Moody's: Mexico Risks Rating Downgrade on Pemex Woes

(Bloomberg) -- Mexico is at risk of a credit-rating cut because of subdued economic growth and the possibility the government will need to give financial support to the state oil company, according to Moody’s Investors Service.

The ratings company reduced its outlook on Mexico’s grade to negative from stable, according to a statement Thursday. Moody’s said falling tax revenue and the growing likelihood that Petroleos Mexicanos will need an injection of liquidity could undermine the government’s efforts to shore up its balance sheet.

Analysts forecast a slowdown in economic growth this year for Mexico amid sluggish manufacturing exports and after the Finance Ministry announced budget cuts as oil prices, a key source of revenue, fell. Moody’s rates Mexico’s government debt A3, four levels above junk and one step above the grades from Standard and Poor’s and Fitch Ratings.

“While not Moody’s base case, should the state-owned oil producer be unable to finance this deficit in the capital markets, the sovereign would likely provide financial relief,” the ratings company said. “The fiscal impact of support could more than offset any progress achieved on fiscal consolidation.”

Mexico’s peso pared gains after Moody’s announcement, and was 0.1 percent stronger on the day at 17.2201 per dollar as of 12:30 p.m. in New York. The country’s benchmark stock index slipped 0.7 percent.

Pemex has reported 13 straight quarterly losses dating back to 2012 and lost a total of about $32 billion in 2015. The oil company, which owed $8 billion to service providers at the end of last year, trimmed its 2016 budget by 100 billion pesos ($5.8 billion) last month amid a decline in international crude prices and 11 straight years of falling crude production.

Moody’s downgraded Pemex to Baa1 from A3 in November and in January put it on review for a second downgrade.

"Moody’s is signaling that if the government and Pemex don’t get serious about a fiscal consolidation, then the rating agency would lower the rating," Benito Berber, senior economist for Latin America at Nomura Holdings Inc. in New York, wrote in an e-mailed response to questions. "If authorities deliver on the spending cuts and carry out additional measures, the downgrade will likely be prevented."

The Finance Ministry didn’t immediately respond to a request for comment. Economic growth will slow to 2.4 percent this year from 2.5 percent in 2015, according to the median estimate of analysts surveyed by Bloomberg.

The government forecasts a fiscal deficit of 0.5 percent of gross domestic product this year, excluding investment in Pemex, down from 1 percent of GDP last year. Including Pemex, 2016’s deficit should equal 3 percent of GDP, the government says.

The broadest measure of debt as a percentage of gross domestic product swelled to 46 percent last year as plunging oil prices eroded government revenue and a weak peso made it more expensive to borrow in dollars. According to the Bank of International settlements, the debt burden is the highest since 1995, during the so-called Tequila Crisis, when investors sold off short-term debt and sparked a peso depreciation.

With assistance from Adam Williams. To contact the reporters on this story: Isabella Cota in Mexico City at icota@bloomberg.net ;Nacha Cattan in Mexico City at ncattan@bloomberg.net To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Sebastian Boyd.

Copyright 2016 Bloomberg News.

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