S&P upgrades Mexico’s outlook for cautious fiscal and monetary policies

S&P upgrades Mexico's outlook for cautious fiscal and monetary policies

“Despite pressures on inflation and growth, amid international price shocks and the growing risk of a recession in the United States, we expect the cautious execution of Mexico’s fiscal and monetary policies to continue during the remainder of the administration. of Andrés Manuel López Obrador and that the net debt index of the country’s general government remains stable”, highlighted the rating agency.

S&P also ruled out that initiatives that put pressure on the business environment will be approved in the coming years due to the political cycle and polarization in Congress.

The agency highlighted that unexpected setbacks in the management or dialogue of trading partners in the TMEC could weaken investment and investor confidence. If this happens, the rating will drop over the next two years.

But complications in the TMEC are not the only reasons why the country’s sovereign rating is at risk. S&P said higher levels of general government debt and deficits would increase fiscal risks associated with any extraordinary support needed for state-owned companies Pemex and CFE.

In order for Mexico to see a higher rating, it has to do effective political and economic management to boost Mexico’s weak growth trajectory.

“With a more dynamic investment landscape, it could translate into a rating upgrade. Similarly, initiatives that promote budget flexibility, fiscal space, and expand the non-oil tax base to mitigate potential contingent liabilities from government-owned companies in the energy sector could improve credit quality,” S&P detailed.

But the work of the federal government does not only influence the rating of the agency. S&P said that “the credibility of the independence of the central bank of Mexico (Banxico) and its ability to follow an inflation-targeting monetary policy in the face of challenging circumstances” play a key role in its analysis of the Mexican economy.

The agency said that despite cautious macroeconomic management in recent decades, Mexico has not achieved economic dynamism compared to other emerging markets, which has led to greater polarization in the country.

“Changes in some domestic policies, especially in the energy sector, in recent years have damaged business confidence, and, together with public insecurity, are likely to limit GDP growth,” he added.

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