MNI INTERVIEW: Moody's Monitors Mexico Fiscal Efforts, Peso

MNI (BRASILIA) - Moody’s Ratings is likely to be able to reassess its negative outlook for Mexico’s Baa2 rating by late 2025 or early 2026, after considering government fiscal policies and the impact of changes to U.S. trade policies under Donald Trump, its vice-president and analyst Renzo Merino told MNI.

"In the case of Mexico, we are really interested in how the government performs in terms of fiscal consolidation during 2025 and the plans for 2026," Merino said in an interview after Moody’s revised Mexico’s outlook to negative from stable last month, citing a weakening in policymaking and institutional settings that risks undermining fiscal and economic outcomes.

"Unless we see a material shock soon, this outlook will likely be resolved by late 2025 or early 2026," Merino said.

RELATIONSHIP WITH U.S.

Another area of focus, he emphasized, is the relationship with the U.S. under President-elect Trump and how the exchange rate evolves. Trump has pledged to impose 25% tariffs on goods from Mexico and Canada.

"The central bank allows the peso to float and act as a buffer against different types of shocks. If these tariff threats materialize, we’re probably going to see a corresponding reaction in the peso, which may help offset some of the impact. A weaker peso benefits Mexican exports, so it could provide some relief," Merino explained.

The period of unusual peso strength earlier this year caused some distortions, he noted.

“It became cheaper to import capital goods, for example. While a weaker peso can benefit exports, it could also create new inflationary pressures," he said.

PEMEX

Merino also highlighted the critical role of state oil and gas company Petroleos Mexicanos in the fiscal scenario.

"If we think about all the components the government needs to align to reduce the deficit from over 5% of GDP in 2024 to levels around 2.5% to 3% in the coming years, Pemex is clearly a significant piece of the puzzle," he said. "There are two major issues with the company. One is its debt, and the other is the fiscal and financial losses.”

Merino acknowledged that the central bank has maintained its independence. "We believe inflationary pressures are dissipating. However, given how high real interest rates still are in Mexico, this is starting to weigh on economic activity. This creates room for easing the policy rate," he said. (See MNI BANXICO WATCH: More Cuts Coming While Core Inflation Falls)

"Our expectation is that the policy rate will continue to decline, but gradually. Policymakers are aware of the need to uphold the central bank’s credibility," Merino concluded.