Economics: The government is in denial over debt ratings cuts
There was considerable discussion in the past two weeks about how severely a series of tariffs that the US president was threatening to levy might affect the region’s economy, especially that of Mexico. But while most attention was focused on the threats emanating from the White House, and on speculation as to the exact terms of the deal reached between Mexico and the Trump administration and their implications going forward, another development with major implications for the economy and public finance garnered much less media attention.
Fitch downgraded the ratings while Moody's lowered the outlooks on sovereign Mexican debt and that of Pemex, and Moody’s also lowered the outlooks of the CFE, three Mexican development banks, Mexico's deposit insurance agency (IPAB), and the country’s Big Four commercial banks. These decisions will have sweeping consequences.
Both ratings agencies concurred in citing a lack of predictability in the government’s policies and approaches to implementing them as reasons underpinning their decisions. Also troubling is the extent to which the administration is committed to reviving Pemex no matter the cost, but its plans to date are widely seen as way too inadequate – or counterproductive – to return the company to financial and operational health.
Both the federal government and Pemex will now have to pay a great deal more to issue new debt or restructure current liabilities. This means the López Obrador administration will now have fewer resources with which to finance investment at Pemex and to fund its signature social policy and infrastructure projects. Austerity efforts have led most areas of government to spend much less than what was budgeted for the first four months of the year, but while there may be considerable slack on the spending side of the ledger so far, budgetary revenues have fallen far short of expectations so far this year and a stalling economy would further depress tax receipts. As we get closer to year-end, political pressure will build to accelerate the full rollout of the new administration’s cash transfer programs, and AMLO officials will continue to try and accelerate costly and questionable infrastructure projects.
Now read on...
Register to sample a report