Sovereign Analysis /

Mexico: The good, the bad and the ugly; assign Hold to sovereign bonds

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    10 December 2019
    Published byTellimer Research

    On our recent trip to Mexico, we met officials from the highest levels of the executive and the legislative branches and from the central bank (Banxico), as well as key players in the private sector.

    Given the variety of the people to whom we spoke and the topics on which we touched, we feel we can paint a clear picture of Mexico on the first anniversary of the rise to power President Andrés Manuel López Obrador (known as AMLO).

    We see 2020 as a repeat of this year for Mexico. There will again be sluggish economic growth and negative internal and external political factors, but, offsetting this, we expect a continuation of the prudent and pragmatic monetary policy, positive influence over the government from sensible and moderate figures in the executive and the legislative branches, and, potentially, a reboot of private investment (if conditions become more conducive).

    We believe it will be difficult for Mexico to avoid a sovereign downgrade in 2020, mainly because of the sluggish growth, the creaking public finances and over-optimistic budget, and the continued economic drag from under-performing state oil firm Pemex. However, the multi-notch cushion will allow the sovereign to remain investment grade – the country will remain the highest-yielding IG market.

    On a relative basis, we do not expect the ‘Latin Spring’ to reach Mexico, mainly because the president hails from the left and the government already allocates a significant amount to social spending. However, the domestic security situation remains dire, with drug cartel violence running rampant and, seemingly, beyond the ability of the government to control it.

    On balance, our opinion is that, for Mexico, ‘the bad’ and ‘the ugly’ slightly offset ‘the good’. Unless we see deep and swift changes to economic policy, there will probably be a sovereign rating downgrade in 2020, the economy will remain stagnant and private investment (direct investment from locals and international investors) will stay low and depressed.

    Despite this net negative view, we assign a Hold recommendation to Mexican sovereign debt in both Mexican pesos and hard currencies. Even given the political and economic headwinds (and even if the economy remains sluggish), Mexican paper is fairly priced and adequately compensates investors for the ‘the bad’ and ‘ugly’.