Mexico Malaise Threatens to Tarnish Pena Nieto Rating Legacy

Updated on
  • S&P cut outlook on country’s rating to negative this week
  • Mexico has received 3 upgrades since Pena Nieto took office

Mexican President Enrique Pena Nieto’s track record of winning ratings upgrades is in serious jeopardy.

On Tuesday, S&P Global Ratings revised the country’s outlook to negative and said there’s at least a one-in-three chance of a downgrade in the next two years if Mexico’s debt increases more than forecast. It marked the second time in the past five months that a major ratings company lowered the nation’s outlook. The trend has been mirrored in the swaps market, where Mexico is seen as less creditworthy than peer Peru, as well as lower-rated Panama.

The negative outlooks represent a reversal for Mexico, which won upgrades form all three large rating companies as Pena Nieto pushed through historic overhauls of the nation’s energy, telecommunications and banking industries between 2012 and 2014. But the changes have failed to spark the economic boom that Pena Nieto promised. Instead, his government has repeatedly slashed its growth forecasts amid low oil prices and a sluggish expansion in the U.S., Mexico’s biggest trading partner.

“The economy’s tanking,” said Luis Maizel, co-founder of LM Capital Group, which has $5.1 billion under management. “How many times have they reduced growth expectations? How many times can you use the same excuse: that the U.S. economy is slowing so the Mexican economy is slowing down?”

S&P currently rates Mexico BBB+, three levels above junk. It announced its outlook change a day after the Pena Nieto administration lowered its 2016 forecast for the second time this year. The government now expects Latin America’s second-biggest economy to expand between 2 percent and 2.6 percent, down from an earlier forecast of 2.2 percent to 3.2 percent.

"The negative outlook underscores the importance of completing the fiscal consolidation trajectory, which is in itself consistent with keeping the current rating," Luis Madrazo, the Mexican Finance Ministry’s chief economist, said in a phone interview. The government will present a budget plan for next year that includes a surplus before interest payments, and the nation is projecting a healthier budget balance than the one incorporated in S&P’s analysis, Madrazo said.

Moody’s Investors Service rates Mexico A3, four levels above junk and one level above S&P. Moody’s has had a negative outlook on the debt since March.

Pena Nieto, whose record of rating upgrades dates back to his days as governor of Mexico’s biggest state, has also presided over a surge in the country’s debt as president. One measure of that debt is approaching levels not seen since the so-called Tequila Crisis of the mid-1990s, when the country needed a bailout from the U.S.

“The expansion of spending has been significant for several years and comes at a time when you have to rein in that expansion to reflect the long-term decline in oil prices,” said Alonso Cervera, an economist at Credit Suisse Group AG in Mexico City. “The room for maneuver to stimulate the economy is limited. On the fiscal side, there’s no margin.”

— With assistance by Eric Martin

(Updates to add government’s comment in sixth paragraph.)
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