Moody's downgrades Mexico to Baa3

Moody’s Ratings cut Mexico’s sovereign credit rating to Baa3 from Baa2 on May 20, leaving the country at the lowest rung of investment grade. The agency changed the outlook to stable from negative at the same time, according to Moody’s ratings materials and Mexico’s finance ministry. Moody’s said the move reflected a sustained weakening in fiscal strength and expectations that low growth, a narrow revenue base and continued support for state oil company Pemex would limit the government’s ability to stabilize debt. Mexico’s finance ministry said the country remains investment grade with the eight agencies that rate its sovereign debt. ### How far down did Moody’s cut Mexico? Moody’s lowered Mexico’s long-term local- and foreign-currency issuer ratings and senior unsecured ratings to Baa3 from Baa2, according to the May 20 rating action. Baa3 is Moody’s last investment-grade tier, one notch above speculative grade. Mexico’s finance ministry said on May 20 that the downgrade did not remove the country from investment grade and noted that Moody’s revised the outlook to stable. (moodys.com) The ministry said that stable outlook means the agency does not anticipate an additional change in the rating over the next 12 to 18 months. ### What reasons did Moody’s give for the downgrade? Moody’s said fiscal conditions have weakened and pointed to spending rigidities, weak revenue generation and continued sovereign support for Pemex. (moodys.com) In Moody’s description of the action, those pressures have eroded fiscal policy anchors and reduced Mexico’s capacity to stabilize debt dynamics. (gob.mx) The agency also tied the downgrade to weaker growth. Moody’s said a narrow revenue base and continued support for Pemex are expected to constrain the government’s balance sheet, according to the rating action carried by Moody’s materials and market coverage of the decision. ### Why does Pemex keep appearing in the rating discussion? Pemex was singled out by Moody’s as a continuing fiscal risk because government support for the oil company can migrate onto the sovereign balance sheet. (events.moodys.com) Moody’s said continued Pemex support was one of the drivers behind the downgrade and the assessment that Mexico’s fiscal strength had weakened. Bloomberg and other market reports on the decision said Moody’s cited rising liabilities associated with Pemex as part of the broader fiscal pressure on Mexico. That links the company’s financing needs to the sovereign rating debate even though the action was on the Mexican government, not only on the company. ### What did Mexico’s government say in response? (events.moodys.com) The Secretaría de Hacienda y Crédito Público said in Communiqué No. 41 that Moody’s action kept Mexico within investment grade and changed the outlook to stable from negative. The ministry said the country still holds investment grade from all eight agencies that evaluate its sovereign debt and described that as evidence of a commitment to responsible economic policy and sustainable public finances. (bloomberg.com) Proceso, citing the finance ministry, reported that officials highlighted Moody’s expectation of no further rating changes over the next 18 months. The ministry’s response focused on the outlook change as the immediate signal to investors after the downgrade. ### What happens next for investors and officials? (gob.mx) Moody’s scheduled a May 21 webinar titled “Sovereign Credit Today | An update on Mexico,” describing the downgrade as driven by fiscal weakening, continued Pemex support and eroding fiscal policy anchors. That event set out the agency’s explanation for investors one day after the rating action. Mexico’s next public reference points are likely to come through finance ministry debt and public-finance updates and any follow-on rating actions tied to sovereign-linked issuers. (proceso.com.mx) Moody’s ratings news for May 22 already showed downgrades for two Mexican insurers following the action on the sovereign, underscoring that the May 20 decision can feed through to other borrowers connected to the country ceiling and sovereign profile. (ratings.moodys.com) (events.moodys.com)