Fitch Ratings lowers Mexico's credit rating for Pemex and commercial tension with the US
Fitch Ratings downgraded Mexico from BBB + to BBB with a negative to a stable outlook. According to the rating agency, the drop in the note is due to the deterioration of Pemex's credit profile and the current weakness in the macroeconomic perspective.
In a statement, the rating agency explained that the drop in the note is due to the deterioration of Pemex's credit profile, together with the current weakness in the macroeconomic perspective, which is aggravated by external threats of commercial tensions.
"Pemex weighs more and more on the sovereign credit profile, as evidenced by the low rating of Fitch from Pemex to 'BBB-' from 'BBB +' in January 2019 and the independent credit profile of the latter CCC. Growth continues below performance, and the downside risks are magnified by the threats of the US president, Trump, to impose tariffs on Mexico from June 10 ... to force the end of the flow of migrants through their territory to the United States, in the midst of a pattern of commercial uncertainty."
For its part, Moody's Investors Service changed the Mexican perspective from stable to negative; however, it confirmed the ratings of the issue of debt in the local currency, as in foreign currency to A3.
Source: Fitch Ratings
Reducing rates will not boost bank loans in Mexico
According to the rating agency, loan growth is expected to remain under pressure, between 6 and 8 percent, in response to the economic context.
Rating agency Fitch Ratings considered that the reduction in the benchmark interest rate of Banco de México Banxico will not be a guarantee for people to request more loans, so a slow economy will continue to deflate Mexican banks.
"Sensitivity to fees, along with potential legislation that would reduce fee income, continues to contribute to Fitch's negative outlook on the banking sector."
Currently, the benchmark interest rate stands at 8.50 percent since last December, net interest margins increased 120 basis points to 6.8 percent at the end of 2018 from 5.6 percent at the end of 2015.
Fitch expects the Banxico to reduce rates 100 basis points cumulatively by 2020, however, the lower rates may not generate a substantially higher credit or bank loan demand as long as the economy remains stagnant and the Consumer spending is weak.
The Mexican banking system is at historically low levels of delinquency, with prudent placement standards, so that some credit normalization or a moderate deterioration of assets could be expected, which could be partially mitigated if the costs of the loans decrease. loans.
Fitch considered that loan growth remains under pressure at between 6 and 8 percent, in response to the weak economic context, the uncertainty about the new administration and the effects of low financial intermediation on credit expansion.
Fitch recommends avoiding mixed signals to achieve a higher GDP
Rating agency Fitch Ratings said that negative rating pressures have increased for some Latin American countries in the last six months, especially four, such as Argentina, Ecuador, Guatemala, and Mexico, which have changed their outlook to negative.
In the case of Mexico, it reiterated that the new administration has sent mixed signals about its policies, the 2019 budget and recent monetary policy statements, which maintain primary surpluses and indicate a continuation of the existing fiscal framework. However, the cancellation of the Texcoco airport and other interventions such as the Energy Reform continue to inject uncertainty into the markets.
Therefore, Fitch Ratings considered it likely that Mexico's economy will experience a moderate slowdown this year, as will Peru and Chile. "In general, the administration seems to be following the continuity of the macroeconomic policy," the rating agency said.
For Brazil and Colombia, the international credit rating agency expects economic growth to increase this year, but only to 2.1 and 3.3 percent, respectively, while in Argentina and Venezuela annual contractions should continue.
As a result, no country has a positive outlook. He explained that these rating pressures reflect a series of factors within an environment of slow global economic growth. He predicted that Mexico, Peru, and Chile will experience a "moderate" slowdown, while contractions will continue for Argentina and Venezuela.
The agency said that negative rating pressures have increased for some sovereigns in Latin America in the last six months, as it reviewed the perspectives of four countries (Argentina, Ecuador, Guatemala, and Mexico) from stable to negative, since the beginning of the fourth quarter of 2018.
As a result, eight sovereigns in the region now have negative prospects, while none have a positive outlook. These note pressures reflect a series of factors within an environment of slow global economic growth, which is challenging efforts to consolidate fiscal accounts and stabilize debt burdens, he explains.
However, Fitch's forecast is neutral, like the one presented by the Inter-American Development Bank (IDB), which estimated that the Mexican economy will register a base growth rate of 2.4 percent on average until 2021.
Fitch Ratings reduces forecast for Mexico to 1.6% for this year
Rating agency Fitch Ratings has reduced its economic growth expectation for Mexico this year, to 1.6 percent from 2.1 that it predicted in December. In its outlook report, published yesterday, the agency explained that this is derived from the pronounced economic slowdown at the end of 2018 and the weak economic data in 2019
The new forecast of the rating agency is in line with what was expected by the consensus of specialists consulted by Citibanamex and in the range expected by the Bank of Mexico, which expects GDP to grow between 1.1 and 2.1 percent in 2019.
He added that oil production continues to fall and predicts that this will continue for the next two to three years. In addition, he said, business confidence is suffering political uncertainty generated by the new administration and automotive exports have been affected by the global slowdown in the sector; a factor that hopes to be reversed.
The rating agency explains that business confidence is affected by the policy, that is, the uncertainty generated by the new administration, while consumer spending has diverged significantly from indicators of consumer confidence, even when the inflation rate has fallen. , increasing real wages.
In terms of employment, Fitch notes that the pace of job creation in the formal sector is slowing and that manufacturing exports remain dynamic, although automotive exports have been affected by the global slowdown in the sector.
However, he says that government spending has been reduced, in addition to the fact that Banxico's rate adjustment cycle seems to have peaked, after two increases of 25 basis points in October and December, which brought the rate to 8.25. percent, and foresees that it will be reduced by the end of 2019 or the beginning of 2020.
It also estimates that with a fall to 3.9 percent year on year in February, the inflation rate is within the target range, for the first time since December 2016, while core inflation has been slower to fall, reflecting the persistence of the price of energy and other shocks.
Internationally, the agency expects that the war between the United States and China may distort trade flows, so it also reduces its global growth forecasts for 2019 and 2020 to 2.8 percent from 3.1 and 2.8 percent from 2.9, respectively.
Fitch Ratings calculates that the decrease of 0.4 percentage points in the growth that we now expect between 2018 and 2019 would be the biggest year after year in the world growth since 2012. In addition, of the 20 countries included in the G20, the expectations of the Gross Domestic Product fell (GDP) for 2019 for 15 of those countries.
Among the revisions for 2019 is Turkey, with -1.7 percent, Italy (-1 percent), Australia (-0.7 percent), Switzerland (-0.7 percent) and Germany (-0.6 percent). New Zealand also lowers its GDP forecast by 0.7 percent, while Poland does have a high forecast of one percent.
Mexico's financial plan is positive but faces challenges
The plan recently announced by the Mexican government to expand financial inclusion should lead to greater long-term financial participation, but reaching the final objectives of the program poses significant challenges, said Fitch Ratings.
"Greater financial inclusion is generally positive for financial systems if it is handled with prudence. However, the proposed measures should be largely neutral for banks and non-banking financial institutions in the short term."
While many details have not yet been announced, specific reforms include increasing mortgage loans, allowing workers to use their payroll bank accounts as a source of payments for all types of loans and, with any financial institution, to reduce the minimum age of current accounts and increase the use of banking services in mobile devices and digital platforms.
Although the reforms are mainly aimed at the growth of consumer loans, it is also an important focus to increase the financial inclusion of small and medium enterprises.
The plan promotes a more liquid and deeper securities market through the participation of the Retirement Fund Administrators (Afore) in the repurchase market and a cut in the tax rate on the profits of the public offer of sale of 35% to incentivize capital offers.
"Greater inclusion would be seen positively from a credit perspective since Mexican banks have lagged behind their regional counterparts in credit penetration. Potential positive aspects include higher profitability of banks due to higher growth and the efficiencies of digital platforms, "said Fitch.
However, the assessment mentioned that there are risks for credit growth in the midst of economic uncertainty and in an inflationary environment.
Growth in the midst of increased competition, particularly in the underpriced/subprime industry segments, which result in the deterioration of credit quality standards, remains a downside risk.
"If growth is not managed prudently under the current macroeconomic conditions, the increase in credit costs could affect profitability and capitalization."
The goal of the new administration to reach a total credit penetration of 50% of the Gross Domestic Product (GDP) of 37% in the next six years is ambitious, although it would align more the financial inclusion of Mexico with Colombia and Peru, the rating agency said.
Increasing the credit penetration rate by 1,300 basis points would require an acceleration of credit growth, which was 10.6% year-to-year to November 2018.
Total credit / GDP, on average, increased around 150 basis points per year in the previous administration; the proportion of loans would require more than 200 basis points per year over the next six years to reach its goal.
This initiative could also boost the growth of credit from non-bank financial institutions since these companies are major players in the provision of private credit in Mexico.
The specialized business models of these, aimed mainly at unbanked sectors and regions that are normally neglected by banks, support the importance of these entities to meet financial inclusion objectives.
"Mexican banks seem to be adequately capitalized to finance higher growth rates, while still absorbing the costs of increasing investments in technology."
It added that fintech spending has been an increasingly important central strategy to improve financial inclusion.
Fintech's expenditure supports the credit fundamentals of the banks rated by Fitch in the medium term, under the assumption that it leads to greater efficiencies, reduces cyber risks and new products and services.
Current bank ratings take into account higher technology spending and expected normalization or moderate deterioration in credit quality.