Mexico: Risk Assessment
Country Risk Rating
|A4||A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.|
Business Climate Rating
|A4||The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.|
Moderate growth supported by US demand
Growth in the Mexican economy in 2016 should be around the same level as in 2015, boosted essentially by sustained economic activity in the United States: Its leading export destination, source of tourist income and émigré labor remittances, as well as the top investor in the country. The geographic proximity of the two countries and the trade agreements between them have helped stimulate private investors, mainly in the automotive sector. The competitiveness of its manufacturing production is also expected to improve as a result of the depreciation of the Mexican currency. Private investments in the oil and gas sector following the opening up of the energy market is however likely to be disappointing thanks to continuing weak oil prices. The maintenance of budget restrictions is also reducing the possibilities of a boost to economic activity through public investment. Household consumption should however hold up thanks to the increase in remittances from migrants, benefiting from the upturn in the US employment market, and which will partly offset the loss in purchasing power due to higher inflation. Inflation remained fairly low in 2015 thanks to falling energy and telecommunications costs, but should increase in 2016, with the depreciation of the peso under the impact of the tightening of US monetary policy.
Spending cuts to be the main driving force for budget consolidation
The efforts of the government to reduce the public deficit are likely to continue in 2016. Despite the ongoing weakness in the price of oil, which generates almost a third of budget receipts, the reduction in investment spending linked with increasing non-oil and gas receipts should contribute to reducing the deficit. The tax reforms implemented in 2014 should continue to bring in additional income for the government, estimated at 3% of GDP by 2018. This is based essentially on a tax on capital gains and dividends, the harmonization of VAT rates in the northern states and the rest of the country, an extension of the income tax base as well as a tax on sales of foods causally linked with obesity (in particular soft drinks). The increase in tax receipts should help to offset the decline in receipts from the energy sector whilst the reduction in spending should be the main element in the consolidation of the budget. The government is planning on cutting its current and capital spending by 1.2% of GDP in 2016. A number of investment projects have had to be delayed, as can be seen with the suspension of the construction project for the high speed rail line between the cities of Mexico and Queretaro. In addition, the adoption of the “zero-base budgeting” plan which states that every expenditure item must be justified instead of simply having to justify the variation in the budget from one year to the next, should also play a role in limiting spending. The implementation of the prudent budgetary policy is also likely to help limit recourse to borrowing.
Towards a reduced current account deficit
Foreign trade should continue to benefit from improving US demand. Exports, consisting mainly of manufactured goods, and to a lesser extent, oil, will continue to be shipped mainly to the United States. Mexico is also the leading trading partner of the United States in Latin America thanks to its geographic proximity and membership of the NAFTA (North American Free Trade Agreement). Almost half of its manufactured exports are produced in ‘Maquiladoras’, factories located in free-trade areas near the US border, using imported components (usually from the north of the continent) before being re-exported once assembled as finished products. Its close links with the US economy will thus be beneficial for Mexican exports in 2016. Imports (capital and consumer goods) are however expected to slow slightly as a result of the knock on of lower investments and the possible depreciation of the Mexican peso (making imports more expensive) because of tightening US monetary policy. Remittances from Mexicans working abroad, mainly in the United States, as well as tourism receipts are expected to increase and help reduce the current account deficit, alongside the reduction in imports. This deficit should mainly be financed by foreign investments, the arrival of which will depend in particular on the outcome of the energy sector privatization process, with the majority hoped for in 2016.
A government weakened by corruption scandals
The President, Enrique Peña Nieto, of the center PRI party (Partido Revolucionario Institucional) is expected to continue focusing on the realization of his program of structural reforms before the end of his term of office in 2018. Despite the success of many of the reforms, popular discontent is growing. A series of corruption scandals, embracing some of those close to the President, and the ongoing scale of criminality and criminal impunity (the enquiry into the disappearance of 43 students in 2014 was reopened after pressure from the international community), are factors contributing to undermine Mexicans’ trust in their government. The country is therefore likely to remain vulnerable to social unrest during 2016.