Mexico's support for Pemex to drive widening fiscal deficit, Moody's says

MEXICO CITY (Reuters) - Mexico’s fiscal deficit will widen to 4.1% of gross domestic product this year, with ongoing support for ailing state oil company Petroleos Mexicanos (Pemex) driving up debt, ratings agency Moody’s Investors Service said on Wednesday.

FILE PHOTO: A general view shows Mexican state oil firm Pemex's Cadereyta refinery in Cadereyta, on the outskirts of Monterrey, Mexico, December 10, 2020. REUTERS/Daniel Becerril/File Photo

Pemex will need $14.7 billion in government support this year alone, Moody’s said in a statement.

This support will ratchet up the fiscal deficit, Moody’s said in a report that highlighted persistent sovereign credit risks despite an expected economic rebound in 2021.

Moody’s analyst Ariane Ortiz-Bollin pointed to three credit risk factors despite the rosier economic outlook.

These include lower growth and pressures on growth in the medium term, substantial and recurring support for Pemex that will impact public finances and the federal government’s fiscal profile, and risks related to “institutional deterioration.”

The agency raised its real gross domestic product outlook to 5.5% this year from a previous 3.5% forecast, citing stronger-than-expected growth in the final quarter of 2020 and a positive carryover effect into 2021.

A strong U.S. economy is seen boosting Mexican manufacturing exports and will prop up economic growth in the context of sluggish private consumption, contracting investment and limited fiscal spending, said Moody’s.

This will lead to a “two-speed” recovery of Mexico’s economy in 2021 as sectors connected to the United States will expand at a faster pace than those driven by domestic demand.

Economic growth is seen at 2.6% next year held back by sluggish domestic demand because of persistently weak investment and a weak labor market that are weighing on consumption.

Significant delays in the distribution of the coronavirus vaccine through 2021 would pose downside risks to Mexico’s economic outlook in 2021 and 2022, said Moody’s.

Reporting by Stefanie Eschenbacher and Anthony Esposito; Editing by Daina Beth Solomon, Marguerita Choy and Sonya Hepinstall