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Mexico's rating agency uproar highlights conflicting signals for investors

SNL Image

Mexican President Andrés Manuel López Obrador answers questions from journalists at at press conference at the National Palace in Mexico City. López Obrador's first 100 days in office have combined a compulsive shedding of presidential trappings with a dizzying array of policy initiatives, and a series of missteps have not even dented his soaring approval ratings.
Source: Associated Press

In a speech marking his first 100 days in office, President Andrés Manuel López Obrador proclaimed Mexico's economy was "progressing" and that there are "no signs of a recession."

The comments were notable in that they clash with recent rating agency warnings over Mexico's future economic growth and debt position. Earlier this month, S&P Global Ratings cut its outlook on Mexico's long-term ratings to negative, estimating an at least one-in-three chance of a downgrade within the next year. That followed a warning from Moody's that flagged concerns over the impact public spending could have on Mexico's credit profile.

The difference of opinion spurred a short-lived furor. AMLO, as the president is widely known, slammed rating agencies for "punishing" Mexico. A senator from his Morena political party went further, proposing a measure that would allow rating agencies to be stripped of their operating licenses if their assessments threatened financial stability. The actions were swiftly and widely criticized, and both the president and congressional members backpedaled.

Still, the incident underscores the mixed signals within the country's major economic indicators, with some suggesting reason for optimism and others pointing to a problematic slowdown.

"Consumer confidence is very high ... [but] if you look at private investors — and I am talking about Mexican investors not foreign — it's just the opposite, and that has to do with some of the policies, or at least some of the signals that have been sent out," S&P Global Ratings analyst Joydeep Mukherji noted in an interview.

Consumer confidence, one of the key indicators supporting the government's optimistic view, hit historic highs in February. More broadly, there appears to be public optimism for the new administration's policies: AMLO enjoys a 78% approval rating — the highest of any Mexican president at the 100-day mark in 30 years.

At the same time, both foreign direct investment and private investment have been on a downward trend for months — spurred in large part by AMLO's October 2018 decision to scrap a multibillion-dollar airport construction project, as well as sporadic proposals from some Morena congressional members that, while failing to gain traction, have caused temporary moments of chaos.

"We are seeing a deterioration in the predictability of public policies, mixed messages. When private investment sees mixed signals, it usually contracts," Moody's analyst Jaime Reusche said. "Every new government has to go through the learning process of how to maintain a good relationship with markets, with investors and with us."

Slowing economy, growing debt ... and Pemex

The outflow of private investment could exacerbate what rating agencies have flagged as a troubling combination for Mexico's economy: weaker growth and rising debt.

Mexican GDP growth slowed to 0.3% in the fourth quarter of 2018 from 0.8% in the prior quarter amid contractions from the manufacturing, mining and construction sectors, and expectations for future growth have mellowed. Banco de México lowered its GDP projections for both 2019 and 2020; it now sees GDP growth hitting between 1.1% and 2.1% this year and between 1.7% and 2.7% in 2020. It previously had guided growth for both years at 2.0% to 3.0%.

That pace of growth "could be even lower with the decreasing confidence in the private sector," Mukherji said.

Combined with government plans to increase spending for social programs and infrastructure development, some say there also is a risk of Mexico's debt ballooning. In its recent report, Moody's noted that while domestic demand would get a boost from the new government's plan to raise social spending and energy investment, the reliance on state support for growth generation is unsettling.

"It generates questions, [and] worries us, about how sustainable the future is," Moody's Reusche said.

Government coffers also will be strained by a new government rescue package for state-run oil company Petróleos Mexicanos SA de CV, or Pemex. The move deepens what S&P Global Ratings' Mukherji described as a troubling government dependency.

"One can see that this policy could lead to higher debt, either directly on the government's balance sheet or indirectly by posing kind of a contingent liability that gets bigger which ultimately the government could have to pay," Mukherji said.

AMLO has promised to implement austerity measures to downsize what he has billed as a top-heavy government, and has maintained that his government will exercise fiscal responsibility. However, Moody's Reusche argued that is untenable without additional tax revenue, given the expense of supporting Pemex and implementing the government's social spending plans.

"It is very difficult to maintain the trilemma. You can do two things but not all three things at once," the analyst said. "You would need a tax reform to be able to do the all three."

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.