(The following statement was released by the rating agency)
Jan 12 - Fitch Ratings affirms Mexico’s ratings as follows:
—Foreign and Local Currency Issuer Default Ratings at ‘BBB’ and ‘BBB+’, respectively; —Short-term Issuer Default Rating at ‘F2’;
—Country Ceiling at ‘A-‘.
The Rating Outlook is Stable.
Mexico’s ratings and Stable Outlook are underpinned by its disciplined macroeconomic policies, a relatively healthy banking sector, resilient external accounts, a modest external debt burden, and the sovereign’s manageable external amortization profile.
These strengths sufficiently counterbalance the structural weaknesses in Mexico’s public finances and the country’s modest growth prospects.
‘While the near-term economic outlook of Mexico appears generally favorable aided by the expected rebound in the U.S. and some further recovery in domestic demand, sustaining higher growth in the medium-term is likely to require additional structural reforms,’ said Shelly Shetty, Head of Latin America Sovereigns.
Despite the GDP growth rate of about 5% in 2010, Mexico’s five-year GDP growth average of 1.7% compares less favorably with the ‘BBB’ median and barely exceeds the five-year average population growth, highlighting the importance of achieving a higher growth trajectory in the medium term. Fitch notes that recent economic performance has been aided by the favorable external trade performance. However, despite the supportive economic policies and job creation, domestic demand (especially investment) conditions remain relatively subdued.
‘The rising wave of drug-related violence appears to be dampening confidence, retail and commerce activities, possibly weighing on a more robust investment and economic outlook,’ added Shetty. Fiscal performance continues to be in line with Fitch’s expectations, and the agency expects the general government debt burden to remain close to 40% of GDP, in line with the peer median. Fiscal performance has been boosted by the economic recovery and the tax reform approved in 2009.
Elevated oil prices and a gradual stabilization in oil output are also providing some fiscal flexibility to authorities. However, the limited resources in the Mexican government’s Oil Stabilization Fund (OSF) leave the country’s public finances vulnerable to swings in oil income, which represents over 30% of total public sector revenue. While the recent gradual stabilization of the oil platform is a positive development, Fitch notes that it is unclear whether production would stabilize at current levels over the medium term. Also, despite revenue-enhancing tax measures in recent years, the non-oil tax base of about 10% of GDP remains quite narrow and limits fiscal flexibility. In the past, political actors in the country have shown resistance to increasing the revenue base significantly.
Moreover, Fitch notes that the political window to further enhance the non-oil tax base or to pass material structural reforms is narrowing owing to the several state elections in 2011 and the presidential election in 2012. Mexico’s external accounts are not a source of significant vulnerability as the current account deficit is small and a large proportion of it is covered by foreign direct investment (FDI) flows. Moreover, Mexico continues to have access to the IMF’s Flexible Credit Line (FCL) in case the external conditions deteriorate markedly and unexpectedly.
More importantly, the Mexican authorities are appropriately exploiting the opportunity provided by increased capital inflows to the country by building international reserves to strengthen their capacity to face future external shocks. Looking ahead, sustained high economic growth, greater fiscal flexibility, and a significant improvement in the international liquidity ratio will be positive for creditworthiness.
Improvement in the outlook for the oil sector will also be viewed positively. While not Fitch’s base case, the agency would view significant fiscal deterioration or renewed economic weakness that undermines public debt dynamics negatively.