Traders Skeptical Mexico Can Avoid Downgrade As Debt Surges

  • S&P and Fitch have negative outlooks on Mexico’s ratings
  • Country’s debt-to-GDP ratio has soared to a 20-yr high of 55%

Traders are growing increasingly pessimistic about Mexico’s ability to stave off a credit-rating downgrade.

It costs 0.23 percentage point more to insure Mexico’s bonds against nonpayment than debt from lower-rated Panama, based on trading in credit-default swaps. That’s the most in six years. Mexico is also more costly to protect against default than Peru, which shares the same A3 rating from Moody’s Investors Service, four levels above junk, and the BBB+ from S&P Global Ratings and Fitch Ratings.

Mexico is struggling to convince investors it can hold on to its rating as the country’s debt load increases and losses deepen at state-owned oil producer Petroleos Mexicanos. The nation’s gross debt will be equal to 55 percent of its gross domestic product this year, according to International Monetary Fund projections, compared with less than 40 percent a decade earlier. Moody’s Investors Service and S&P Global Ratings both have a negative outlook on Mexico’s grade.

“Debt-to-GDP has been rising, and there is concern about the accumulation of fiscal deficits,” said Benito Berber, an analyst at Nomura Holdings Inc. in New York. “Part of that has to do with the support the government gives to Pemex and the inability of Pemex to be financially sustainable.”

Pemex, as the oil producer is known, hasn’t posted a profit since the third quarter of 2012 as declining oil prices exacerbate a drop in production. In April, the government pumped $4.2 billion into the company.

Mexico’s current-account deficit has swelled to the widest since 1999 as the government slashes growth forecasts amid falling crude exports and a sluggish expansion in the U.S., the Latin American country’s biggest trading partner.

“Sentiment towards Mexico is changing rapidly,” said Claudio Robertson, a managing director at Investment Placement Group in San Diego.

The peso was little changed Monday at 19.7912 per U.S. dollar as of 9:18 a.m. in New York after reaching a record low last week.

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