Research Update:
Mexico Foreign Currency And Local Currency Ratings Affirmed; Outlook Remains Positive
Primary Credit Analyst: Lisa M Schineller, PhD, New York (1) 212-438-7352; [Link]@[Link] Secondary Contacts: Roberto H Sifon-arevalo, New York (1) 212-438-7358; [Link]-arevalo@[Link] Sebastian Briozzo, Buenos Aires (54) 114-891-2120; [Link]@[Link]
Table Of Contents
Overview Rating Action Rationale Outlook Key Statistics Related Criteria And Research Ratings List
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Research Update:
Mexico Foreign Currency And Local Currency Ratings Affirmed; Outlook Remains Positive
Overview
The Mexican government's recent fiscal and energy reform proposals could strengthen the country's fiscal flexibility and medium-term growth prospects. We are affirming our 'BBB/A-2' foreign currency and 'A-/A-2' local currency sovereign credit ratings on Mexico. The positive outlook (assigned in March 2013) reflects the greater than one-in-three chance that the government could gain approval of measures to meaningfully improve fiscal room for maneuver and inject more dynamism into the economy.
Rating Action
On Oct. 10, 2013, Standard & Poor's Ratings Services affirmed its 'BBB/A-2' foreign currency and 'A-/A-2' local currency sovereign credit ratings on Mexico. The outlook on its long-term credit ratings on Mexico remains positive.
Rationale
The ratings on Mexico reflect its track record of cautious fiscal and monetary policies, which have contributed to low government deficits and inflation, bolstered economic resiliency, and contained fiscal and external debt levels. However, the sovereign's limited fiscal flexibility and modest medium-term growth prospects constrain the ratings. About one-third of the country's total budgetary revenues come from the oil sector, which renders the government vulnerable to volatile oil prices and potential declines in oil production over the medium term. In addition, the non-oil tax base is low at 9% to 10% of GDP and has historically proven politically challenging to increase. The fiscal and energy reform proposals submitted by President Enrique Pea Nieto's administration, under discussion in Mexico's Congress, could mitigate these ratings constraints. Tapping into Mexico's vast oil potential would energize investment and growth throughout the economy. The reform under discussion in Congress lifts key restrictions that preclude private, including foreign, investment by amending two key articles of the Mexican constitution. If the constitutional amendments are approved, the success of the reform in attracting more investment will depend on the details of the secondary legislation.
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Research Update: Mexico Foreign Currency And Local Currency Ratings Affirmed; Outlook Remains Positive
The tax reform submitted by the government aims to increase revenues by 1.4% of GDP next year and by 2.9% by 2018. In our view, the actual increase in revenue is likely to be somewhat less than official estimates. The reform raises some taxes, but reduces others. We also expect some watering down of the proposal during congressional negotiations. What is ultimately approved by Congress will provide a basis for more realistic revenue projections. The government also plans to strengthen the fiscal framework by revamping the oil stabilization funds and to save more during an upswing in the economic cycle by establishing expenditure caps. If passed and implemented effectively, these measures could be an important step in reducing revenue volatility. In our view, it's the combination of fiscal and energy reform that will determine the buoyancy to the economy and fiscal accounts, not either one in isolation. Passage of these reforms could mitigate some of the key rating constraints for Mexico: lackluster growth and limited fiscal room for maneuver. Fiscal and energy reforms have proven politically challenging and difficult to pass during the last decade. Standard & Poor's believes that the government has a high likelihood of gaining approval for these proposals, partly because of the president's political capital. We expect the details of the reforms will change as they are discussed and negotiated in Congress. Hence, we will await at least partial approval of the fiscal and energy reforms to assess the rating implications. We now expect real GDP growth of only 1.5% in 2013, subject to some additional downside risk from the recent storms and potential ramifications of the U.S. government shutdown. A series of downward revisions to our forecast reflects weaker demand from the U.S., lower government expenditure in the first half of the year, and a weak construction sector. However, we expect growth to pick up, to 3.2% in 2014 and 2015, along with the U.S. economy and assuming government progress on reforms to boost investment. From the rating perspective, it's not one quarter or one year of growth, but the broader, medium-term trajectory that matters. Robust reform momentum, however, would imply an upside to the medium-term growth outlook. We expect net general government debt to rise somewhat in 2014, given the government's budget proposal, from about 35% of GDP in 2013. We project that the general government deficit will decline this year toward 2%, but rise to more than 3% of GDP in 2014 pending further clarification on the approved budget; this compares with 2.8% in 2012. General government revenues of a little over 18% of GDP are much lower than those of most of its similarly rated peers, which tend to have revenues exceeding 30% of GDP (the 'BBB' median is 33% of GDP). Mexico's external vulnerability has risen somewhat over the past year despite a very low current account deficit, given higher nonresident holdings of locally issued government securities. These holdings are estimated at US$135
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Research Update: Mexico Foreign Currency And Local Currency Ratings Affirmed; Outlook Remains Positive
billion this year, higher than US$121 billion as of December 2012 and up from US$69 billion in 2011. As a result, the country's external debt, net of liquid assets, increased to 42% of current account receipts in 2012 from an average 32% during the previous five years. We expect the ratio to rise more slowly over the forecast period as the pace of these inflows moderates somewhat. The absence of large current account imbalances (at about 1.5% of GDP) feeds into comparatively low external financing needs vis--vis some peer issuers.
Outlook
The positive outlook reflects the greater than one-in-three chance that the government could gain approval of a series of policies that meaningfully improve Mexico's fiscal room for maneuver and inject more dynamism into the economy. We could raise the ratings based on our evaluation of the impact of the reforms that seek to strengthen the general government (central and local) non-oil revenue base and encourage more investment. For example, we could raise the ratings if the reforms reduce the vulnerability of public finances to sharp drops in oil revenues and enhance the country's long-term growth prospects. Conversely, we could revise the outlook to stable if the government fails to obtain approval for its substantial policy proposals, or if the reforms are insufficient, in our view, to materially strengthen public finances and contribute to greater economic resilience.
Key Statistics
Mexico--Selected Indicators
2007 GDP (nominal) (bil. US$) GDP per capita (US$) Real GDP growth (%) Real GDP per capita growth (%) Change in general government debt/GDP (%) General government balance/GDP (%) General government debt/GDP (%) Net general government debt/GDP (%) General government interest paid/general government revenues (%) 11,404 9,796 3.1 2.0 2.3 (1.6) 28.9 28.7 9.5 2008 12,257 10,228 1.4 0.4 5.3 (1.4) 32.2 31.3 8.6 2009 12,094 8,213 (4.7) (5.6) 4.3 (2.4) 37.0 34.5 10.1 2010 13,229 9,550 5.1 4.0 2.0 (2.8) 35.8 33.7 9.0 2011 14,424 10,493 4.0 3.0 3.9 (2.7) 36.7 35.8 9.0 2012 15,506 10,516 3.8 2.8 3.1 (2.8) 37.2 36.5 9.0 2013 16,446 11,452 1.5 0.5 2.2 (2.1) 37.3 35.3 9.1 2014 17,737 12,523 3.2 2.2 3.5 (3.3) 38.0 36.2 9.0 2015 19,183 13,497 3.5 1.5 3.1 (2.9) 38.3 36.6 8.8
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Research Update: Mexico Foreign Currency And Local Currency Ratings Affirmed; Outlook Remains Positive
Mexico--Selected Indicators (cont.)
Other depository corporation claims on resident non-government sector/GDP (%) CPI growth (%) Gross external financing needs/CAR + usable reserves (%) Current account balance/GDP (%) Current account balance/CAR (%) Narrow net external debt/CAR (%) Net external liabilities/CAR (%) 24.9 22.7 24.5 24.9 26.5 26.9 28.1 29.0 29.8
4.0 92.1 (1.2) (3.9) 30.8 116.8
5.1 96.6 (1.7) (5.4) 30.4 94.2
5.3 91.5 (0.6) (2.0) 32.4 137.3
4.2 89.2 (0.2) (0.6) 33.9 131.4
3.4 90.6 (0.9) (2.5) 30.2 106.4
4.1 85.9 (1.2) (3.4) 41.7 127.1
3.7 87.0 (1.7) (4.9) 43.4 134.1
3.5 85.0 (1.2) (3.8) 45.1 135.4
3.5 85.3 (1.4) (4.6) 46.4 136.1
Note: Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private-sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. f--Forecast. CARs--Current account receipts. The data and ratios above result from Standard & Poors own calculations, drawing on national as well as international sources, reflecting Standard & Poors independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
How Mexicos Proposed Tax And Energy Sector Reforms Could Affect The Ratings, Oct. 10, 2013 Sovereign Government Rating Methodology And Assumptions, June 24, 2013 Mexico, May 30, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance And Sovereign Issuers, May 7, 2013 Sovereign Defaults And Rating Transition Data, 2012 Update, March 29, 2013 Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the
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Research Update: Mexico Foreign Currency And Local Currency Ratings Affirmed; Outlook Remains Positive
rating committee are summarized in the above rationale and outlook.
Ratings List
Ratings Affirmed Mexico Sovereign Credit Rating Foreign Currency Local Currency CaVal (Mexico) National Scale Transfer & Convertibility Assessment Senior Unsecured Foreign Currency Local Currency Short-term debt
BBB/Positive/A-2 A-/Positive/A-2 mxAAA/Stable/-A
BBB AA-2
Complete ratings information is available to subscribers of RatingsDirect at [Link] and at [Link]. All ratings affected by this rating action can be found on Standard & Poor's public Web site at [Link]. Use the Ratings search box located in the left column.
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