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Mexico’s policy framework will weaken growth

Publication Date: 19 Jun 2019 - By ReachX Team By ReachX Team
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Investment Strategies Macro FX & Rates Multi Asset Latin America

Mexico's “unpredictable policymaking” under President Andrés Manuel López Obrador is undermining investor confidence and medium-term economic prospects, according to a leading rating agency. 

In a note to clients, Moody’s said lower growth, changes to energy policy and the mandate given to Mexico's national oil company PEMEX, introduces risks to the country’s medium-term fiscal outlook.

"We continue to anticipate a challenging year for Mexico's economy and forecast growth will slow to 1.2% in 2019 from 2.0% in 2018," said Moody's Associate Managing Director Alejandro Olivo. 

"As a result, public revenue may be lower than the government's estimates, requiring spending cuts to maintain fiscal rectitude as President Obrador has promised."

Moody's forecasts that PEMEX will require additional financial support from the government to fund its planned capital investment and resulting negative free cash flow. “PEMEX will need even more government support if it is to achieve ambitious production growth targets and could also need help for its large debt maturities. This uncertainty has only added to the market's concerns regarding policy predictability and sapped investor confidence in PEMEX,” the agency noted.

While appetite to invest in Mexican infrastructure projects exists, an unpredictable policy environment following last October's New Mexico City airport project cancellation has also undermined market and investor confidence in this sector. 

Furthermore, the federal government's expected fiscal consolidation plans could lead to a decrease in public infrastructure investment in the near future, Moody’s observed.

Despite slowing economic growth, the rating agency expects Mexican banks to maintain strong financial fundamentals. 

The slowdown in economic activity will pressure several insurance segments and this negative effect is expected to reduce the industry's recent premium growth. Pension and mutual fund managers will maintain their conservative investment strategy, with high concentrations of short-term and highly liquid securities, Moody’s concluded.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

ReachX Team

 

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