S&P raises Mexico’s credit rating: more wishful thinking on debt quality improvement than hard facts

MEXICO - In Brief 23 Dec 2013 by Mauricio Gonzalez

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Standard and Poor’s (S&P), raised Mexico’s sovereign rating from BBB to BBB+ shortly after Energy Reform was approved. Mexico’s country rating has been investment grade for a while. With this action S&P reverses the one notch reduction following the 2009 recession (-6.2% annual GDP change) and brings the rating in line with other rating agencies, like Moody’s and Fitch. S&P rationale is that “The passage of a landmark energy reform supported by some changes in the fiscal framework, bolsters Mexico’s growth prospects and fiscal flexibility in the medium term”. S&P recognizes that the energy amendments to the Constitution to open the energy sector to private investment require “ the passage of important secondary legislation next year” and that “we won’t see its tangible effects on economic activity for a number of years”. S&P rationale is correct but in our opinion it leaves aside the most important aspect of a credit rating improvement, meaning a lower credit risk which is not at all granted by this certainly ambitious energy reform. Within S&P’s credit rating scenario the Mexican Government would keep the General Government/GDP ratio constant at 39% from 2012 to 2016. This estimate is most optimistic, even more so than the government’s expectations (that allow the abovementioned ratio to increase to 41% by 2015 in order to stabilize it at 39% until 2019). In order for S&P estimates to be correct four strong assumptions need to hold SIMULTANEOUSLY (as mentioned in some of our previous reports): i) Crude oil production would need to increase by about 25% from 2013 to 2019, from 2.5 to 3.1 million barrels per day (mbd). This assumption would be hard to achieve considerin...