Mexico was downgraded to Baa2 from Baa1 by Moody’s on the back of weak economic and fiscal trends which are expected to undermine Mexico’s overall credit profile. The weakening trends would align it with that of Baa2-rated peers, they said. Moody’s expects economic activity to stay “constrained by weak investment prospects and increased structural rigidities”. Also, it notes that the gap between pre-pandemic and current GDP will continue to persist. The rating agency also notes that Mexico’s debt affordability is consistently weaker than Baa2-rated peers and it is set to further weaken with the onset of higher interest rates.

Moody’s has downgraded PEMEX from Ba2 to B1, assigning a stable outlook to the Mexican company. This was mainly prompted by Mexico’s rating downgrade from Baa1 to Baa2, with a negative outlook. Moody’s notes that since PEMEX is highly dependent on support from the Mexican government, especially in helping with its liquidity struggles, the credit profile of the petroleum firm is also strongly linked to the financial strength of the government. The government has been supporting PEMEX in various ways since 2016 and increasingly from 2019 to 2021, through capital injections, tax reductions etc. Besides that, another driver of the rating downgrade was that Moody’s expects persistent negative free cash flows from PEMEX’s operations, making it likely for them to require external funding for its high debt maturities in 2022 to 2024. Their potential inability to repay their debt due to liquidity struggles is further compounded by their limited access currently to the capital markets, given its intrinsic risk.

Despites the downgrade, PEMEX’s 4.625% 2023s are trading 1.22 points higher at 98.15 cents to the dollar, yielding 6.26%.


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