Mexico seen at least risky since 2014

Mexico City

LOW inflation, tight public spending and a reduction in the vast debts of loss-making state oil giant Petroleos Mexicanos (Pemex) have helped spruce up Mexico's so-called risk profile, which reached its "safest" level in five years this month.

Risk premiums of investing in Mexico, as measured by traders in credit default swaps (CDS), hit their lowest level since November 2014 despite business and investor concerns about the economic management of the leftist government.

Economic growth has ground to a halt during the first year in office of President Andres Manuel Lopez Obrador, who has repeatedly castigated excessive free market liberalism for ruining Mexico. Analysts expect growth to be weak next year too. But inflation is below the central bank's 3 per cent target and Mr Lopez Obrador has lowered trade tensions with the United States.

Mexico has also avoided the social unrest that has racked many emerging markets in 2019, especially in Latin America.

Against this backdrop, Mexico's five-year CDS - a barometer of a country's default risk - was quoted at 75 basis points earlier this month. On Monday, it stood at 81 basis points. "The stable debt-to-GDP ratio, contained inflation, a central bank with a good reputation and the government's fiscal discipline" have made Mexican debt very attractive and low risk, said Jose Luis Ortega, director of debt investments at asset management firm BlackRock.

Mr Lopez Obrador's government has promised to lower to 45 per cent the debt-to-GDP ratio, which touched 50 per cent in 2016.

The president has vowed to revive Pemex, the world's most indebted oil company, cutting its financial debt by around US$7 billion this year via refinancing operations.

However, Pemex's debt still stands close to US$100 billion and is viewed as a major risk to the financial stability and creditworthiness of Latin America's second-largest economy.

The CDS risk rating has not always reflected favourably on the administration of Mr Lopez Obrador, who spooked investors by cancelling a part-built US$13 billion Mexico City airport five weeks before taking office in December 2018. At their worst, CDS spreads on Mexico shot to 147 basis points shortly after he assumed power. During the six-year term of his predecessor, Enrique Pena Nieto, CDS spreads fluctuated between 64 and 230 points.

Mexico's 5-year CDS spread level was last week 20 basis points lower than the benchmark CDS Emerging Markets index, made up of 15 developing economies and compiled by data firm Markit.

It was Mexico's lowest risk level since October 2014.

Rating agency Standard & Poor's last week reaffirmed Mexico's credit rating at BBB+/A-2, but kept the outlook negative, implying a one-in-three risk of a downgrade in the coming year. REUTERS