Mexico Rating Cut Sharpens Fiscal Pressure Arabian Post

(MENAFN- The Arabian Post) clearfix">Mexico's sovereign credit rating has been cut to the last rung of investment grade, placing fresh pressure on President Claudia Sheinbaum's administration as investors weigh rising debt, sluggish growth and the continuing fiscal burden of Petróleos Mexicanos.

Moody's Ratings lowered Mexico's long-term local and foreign-currency issuer and senior unsecured ratings to Baa3 from Baa2, while changing the outlook to stable from negative. The move leaves Latin America's second-largest economy just one notch above speculative grade, a position that could raise borrowing costs if fiscal consolidation weakens further or investor confidence deteriorates.

The downgrade reflects a sustained erosion in fiscal strength that accelerated in 2024 and is expected to persist through the next two years. Mexico's fiscal deficit remained close to 5 per cent of gross domestic product in 2025 after reaching about 5.3 per cent in 2024, while gross government debt rose to 49.3 per cent of GDP in 2025 from 46 per cent a year earlier and 39.8 per cent in 2023. Deficits covering the federal government and social security system are expected to remain above 4 per cent of GDP in 2026 and 2027, pushing the debt ratio towards 55 per cent of GDP by 2028.

Pemex remains the central fiscal risk. The state oil company has relied heavily on Treasury support to meet debt obligations and fund operations, with government assistance estimated at about $35 billion in 2025 and an additional $14 billion budgeted for 2026. The company's weak production profile, high debt burden and operational setbacks have limited its ability to generate enough cash to reduce pressure on public finances.

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The rating action follows growing unease among credit analysts over Mexico's limited revenue base, rigid public spending and weaker policy flexibility. Interest costs have climbed as domestic financing has become more expensive, leaving debt-service payments at around 17 per cent of government revenue, far above pre-pandemic levels and higher than many peers in the same rating category.

Mexico retains significant economic strengths, including a large and diversified manufacturing base, deep trade links with the United States and a credible central bank. These factors helped preserve the investment-grade rating and supported the stable outlook, which signals that another downgrade is not expected immediately. The country also remains a key beneficiary of supply-chain shifts linked to nearshoring, particularly in automotive, electronics, logistics and industrial real estate.

Growth, however, has become a weaker pillar of the credit profile. Moody's has lowered its expectations for Mexico's economy to less than 1 per cent growth in 2026 and 1.3 per cent in 2027, leaving average expansion over 2024-27 at around 1 per cent, well below the country's long-term trend of about 2 per cent. Mexico's central bank has forecast growth of 1.6 per cent this year and 2 per cent by 2027, while the government has projected a stronger recovery.

The downgrade also comes days after S&P Global Ratings revised Mexico's outlook to negative while maintaining its BBB foreign-currency and BBB+ local-currency ratings. That decision cited slow fiscal consolidation, weak economic activity and the financial condition of Pemex and the Comisión Federal de Electricidad. S&P expects the general government deficit to reach 4.8 per cent of GDP in 2026 and net government debt to climb from 49 per cent of GDP in 2025 to about 54 per cent by 2029.

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Sheinbaum has sought to balance social spending, energy sovereignty and fiscal discipline, but the policy mix has left limited room for rapid debt stabilisation. Her administration has pledged to strengthen tax collection without major tax increases, maintain priority welfare programmes and continue supporting state energy groups. Those commitments have helped preserve political support but have also narrowed the government's fiscal options.

Leadership changes at Pemex have added to the scrutiny. Chief executive Victor Rodríguez Padilla is leaving after an 18-month tenure marked by internal divisions, production shortfalls, a major oil spill, a refinery accident and a first-quarter loss of about $2.6 billion. Juan Carlos Carpio, the company's chief financial officer, has been nominated to take over, with a mandate to reinforce the company and support the government's energy strategy.

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