March 26, 2020 / 10:34 PM / 7 days ago

S&P cuts Mexico, Pemex ratings as coronavirus bites

MEXICO CITY (Reuters) - S&P downgraded Mexico’s credit rating on Thursday as the coronavirus pandemic and a hit to state oil firm Pemex from plunging crude prices battered the growth outlook and piled pressure on the government to lift the struggling economy.

The ratings agency cut Mexico’s sovereign rating to BBB from BBB+, and downgraded Pemex’s stand-alone credit profile to ccc+ from b-.

Mexico’s economy had already tipped into recession in 2019 and the coronavirus, which causes a respiratory illness called COVID-19, has stoked fears of a sharper downturn this year.

“The pronounced COVID-19 and oil price shocks, in our view, exacerbate Mexico’s already modest growth,” S&P said in a statement, leaving the sovereign rating two notches above junk.

The sovereign downgrade, though expected by a number of analysts, hit the peso, pushing it down by 2% against the dollar.

The decline in Mexico’s creditworthiness is a blow to President Andres Manuel Lopez Obrador who has made steep cuts to some government departments to keep public finances stable.

Still, the leftist’s retreat from the previous government’s opening of the oil and gas sector, and his determination to revive heavily indebted, loss-making state oil company Petroleos Mexicanos (Pemex) have alarmed some market analysts.

S&P said the cut to Pemex’s stand-alone credit profile was driven by concerns that a weaker cash flow due to lower oil and gas prices over the next two years will hamper the company’s ability to carry out its business plan.

Luis Gonzali, a portfolio manager at Franklin Templeton, said though the sovereign downgrade was expected, the outlook was a worry.

“We wouldn’t be surprised to see another downward revision within the next 12 to 18 months,” he said. “At the same time, Moody’s doesn’t take long to act, and we expect that their decision will go in the same direction.”

Further downgrades could push Pemex’s bonds into junk territory, triggering a sell-off by a number of major investors whose mandates require them to hold investment grade assets.

Mexico’s finance ministry did not immediately reply to a request for comment.

S&P said it expected Mexican gross domestic product (GDP) to shrink between 2% to 2.5% in 2020, an outlook which is less pessimistic than some other forecasters. Next year, the economy should rebound by a little over 2%, the rating agency said.

“The downgrade reflects our revised expectations that real per capita GDP growth will remain below that of peers with a similar level of economic development,” S&P added.

J.P. Morgan later on Thursday also cut its growth forecast, saying it expected Mexico’s economy in the second quarter to shrink 35.5% at a seasonally adjusted annual rate and contract 7% over the course of 2020.

S&P also put Mexico’s outlook on negative and lowered its long-term local currency sovereign credit rating to BBB+ from A-.

Coronavirus has infected more than 500,000 people and killed over 22,000 worldwide, causing economic chaos across the planet.

Mexico’s economy shrank 0.1% last year.

Reporting by Noe Torres, Anthony Esposito, Stefanie Eschenbacher, Abraham Gonzalez and Daina Beth Solomon; Editing by Lisa Shumaker, Cynthia Osterman and Kim Coghill

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