According to analysts at Wells Fargo, Mexico will likely face more credit rating downgrades that could lead to capital outflows in the future. They warn that a tight fiscal policy in Mexico wont prevent the fiscal deficit from widening.
“Like many of the world’s economies, Mexico has also been hit hard by the dual challenges of COVID-19 and low global commodity prices. In an effort to offset the negative effect, the Central Bank of Mexico cut rates 175 bps this year, in addition to the 100 bps of cuts in 2019. Despite these efforts, we believe the central bank will need to continue easing monetary policy aggressively, given that Mexico is one of the only countries that has not deployed large fiscal policy to help its economy weather the COVID-19 pandemic.”
“Tight fiscal policy will not likely prevent Mexico’s fiscal deficit from widening this year, as the oil price collapse and lower taxes are likely to push debt higher. As of 2019, Mexico’s fiscal budget deficit fell to 1.6% of GDP from a year earlier, but analysts look for the deficit to jump to 4.3% of GDP by the end of 2020.”
“In the scenario debt continues to rise and the fiscal deficit widens further, it could potentially result in Mexico’s sovereign credit rating being further downgraded, teetering toward junk status.”
“We expect credit rating downgrades to continue, which will likely result in additional capital outflows in the future, placing additional downward pressure on the Mexican economy and currency.”