HR Ratings ratified Mexico’s credit rating at BBB+ and modified its outlook from negative to stable.
The rating agency recognized the fiscal consolidation efforts of the federal government and highlighted the adjustments in current and investment spending, as well as the dynamism of tax revenues, the Ministry of Finance highlighted in a statement.
“This evolution reflects prudent spending management, greater collection efficiency, combating tax evasion and commitment to medium-term fiscal sustainability,” the agency said in a statement.
HR Ratings anticipated that the trend towards lower deficits will continue in the medium and long terms, despite the risks of the external environment.
Among the main challenges, it identifies higher financial costs and possible exchange rate depreciations that could affect public debt, but a favorable renegotiation of the USMCA could boost investment in strategic sectors and favor the evolution of net debt through a positive exchange effect, highlighted the Treasury.
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The rating agency stressed that the stability of public finances has been supported by the good performance of tax collection, even without a tax reform.
“A factor that has contributed to maintaining a certain stability in public finances is the good level of tax collection in the absence of a tax reform. The fight against tax evasion, as well as the dynamics in consumption, has allowed this item to support spending without incurring a greater debt burden,” the agency stated.
The firm mentioned that the federal government’s support for Pemex could provide it with greater investment capacity and generate positive financial balances for the company, with the effect of reducing its debt level in the medium term.
HR Ratings anticipated a more favorable economic environment for Mexico in the coming years, with inflation gradually converging to its target and declining interest rates, while highlighting the solidity of the financial system, supported by high levels of international reserves.
Factors that could raise the rating, according to HR Ratings
- Sustained fiscal consolidation. Fiscal deficits below what was projected (Public Sector Financial Requirements around 3% of GDP) would indicate prudent management of current spending, as well as an improvement in tax collection levels, which would contribute to lower increases in debt. Furthermore, an improvement in oil revenues compared to estimates would imply greater resources to stimulate the economy in investment spending.
- Growth in productive investment in the medium and long term. Growth in investment levels could stimulate the operational capacity of sectors such as manufacturing, which would translate into a higher GDP growth rate and an increase in tax revenues, thus reducing pressures on public finances.
Factors that could lower the rating
- Fiscal deterioration that compromises debt sustainability. Lower levels of tax collection, or pressures on spending, would affect the sustainability of fiscal balances, which would result in a greater need for financing through the issuance of debt to meet spending commitments, and would take the net debt above 60% in the projection horizon.
- Prolonged economic slowdown that harms metrics measured in terms of GDP. Growth close to 1% in the medium and long term would affect fiscal metrics such as deficit and net debt.
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