment grade, the rating with which three credit agencies certify that the country is not at risk of defaulting on its debt.
An investment bank even informed its clients in a brief note on September 9 that it expected the country to lose investment grade in 2021. Alarms were reignited by long-standing concern.
In 2018, the Fitch Ratings agency changed its outlook for the country from stable to negative, arguing that the then president-elect, Andrés Manuel López Obrador, represented a deterioration in the balance of risks, since his policies would bring more uncertainty.
So far in 2020, both Fitch and Standard & Poors and Moody's have proceeded to lower the rating, and not just the outlook, on the country.
The methodology of the agencies varies between them, as well as the ratings they use.
However, they all divide their ratings into "investment grade" versus "junk."
Among the three rating agencies, only Fitch places Mexico one notch above the “junk” rating.
S&P puts it two steps up and Moody's three;
Both companies, however, see the country in a negative perspective.
“We have cut Mexico's rating twice since mid-2019, once driven by increased risks from Pemex and the reversal of the structural reforms that we expected to boost growth, and again in response to the pandemic, which led to a severe recession. which exacerbated these growth risks and led to an increase in the debt ratio, ”explains Charles Seville, Fitch's sovereign debt analyst for Mexico.
Pemex's multimillion-dollar losses, its high level of debt and the government's insistence to continue investing in the company instead of reducing its costs and size, led the oil company itself to lose its investment grade, first in 2019 and later this year. year.
"Most likely, for there to be a cut, we will have to lose confidence in the coherence of the policy framework, not see a recovery in the economy or see more damaging microeconomic policy interventions," adds Seville.
A cut in the credit rating would imply an increase in the cost of financing for the Mexican government.
In other words, if Mexico lost its investment grade, it would pay more interest on its debt.
Mexican companies that issue bonds in the international market would also be affected and pay higher rates.
JP Morgan Bank estimates that $ 8.9 billion in corporate bonds are at risk of seeing their financing costs rise if the sovereign bond suffers a rating downgrade.
Experts such as Bank of America Chief Economist for Mexico Carlos Capistrán expect Mexico to lose credit investment grade as early as next year.
The bank informed its clients of the risk in a recent information note.
“When your debt as a percentage of your production increases more than 50%, they already begin to see and review your rating, to see what is happening”, says Capistrán in a video call, “and precisely Mexico has just passed that threshold.
Last year, in December, the debt was at 45% and in June it was already 60%, as has happened in other countries due to the effect of the pandemic ”.
Despite the fact that one of President López Obrador's commitments is not to increase the debt, the government's financing needs remain great and the country's production plummeted due to the pandemic, making it impossible to contain a deficit.
Much Mexican debt is in dollars, so a depreciation of the exchange rate also increases the level of debt.
Despite the Administration's efforts, there are factors that are beyond its control.
In the budget delivered to Congress this month, Secretary Herrera estimates a drop in the economy this year of 8% and growth in 2021 of 4.6%.
“The budget is very optimistic, they keep putting money into Pemex and Pemex keeps losing money.
So, despite good intentions, it seems that we are already in a trend, "says Capistrán.
His forecast for 2020 is that the Mexican gross domestic product will contract by 10% and that next year the country could grow by 2%.
“As we don't see much growth in Mexico, and we have many financing needs, we believe that debt will continue to grow and at some point, perhaps next year, they will continue to cut Mexico's rating, until it eventually loses its grade. investment ", says Capistrán." It's as if the ratings were from 0 to 10, "he adds," and you said that Mexico has a rating of 10. And what we are talking about is that it is going to lose it and it will go to 8 Well, maybe it's not the end of the world but we had 10, we were like the star student. And now you can lose that. "