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NAFTA 'retreat' could lead to a rating downgrade for Mexico, S&P warns

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NAFTA 'retreat' could lead to a rating downgrade for Mexico, S&P warns

S&P Global Ratings warned that it could cut Mexico's BBB+ long-term foreign currency rating if there is a "retreat" from the North American Free Trade Agreement.

The rating agency said retreating from NAFTA could lead to low foreign and domestic investment in Mexico and sluggish economic growth, which may worsen the country's public finances.

"A prolonged fall in the GDP growth rate resulting from a retreat from NAFTA would weaken government revenues, potentially resulting in higher fiscal deficits and a rising burden of government debt. We could lower our rating on Mexico as a result," said S&P, which affirmed Mexico's ratings and stable outlook in March and projected its economy to grow by just over 2% through 2021.

S&P still expects Mexico, the U.S. and Canada to eventually resolve differences without undermining NAFTA's role or materially damaging trade and capital flows between the three nations.

But in the event of an unexpected rupture in North America's cross-border economic links, S&P believes that Mexico would face bigger challenges compared to Canada due to its weaker economic profile and lesser fiscal and monetary flexibility.

Mexico has high exposure to trade — representing nearly 78% of GDP in 2017, up from 31% in 1994 when it entered NAFTA — the rating agency noted. In contrast, Canada's total trade represented 64% of its GDP in 2017, down from 83% in 2000. U.S. trade accounted for only 27% of its economic output last year, down from just over 30% in the previous decade.

The U.S. also buys more than 70% of Mexico's exports and supplies about 50% of its imports, S&P said.

The last round of NAFTA negotiations ended in May, with U.S. Trade Representative Robert Lighthizer saying the countries "are not at this time close to a deal." Canadian and Mexican officials said they expect talks to resume in July.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.