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Mexico Fiscal April 2020

Mexico: Government presents timid response against Covid-19 crisis, jeopardizing economic and credit rating outlook

On 5 April, President Andrés Manuel López Obrador (AMLO) unveiled a set of policy measures to placate the economic fallout of the rapidly-spreading Covid-19 pandemic. The plan, however, fell well short of expectations as it was largely devoid of significant relief and stimulus measures, particularly towards the business sector. Instead, the plan for the most part covered previously announced policies, consisting mainly of low-interest loans, infrastructure projects and social programs for the most vulnerable. Additionally, robust countercyclical spending was left off the table—paling in comparison to the larger fiscal packages adopted by other countries in the region—while the needed resources would be mobilized by tapping into the government’s stabilization fund, development bank and various trusts. Against the backdrop of a limping economy, which is set to be further hit by the health emergency declared on 30 March that has stalled non-essential activities for at least a month, the government’s timid fiscal response gravely exacerbates risks not only to the country’s already-frail economic outlook but also to its credit rating standing ahead.

Highlights of the announced measures included a MXN 339 billion (about USD 14 billion) public-private investment plan for the energy sector; provision of some MXN 212 billion (around USD 9 billion) in personal and housing loans; the continued construction of the government’s flagship projects such as the Santa Lucia airport and Dos Bocas refinery; and a MXN 65 billion (about USD 3 billion) tax cut to Pemex, the heavily-indebted state-owned oil company. In his speech, AMLO also stressed that his administration would not bailout large companies nor grant them tax breaks, and vowed to tighten austerity through cost saving measures to avoid piling on the public debt. He later announced, however, on 17 April a cash injection of around MXN 60 billion (around USD 2.5 billion) in May to further mitigate the effects of the pandemic.

The economic beating from Covid-19, coupled with the government’s underwhelming response to cushion the fallout, has led to faster credit rating downgrades of the sovereign and Pemex, which have also been compounded by the recent plunge in global oil prices. S&P Global Ratings already slashed both Mexico’s and Pemex credit rating from BBB+ to BBB on 26 March—leaving them at two notches above junk status—while Fitch Ratings cut the state oil firm’s bonds even deeper into junk territory from BB+ to BB on 4 April. On 15 April, meanwhile, it downgraded the sovereign’s debt from BBB to BBB-, the lowest investment grade. On 17 April, Moody’s followed suit by lowering the sovereign’s rating from A3 to Baa1, which now remains at two notches above junk, and cutting Pemex by two notches from Baa3 to Ba2, becoming the second major agency to rate the company’s debt as junk. The move is expected to trigger a forced sell-off of Pemex’s bonds by investors who are required to hold investment-rated assets, adding to the oil firm’s financing difficulties which could in turn amplify the government’s cost of borrowing.

All in all, the announced economic plan comes amid a fragile economic scenario that already saw GDP shrink for the first time in a decade last year and a deep recession this year is now seen as inevitable amid the coronavirus outbreak and the measures implemented to control its spread. On top of that, the U.S.—the country’s largest trading partner—is also seeing its economy screech to a halt amid its own battle against the pandemic. This will certainly deal a severe blow not only to the country’s manufacturing industry and exports but also to the inflow of remittances, a key pillar that sustains domestic consumption, clouding the country’s outlook even more.

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