Mexico’s sovereign rating could be damaged: Moody’s

MEXICO CITY.— Moody’s Investors Service said the judicial reform approved by Congress on Tuesday night could affect Mexico’s sovereign rating because of its implications for the economy, public finances and investments.

The US-based rating agency said the reform could erode judicial oversight as the power becomes increasingly aligned with the executive and legislative branches.

The initiative sent by President Andrés Manuel López Obrador and endorsed by Congress contemplates, among other things, the election by direct vote of judges, magistrates and ministers of the Supreme Court of Justice of the Nation.

“The credit implications of the changes could be significant for Mexico’s sovereign credit quality, more moderate for rated financial and non-financial companies, as well as for electric and infrastructure companies, and relatively low for banks,” the rating agency said in a report.

Moody’s also said that changes to the judicial system would be particularly detrimental to future investments in the context of nearshoring, as it would create more uncertainty for infrastructure projects.

“Legal uncertainty will likely hit Mexican corporate sectors that rely on concessions and large investments, such as mining and telecommunications, the rating agency said in its report. “If uncertainty continues to pressure the Mexican peso, this would also hurt the credit metrics of companies that calculate their costs in US dollars and generate revenues in pesos, or those with low diversification outside Mexico.”

Moody’s credit rating for Mexico has been at “Baa2” since July 2022, the penultimate position in the block of investment grade assets, with a “Stable” outlook.

I would change to “Negative”

Following the approval of the reform to the Judicial Branch and a few weeks after Claudia Sheinbaum’s government began, the rating agency “Fitch Ratings” could change the current “Stable Outlook” of Mexico’s “BBB-” sovereign rating to Negative, shortly before making a cut to the rating, according to Gerardo Carrillo, regional director for Latin America of international public finances of the agency.

“The rating outlook is stable, which means that we are seeing a balance between strengths and weaknesses. Before observing a direct downgrade of the sovereign rating, what could be expected from us is a change in the outlook, either from stable to positive or from stable to negative, the latter will probably happen,” said Carrillo, within the framework of the 18th National Convention of the Association of Multiple Purpose Financial Companies of Mexico (Asofom).

Although he does not see a downgrade in the rating outlook in the short term, Carrillo said that they would consider moving from a Stable to a Negative Outlook, given that the reforms of the so-called “Plan C” would affect Mexico’s institutional profile, especially the reform of the Judicial Branch.

“Fitch Ratings” It is still too early

Gerardo Carrillo points out that it is still too early to assess the magnitude of this reform.

The debt is still low

“We must not forget that the debt is relatively low, external finances are very solid, Banco de México has great credibility, it is a pillar of the country’s economy. The Outlook at this moment is stable, of course we will evaluate what has been mentioned, such as the reforms,” he said.

Carrillo said that the next review of the sovereign rating could take place before the end of 2024, although he did not specify the exact date. This review will take into account the other reforms proposed by AMLO, in addition to the Economic Package for 2025.