(Bloomberg) -- S&P Global Ratings cut its sovereign credit score for Mexico by one notch to BBB, saying shocks from the spread of coronavirus and an oil price rout will harm the country’s already grim economic outlook.
In their statement, S&P also said that Mexico will remain on credit watch negative, reflecting the possibility that its rating could be cut a second time within a year or two.
“Prolonged poor fiscal performance and a resulting rising debt burden, or the risk of potentially weak policy implementation, could lead us to lower the rating,” wrote S&P analysts Lisa Schineller and Joydeep Mukherji in the decision.
For President Andres Manuel Lopez Obrador -- who is already contending with an economic slump, the virus, and a steep decline in business confidence -- the S&P decision is yet another in a long list of setbacks. While the downgrade was widely expected after Mexican assets plunged, it confirms just how dire the situation is for an economy that some experts see contracting near 6%, a similar scenario to the Tequila Crisis of the mid 1990s.
“While we were surprised by the timing, we were not surprised by the downgrade itself and the negative credit watch,” said Jens Nystedt, a senior portfolio manager at Emso Asset Management in New York. “It shows the growth and fiscal challenges Mexico is facing and those have been made worse by the likely impact of the Covid-19 virus.”
‘Amid the Risks’
Nystedt added that while Mexico’s investment grade rating is not yet at risk, state oil company Petroleos Mexicanos’s might be over the next few months. It’s already been downgraded to junk by Fitch, and Moody’s Investor Service has Pemex on negative watch to lose investment grade.
Despite the government’s strict adherence to fiscal discipline, it is the poor economic prospects that analysts worry could lead to further credit downgrades in the future.
“The probability of another downgrade to materialize in the next 12 to 24 months is not low,” said Claudia Ceja, a BBVA strategist based in Mexico City. “Another downgrade would depend on the ability to implement public policies amid the risks that the economy will keep on facing.”
Read More: Mexico, Not Just Pemex, Will Shoulder Burden of Lower Oil Prices
Mexico’s peso reversed gains and fell 1.4% to 23.2630 per dollar after the downgrade.
The S&P analysts also mentioned potential increases in contingent liabilities from Pemex, which has been hammered by the oil price plunge this year. Investors have long feared that the Mexican sovereign would be required to do more to support the company as it struggles under a debt burden of more than $100 billion.
In the decision, S&P highlighted the shift in energy policy under Lopez Obrador, which the analysts said has increased the country’s reliance on the oil company. Business confidence in the country “remains low” and hasn’t improved since an infrastructure plan announced in November, it said.
Read More: Mexico President Pushes Business Tensions to Boiling Point
“If the government’s fiscal profile remains weak for a prolonged period,” the analysts added, “Pemex’s poor operational and financial performance and technical capacity constraints could pose a more material contingent liability for sovereign creditworthiness.”
(Updates with investor comments starting in fourth paragraph.)
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