KBRA Assigns BBB Rating to Mexico

NEW YORK--()--Kroll Bond Rating Agency (KBRA) assigns BBB long-term issuer ratings to Mexico. KBRA also assigns K2 short-term issuer ratings to the sovereign. The long-term ratings have a Stable Outlook. The ratings are unsolicited. The most recent credit report on the sovereign is available here.

Ratings

 

Rating

Outlook

Action

Foreign Currency Sovereign Rating—Long Term

BBB

Stable

Assigned

Local Currency Sovereign Rating—Long Term

BBB

Stable

Assigned

Foreign Currency Sovereign Rating—Short Term

K2

 

Assigned

Local Currency Sovereign Rating—Short Term

K2

 

Assigned

The main credit support factors include:

  • Considerable geostrategic importance. Its large size, close political, financial, and commercial ties with the U.S. are key credit strengths.
  • Mexico’s sound macro policy framework—based on a commitment to fiscal restraint and transparency, a flexible exchange rate, and responsible, independent monetary policy—enhances its attractiveness to investors.
  • Commitment to fiscal restraint is an anchor for Mexico’s financial stability. Comprehensive public sector reforms within and outside of the budgetary sector would substantially build upon fiscal health.
  • Mexico has a competitive economy thanks to a favorable cost structure and significant production integration with the U.S. market.

The main credit concerns include:

  • Lack of significant structural reform renders the economy and government finances exposed to shocks, the most pressing of which includes the financial problems of state-owned entity Petróleos Mexicanos (Pemex).
  • Inability to meaningfully address the country’s high level of corruption and crime, low levels of educational attainment, and weak productivity are detrimental to growth and fiscal flexibility. Moderate GDP growth and wide regional income disparities exacerbate domestic political pressures, while also impairing fiscal flexibility.
  • Fiscal risks stem from a low tax yield and an outsized dependence (20%) on energy related revenues.
  • Low credit penetration and the lack of a deep internal capital market render Mexico dependent on external sources of financing that could be sensitive to shocks. As the Mexican Peso (MXN) is the second most liquid currency in the emerging markets universe, Mexico is particularly exposed to shifting investor sentiment. The profile of Mexican government debt, with a long-average weighted maturity of foreign currency debt, and the large share of fixed-rate peso debt, helps mitigate risks.

Mexico’s credit ratings reflect its geostrategic importance, access to emergency liquidity, large size, location, and competitiveness of the country as well as its generally sound policy environment. These features of the Mexican economy enhance its external relations and resiliency to withstand shocks. The ratings also balance structural weaknesses in the economy including inefficiency, low educational attainment, poverty, corruption, and organized crime that significantly reduce investment and growth prospects, as well as fiscal health. In addition, institutional weaknesses related to rule of law and governance constrain KBRA’s credit view on Mexico.

Regarding structural weakness in government finances, on the revenue side, a low tax collection at 13% of GDP and historic dependence on oil sector revenues (from Pemex) constrain fiscal income. On the expenditure side, pressing demands to build human and capital infrastructure, social spending, and considerable debt service costs are impediments to a significant narrowing of borrowing requirements.

The ratings are based on KBRA’s Sovereigns Rating Methodology published on May 11, 2017.

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About KBRA and KBRA Europe

KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

Contacts

Analytical:
Joan Feldbaum-Vidra, Managing Director
+1 (646) 731-2362
jfeldbaumvidra@kbra.com

Alan Madden, Director
+353 (1) 558-1230
amadden@kbra.com

Business Development:
Mauricio Noe, Senior Managing Director
+353 (1) 588-1220
mnoe@kbra.com

Contacts

Analytical:
Joan Feldbaum-Vidra, Managing Director
+1 (646) 731-2362
jfeldbaumvidra@kbra.com

Alan Madden, Director
+353 (1) 558-1230
amadden@kbra.com

Business Development:
Mauricio Noe, Senior Managing Director
+353 (1) 588-1220
mnoe@kbra.com