Moody's: Mexico's A3 rating underpinned by structural reforms, fiscal challenges undermine outlook

 A large and diverse economy, a high degree of integration with the US, as well as anticipated growth prospects associated with structural reforms support the Government of Mexico's A3 rating, Moody's Investors Service says in an analysis of the sovereign. However, the outlook was revised to negative from stable in March and downward pressure to the rating could occur from stalled fiscal consolidation and the potential crystallization of contingent liabilities via further support to Petroleos Mexicanos (PEMEX, Baa3 negative). 

Mexico's A3 rating incorporates Moody's expectation that recent structural reforms would improve the country's medium-term potential economic GDP growth to a 3%-3.5% range versus a pre-reform 2%-3% level. 

"However, a combination of the oil price shock and declining oil production at PEMEX, along with slower-than-expected growth have undermined the economic outlook," Jaime Reusche, a Moody's Vice President and Senior Analyst says. As a result, Moody's has forecast moderate growth of 2.5% for 2016 and 2017. 

While curtailed oil production at PEMEX has weighed on growth, recent energy sector reform has attracted private investment, albeit with mixed results amid low oil prices, curbing expectations for investment up to 2017 and beyond. 

Challenges facing the sovereign include reduced fiscal revenues as growth remains subdued and historically low oil prices. Moody's forecasts overall federal government revenues will decrease to 18.5% of GDP in 2016 from 19.3% in 2015. 

"Despite the drop, the authorities have begun implementing expenditure measures to reduce the federal government deficit from 2.8% of GDP in 2015 to 2.5% in 2016," Reusche says. 

Moody's credit analysis on Mexico does not constitute a rating action.