“This rigidity is associated with policy commitments of the current administration, for example, support for state companies, particularly Pemex -between 1% and 1.5% of GDP per year-, as well as an increase in charges of pensions in total spending and also to our expectation that the interest burden will increase, particularly in a context where interest rates will be higher than what we expected a year ago,” the executive detailed in a videoconference.
According to Moody’s, the burden of pensions went from 2 points of GDP 15 years ago to 4 points between 2020 and 2021. “We have seen that there will be an expansion in terms of coverage of non-contributory pensions for older ages. This, over time, the population of Mexico will age, that could also increase the pressure related to pensions,” Merino said.
Other factors that the rating agency took into account have to do with issues related to the type of capital expenditure, investment associated with the emblematic projects of Andrés Manuel López Obrador: the Dos Bocas refinery, the Mayan Train and the Felipe Ángeles International Airport. “That reduces the flexibility of being able to make adjustments for this type of expense if necessary to control a deterioration, in terms of fiscal accounts.”
One aspect that influenced the downgrading of the rating is the use of “cushions” (boofers) that existed at the beginning of the current administration, which are no longer available to help “compensate for income losses in the coming years,” said Renzo Merino.
What change?
The rating agency upgraded Mexico’s sovereign rating from Baa1 to Baa2 with a stable outlook. According to Renzo Merino, this qualification level will be maintained, at least until 2024.
Unlike in April of a year ago, when Moody’s decided to maintain the rating, “we have seen that on the economic side, the economy’s ability to recover from these strong shocks has been undermined by certain dynamics that already preceded the pandemic period. ”, Renzo Merino said.
These are measures that have generated uncertainty to make investments in the country, such as President López Obrador’s electricity reform proposal.
A year ago a more dynamic economic recovery was expected, supported by the US economy. However, since there is no “substantial improvement” in the business environment in the country, “we now see that the recovery of the Mexican economy will be weaker than that of peer countries,” said the vice president and senior analyst at Moody’s Investor Services for sovereigns and supranationals.
