Barclays, Nomura divided over whether Mexico can avoid downgrade

[MEXICO CITY] Mexico President Enrique Pena Nieto's attempt to stave off the first ratings downgrade of his tenure is winning over Barclays Plc, Bank of America Corp and Banco Itau BBA SA. But to Nomura Holdings Inc, his efforts won't be enough.

One day after Moody's Investors Service changed its outlook on Mexico's rating to negative, Pena Nieto said Friday the government will reduce the budget by an estimated 175 billion pesos (S$13.4 billion) next year, wiping out the deficit.

The move will help Mexico shore up its finances in the face of low oil prices and sluggish economic growth, convincing Moody's to leave the country's A3 rating intact, according to Marco Oviedo, chief Mexico economist at Barclays.

"The decline in spending is outstanding," he said. "It is no joke." But Nomura economist Benito Berber is skeptical the budget cuts will be enough since they don't deal with the growing problems at state oil producer Petroleos Mexicanos. In its statement Thursday announcing the change in outlook, Moody's cited the possibility the government will have to provide Pemex with financial support, a move that could weaken Mexico's own finances. Moody's also cut Pemex's rating to one level above junk that day.

Mr Berber said Pemex, which lost a record US$32 billion last year, still needs to cut its work force, sell businesses, announce joint ventures or farm outs and provide a detailed plan for paying contractors. The Finance Ministry also needs to reduce the company's tax load, he said.

"Pemex represents the biggest risk to fiscal accounts and more measures need to be announced in order for the fiscal consolidation of the whole public sector to become credible," Mr Berber said.

Mexico's Finance Ministry says the measures announced April 1 along with others puts the nation on the right track. "We believe these are the correct actions and the right actions and should bring about fiscal consolidation," Luis Madrazo, the ministry's chief economist, said in a telephone interview. "I believe this should bring us back to a stable outlook for the credit rating."


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