Moody's forecasts debt and political risks for Mexico in 2021

04/05/2021

Moody's raised its forecast for Mexican GDP growth to 5.6% for this year from a previous estimate of 3.5%, although it warned of a "weak political framework" and the increasing rise in public debt. The rating agency attributed the change to the "solid recovery" of the U.S. economy, destination of more than 80% of Mexican exports, so it also adjusted the growth estimate for 2022 to 2.7% from a previous 2%.

"Despite projections of higher real growth in 2021-22 compared to our previous forecasts, GDP will not reach 2019 levels before the end of 2022," Moody's qualified in its report. The GDP forecast has been released after Moody's ratified last Thursday the credit rating for Mexico's debt at "Baa1 with negative outlook".

The GDP growth estimate is even higher than the official estimate of 5.3% contemplated by the Mexican Government's Ministry of Finance and Public Credit (SHCP). It also coincides with recent adjustments by international agencies, such as the International Monetary Fund (IMF), which now estimates a 5% rise in GDP for 2021 versus a previous expectation of 4.3%.

Even so, Moody's considered that "domestic demand will remain sluggish due to the persistence of weak investment and a weak labor market that will impact consumption". It also estimates that overall government debt will increase to 42.1% of GDP from 42% in 2020 and 36.1% in 2019.

The agency noted that the unemployment rate is still above the 3.3% recorded in December 2019, while underemployment is 1.7 times higher. Despite acknowledging "that the deterioration in public finances caused by the coronavirus pandemic was small relative to peers," the rating agency enunciated political factors unrelated to the COVID-19 crisis.

"Over the past 2.5 years, adverse investor reaction has been in response to specific rhetoric and policies that have been clearly negative to the economic interest and driven by political and economic considerations, or have raised concerns of future change," it noted.

Mexico had a historic 8.2% GDP contraction in 2020 due to the COVID-19 crisis, which has left more than 2.34 million contagions and nearly 217,000 deaths, the fourth country with the most fatalities behind India, Brazil and the United States. "Significant delays in the distribution of the coronavirus vaccine in 2021 could pose downside risks to Mexico's economic recovery in 2021," Moody's concluded.