Fitch Ratings warns of adverse effects for Mexico from reforms to Banxico and the electricity industry.
MEXICO CITY (The Economist) – Charles Seville, Fitch Ratings’ sovereign analyst for Mexico, warned that eliminating existing rules for competition in energy projects would again discourage investment, particularly from the United States, which is especially problematic in the context of the entry into operation of the trade agreement.
The approval of the reforms under discussion regarding the Bank of Mexico Law for the purchase of dollars in cash or the Electricity Industry Law are negative risk factors for Mexico, analysts from Fitch and HR agencies agreed separately.
There is no specific risk for Mexico’s sovereign rating in the case of Fitch, where the rating is at the “BBB-” level with a stable outlook, said a sovereign analyst for the country, Charles Seville.
However, they are among the negative signals and factors of concern that continue to undermine confidence, said the analyst.
Participating in the webinar entitled “2021 Outlook for Latin America Sovereigns”, Seville explained that the initiative issued by the AMLO to reform the Electricity Industry Law with its preferential nature adds to the government’s intention to absorb regulators in the secretariats, which would also be detrimental to the independence of its operation.
Seville warned that eliminating the existing rules for competition in energy projects would again discourage investments, particularly from the United States, which is especially problematic in the context of the entry into operation of the trade agreement.
Regarding the reform to the Law of the Bank of Mexico “approved with speed by the Senate,” it is another new negative signal because as it stands, it affects the autonomy of the central bank.”
The characteristics of the sovereigns in Mexico’s rating in Fitch incorporate the management that the Mexican authorities are granting, he underlined.
Even the impact that consistent support to Pemex has on public finances is captured in the sovereign rating and the outlook. This is still a factor of concern, he said.
HR sees inflation risk.
The case is slightly different for Mexico’s sovereign rating at HR, which is at “BBB+.” This rating is three notches above Investment Grade, explained Félix Boni, Director of Analysis at the agency.
The outlook for Mexico’s rating is negative in this rating agency, indicating one of three possibilities of a cut.
Either of the two reforms will bring with it constitutional controversies, and the one that proposes to modify the Electricity Industry is, in particular, a “source of potential conflict” for the only engine of the Mexican recovery, which is exports to the United States, said the Executive in an online conference.
At the conference to present his “Economic Outlook for 2021”, he explained that in the eventuality that the preferential reform issued by President Andrés Manuel López Obrador to modify the Electricity Industry Law is approved, controversies are also anticipated in international courts. “A conflict with the Government of the United States will be enhanced (…) it may cause problems within the framework of the Trade Agreement”, he stated.
Besides, he considers that if this initiative is approved, it will trigger inflation and thus limit Banco de México’s room for maneuver to cut the rate and support economic recovery with this action, he stressed.
Mexico’s HR rating is “BBB+/negative outlook,” a perspective that indicates one of three possibilities of a rating cut but does not indicate risk for the Investment Grade since it is three notches above it.