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Mexican corporate credit quality to remain overall stable but energy sector at risk

Publication Date: 15 Aug 2018 - By ReachX Team By ReachX T.

Multi Asset Equity Fixed Income/Credit Other Financial Services Industry Consumer Energy Metals and Mining


Mexican corporate credit quality will remain largely stable for most industry sectors through mid-2019, although changes to the country's energy policies by the López Obrador administration may heighten risks for the oil and gas industry, according to a new report. 

Rating agency Moody’s made the observation in a note for its clients adding that as long as uncertainties remain around the new administration's policies in general and NAFTA negotiations are ongoing, the financial climate could at times be more volatile in the country.

"During the first year of the López Obrador government, we expect some policy inertia, particularly with regard to fiscal management, given the outgoing administration is preparing the 2019 draft budget," says Sandra Beltran, analyst at Moody's.

"But Mexico's economic performance has proven resilient in the face of ongoing uncertainty, most lately around NAFTA, thus we expect steady GDP growth in the low single digits in 2018-19, and don't expect the fiscal deficit to widen significantly next year."

Possible changes to government energy policies do however heighten risks for PEMEX, Mexico's national oil company, Beltran says. 

Fuel price caps, the need to build new refineries or upgrade existing ones, or delayed oil and gas auctions with foreign investors could all disrupt the company's business.

In the mining sector, Fresnillo and Industrias Penoles will maintain solid credit profiles despite higher capital spending. Meanwhile, Mexican auto parts suppliers Nemak and Rassini Automotriz face little risk of changes in US-Mexico trade policy, even if the US were to impose a 25% tariff on imported vehicles. Both companies have production facilities in the US and are the sole sources of particular parts.

In manufacturing, Elementia and other firms that are more exposed to the domestic market will benefit from a healthy consumer environment and increasing remittances, Moody's notes.

Recovering consumer sentiment will also buoy Mexican packaged-food producers Grupo Bimbo and Sigma Alimentos, which will benefit from their integration of large, debt-funded acquisitions, while soft-drinks bottlers Arca Continental and Coca-Cola FEMSA will see gains from their expanded territorial reach. 

At the same time, customers' increasing demands for more expensive data and broadband plans support higher margins for Mexico's telecom companies, even as competition remains intense.

The weak peso will provide a boost to the US-dependent lodging sector next year, though violence and slower industrial activity pose some risks, Moody's says. 

The López Obrador administration appears likely to shift the new Mexico City airport project to the private sector, rather than cancel it, and unlikely to change current housing policy significantly, while homebuilders will increasingly build more expensive, higher-margin homes, the rating agency concluded.


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