One point to JP Morgan, which predicted not a week ago that Fitch was likely to cut Mexico’s credit rating. On Monday, the rating agency did just that, lowering the country’s foreign currency issuer default rating by one notch to BBB. The rating agency said its outlook for Mexico’s ratings was stable.
Here’s what JP Morgan said on November 17, after the Mexican congress approved a 2010 budget that forecasts the widest deficit in two decades, via Bloomberg:“We continue to believe that Fitch Ratings will downgrade Mexico’s sovereign debt rating by one notch to BBB, and that Mexico will be able to avert S&P’s downgrade,” Casillas wrote in a note to clients today. “Fitch Ratings could make its pronouncement as soon as today or tomorrow”
Overall, the downgrade was not unexpected – Mexico’s sovereign debt was already trading in the BBB range, as analysts have not been optimistic about the country’s economic prospects. Standard & Poor’s warned in May that it might lower Mexico’s rating, but Fitch has been more aggressive than its rivals in acting on sovereigns.
Consider the view of Research2, the research arm of property specialist BH2, in October:
For Mexico we caution coming years will be extremely challenging. There is the likelihood that its exports of goods and people will be hit as economic conditions in the US deteriorate. Mexico is also at serious risk from reduced US tourism, together with a falloff in remittances from its estimated twelve million nationals already in the US. Those viewing energy as a potential catalyst to swift recovery should not be so sure. Despite the rebound in energy prices, and our belief in further rises, Mexico’s oil production is falling, harming its ability to earn hard currency income as well as the state’s tax take. Were economic threats not enough Mexico faces continued drug related violence; the export of narcotics providing small economic help but also a great deal of harm (both economic and humanitarian).
Highlights from the Fitch statement on the downgrade, emphasis FT Alphaville’s:
Fitch downgraded Mexico’s ratings as the global economic and financial crisis and falling oil production have accentuated weaknesses in the sovereign’s fiscal profile, including the high oil dependence of public sector revenues, a narrow non-oil tax base and a limited fiscal cushion.
These weaknesses limit Mexico’s fiscal maneuverability in the face of future oil income shocks. Mexico’s limited ability to implement a credible counter-cyclical fiscal policy this year (in contrast to that observed in some of its rating peers) also highlights the underlying structural fiscal weaknesses.
Mexico’s general government debt is expected to reach 37% of GDP in 2009, which is above the ‘BBB’ median, while the debt to revenue ratio is significantly above the peer median highlighting the narrowness of its revenue base.
Mexico’s less dynamic growth performance and outlook relative to similarly rated peers (sovereigns rated ‘BBB+’, ‘BBB’ and ‘BBB-’) suggest fiscal income pressures could continue, especially if oil production continues its secular decline.
Finally, Mexico’s external buffers are also limited compared with peers to deal with potential external shocks in the future. Oil income, which constitutes over 35% of the public sector revenues, has been adversely impacted by the fall in oil prices from their peak and oil production. Oil production declined from a peak of 3.4 million b/d in 2004 to 2.6 million currently, with the rate of the decline accelerating to 9% in 2008 representing a structural shock to public finances.
Related links:
Strange rumblings down Mexico way – FT Alphaville
Mexic-oh no – FT Alphaville
Citi, Banamex and the peso – FT Alphaville