The Mexican government will increase its fiscal deficit and debt as a percentage of gross domestic product (GDP) in the next two years, under pressure to finish the priority infrastructure projects of President Andrés Manuel López Obrador and the increase in borrowing costs, the rating agency Fitch Ratings estimated on Monday.
“We expect the debt ratio to rise slightly, to just over 50% of GDP by 2024, partly due to low secular growth rates and rising borrowing costs,” the rating agency said in its most recent report.
Fitch added that he also expects a higher deficit in 2023 (3.9%) and 2024 (3.5%), compared to the 2022 preliminary official estimate of 3.2%, “as the AMLO (Andrés Manuel López Obrador) government seeks to complete priority infrastructure projects before the mid-2024 elections.”
However, the rating agency rejected that this temporary increase in capital spending represents a deviation from the prudent fiscal frameworks that have characterized the Mexican government; although the deficits “are somewhat higher than in the past”, since the average of these is 2% in the five years prior to the pandemic “and could put the debt / GDP on a gradual upward path.”
In this sense, Fitch assured that the country’s sovereign rating (BBB, stable) remains “supported by a prudent macroeconomic policy framework”, result of an estimate below the median of the “BBB” category of 56.2%.
Pemex still weighs on Mexican finances
The rating agency also projected that the state-owned Petróleos Mexicanos (Pemex) will still weigh on the finances of the Mexican government, although “will not be able to guarantee the debt of the parastatal due to the legal framework that does not allow it“.
Regarding Pemex’s debt, Fitch estimated that the Mexican state oil company will require 18 billion dollars between 2023 and 2025 to finance its negative cash flow and address refinancing needs.
“We believe this will require government support (how big this will be will depend in part on oil prices and Pemex’s ability to tap into alternative sources of financing), but we do not expect the government to explicitly guarantee Pemex’s debtsince it is prohibited by current legislation ”, he considered.
Pemex announced last month a bond issue for 2,000 million dollars, with maturities of 10 years and yield prices above 10%.
Although the rating agency confirmed that it will only partially refinance 6.1 billion dollars of debt maturing in the first quarter of 2023, therefore “its high refinancing and capital spending needs underscore our expectation that the (Mexican) government will continue to provide financial support ‘ad hoc'”.
“High maturities over the next decade and rising interest expenses will restrict the company’s financial flexibility and liquidity,” the Fitch analysis said.
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