By Anthony Harrup
MEXICO CITY--Moody's Ratings changed its outlook on Mexico's sovereign debt to negative from stable, citing recent changes in the country's constitution, challenges to reducing the fiscal deficit, and risks from possible changes in U.S. trade policy.
Moody's affirmed the country's rating at Baa2, a notch above the minimum investment grade, saying the economy remains supported by its diversity and potential benefits of nearshoring, as well as a history of "relatively prudent fiscal and monetary policies."
The outlook change "is driven by our view of a weakening in the policymaking and institutional settings that risks undermining fiscal and economic outcomes," Moody's said.
The administration of President Claudia Sheinbaum, who took office Oct. 1, faces the task of lowering the fiscal deficit from more than 5% of gross domestic product this year. The government plans to submit its 2025 budget proposal to congress on Friday.
Although the administration has committed to reducing the deficit over the coming years, "we consider that their ability to achieve material fiscal consolidation will be constrained as a consequence of a series of reforms implemented or announced," Moody's said.
General government debt is expected to exceed 45% of GDP in 2025, compared with 40% in 2023, and could rise toward 50% in 2027-2028, the ratings firm added. Continued support for highly indebted state oil company Petróleos Mexicanos is also seen as a risk for the government's balance sheet.
Among constitutional changes made in recent months is an overhaul of the judiciary that is seen eroding the system of checks and balances, and legal changes giving state energy companies greater dominance over the oil and electricity sectors.
Moody's expects Mexico will continue to benefit from investments related to nearshoring, but "the constitutional reforms may dampen investors' confidence, which risks materializing in lower investment and economic growth that underperforms vis-à-vis our expectations of medium-term growth of about 2%."
Mexico faces further risks as the U.S.-Mexico-Canada Agreement comes up for review in 2026, particularly if changes in rules of origin, labor clauses or U.S. trade policies toward Mexico limit exports.
"Lower economic growth and, consequently, government revenue would undermine fiscal consolidation efforts," Moody's said.
Write to Anthony Harrup at anthony.harrup@wsj.com
(END) Dow Jones Newswires
November 14, 2024 17:41 ET (22:41 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments