S&P Upgrades Mexico amid Soaring Inflation
By MARK LORENZANA
Just as Mexico’s inflation rate rose to 7.99 percent in June of this year, the U.S. financial services rating agency Standard & Poor’s (S&P) in its Global Ratings report on Wednesday, July 6, revised the outlook on its long-term ratings on Mexico from negative to stable.
In addition, the S&P Global Ratings affirmed the country’s credit rating for long-term sovereign debt in foreign and local currency at BBB and BBB+, respectively.
According to S&P’s credit-rating system, a BBB rating is investment-grade level, but barely: It means a country has “adequate capacity to meet financial commitments,” but is “more subject to adverse economic conditions.”
The rating agency, however, cautioned that Mexican President Andrés Manuel López Obrador (AMLO) needs to “pursue economic policies that will result in stable fiscal and debt dynamics.”
Also in its report, S&P warned that Mexico’s friction with its North American trading partners — the United States and Canada — could discourage further investment in the country.
“Unexpected setbacks in macroeconomic management or in discussions between U.S.-Mexico-Canada Agreement (USMCA) partners on strengthening supply-chain resilience and cross-border linkages would likely weaken investor sentiment and investment, and could lead to a downgrade over the next two years,” the S&P statement said.
The S&P Global Ratings also pointed out that any “extraordinary support” for state-owned and operated companies Petróleos Mexicanos (Pemex) and the Federal Electricity Commission (CFE) could also lead to a downgrade further down the line, since this would lead to “higher general government debt and deficits” and would “heighten fiscal risks.”
Financial analysts in Mexico welcomed the improved outlook from the S&P Global Ratings.
“Now only Moody’s has the country on a negative outlook. We have to see if it also decides to put us on stable,” said Ernesto O’Farrill, president of Grupo Bursamérica.
O’Farrill, however, said that if the United States is headed to a recession, it would definitely impact Mexico’s economy. “Higher interest rates and lower economic activity could put pressure on Mexican public finances in the future,” he said.
Analysts from the Banorte Financial Group said that S&P’s decision reflected the confidence that investors have in the country. “The decision reinforces our confidence that Mexico will continue to be an investment destination, both in the short and medium term,” the group said.
For her part, Pamela Díaz Loubet, an economist for Mexico at BNP Paribas, said that while she welcomed S&P’s decision, the biggest problem for the AMLO government is the rising cases of violence and continued insecurity, which have big implications on the economy.
“The negative perception of insecurity and growing violence in the country has been increasing. This has had a negative impact on the national production chains. This is an important factor to monitor, since it could limit an adequate capitalization of nearshoring benefits in the country,” Díaz Loubet said.
Meanwhile, according to the National Institute of Statistics and Geography (Inegi), the country’s inflation rate of 7.99 percent in June of this year was the highest recorded since January of 2001, which had a rate of 8.11 percent.
The increase came after a slowdown to 7.65 percent in May and 7.68 percent in April, and was above market expectations, which was set at an annual rate of 7.96 percent, according to analysts at financial group Citibanamex.
The products whose prices were affected by rising inflation in June included potatoes, chicken, tortillas and oranges.