This report does not constitute a rating action.

On June 2, Mexican voters elected Claudia Sheinbaum as their next president and gave her political party, Morena, a substantial majority of seats in both chambers of Congress. They also elected more than 20,000 officials for national, state, and local governments. The incumbent center-left Morena party, founded by outgoing president Andres Manuel Lopez Obrador, will maintain its dominant political role since the 2018 national elections.

Here we answer questions that we have been receiving regarding our sovereign ratings on Mexico (foreign currency: BBB/Stable/A-2) and on the rating links between the sovereign and state-owned oil giant Petroleos Mexicanos (Pemex).

Frequently Asked Questions

What are the main issues facing the next administration from the perspective of the sovereign credit rating on Mexico?

The Sheinbaum administration, which will take office on Oct. 1, will face embedded challenges in public finances, including a recently growing fiscal deficit and long-standing weaknesses in state-owned Pemex. In addition, the new administration faces the need to boost the country’s rate of economic growth on a sustained basis to help address pressing social needs.

What are the main fiscal obstacles?

Mexico’s general government deficit (which includes both the central and subnational governments) is slated to exceed 5% of GDP in 2024, from 3% last year, in part because of large capital expenditures to finish construction of several large projects (including a Mayan Train and a new oil refinery built by Pemex). As a result, net general government debt may increase toward 48% of GDP this year from 45% in 2023.

The outgoing administration of President Andres Manuel Lopez Obrador presented projections for a substantial fiscal correction in 2025, reducing the total public-sector borrowing requirement by nearly half. However, it remains to be seen whether the new Sheinbaum administration will adhere to the current administration’s fiscal path when it presents its own budget for 2025. A potential weakening of public finances, leading to a higher debt burden, could hurt the sovereign rating.

President Lopez Obrador has pursued cautious fiscal policy while maintaining social stability and managing the various political currents within Morena, a political party that he created. President-elect Sheinbaum may face political pressure to loosen government spending if there is a significant economic deceleration.

What is the relationship between the sovereign credit rating on Mexico and the issuer credit rating on Pemex?

Since 2019, we have signaled that our sovereign credit rating could face pressure from Pemex as a contingent liability to the sovereign. The next administration’s approach to Mexico's overall public-sector finances, including how it chooses to support Pemex, address policy in the energy sector, and organize Pemex's operations and management, will likely affect our ratings on both Mexico and Pemex.

Our view of the almost certain likelihood of sovereign support dominates the analysis of Pemex's creditworthiness. This likely support aligns the issuer credit rating with the sovereign credit rating, irrespective of Pemex's stand-alone credit profile, which has been ‘ccc+’ since 2020.

Since 2019, the Lopez Obrador administration has provided about Mexican peso (MXN) 869 billion (or US$51 billion) to Pemex through different mechanisms, including equity injections targeting debt repayment, and liability management, as well as investment in the fertilizers chain, the national refinery system, and the Olmeca refinery. It has also reduced Pemex's heavy tax burden by slashing the profit-sharing duty (Derecho por la Utilidad Compartida) to 30% from 65% during 2019-2024. This year, the sovereign for the first time included a budget item to cover almost all of Pemex’s 2024 amortization payments (about US$6.3 billion as of the first quarter of 2024).

What are your expectations for the next administration's policy toward Pemex?

We expect that the new Sheinbaum administration will continue to support Pemex, as have previous Mexican administrations of different political parties.

However, assuming no improvement in Pemex's financial standing and assuming the likelihood of sovereign support remains almost certain, we would likely consider Pemex to pose a moderate contingent liability should the combined debt of the government and Pemex rise more pronouncedly. This would weaken our view of Mexico's fiscal profile and could weigh on the sovereign rating.

Debt repayment for Pemex will remain a source of strain in 2025 and 2026, with around $6.8 billion and $10.5 billion due in these years, respectively. The new administration could provide financial support to Pemex, including through tax cuts or budget transfers, perhaps in conjunction with reforms to strengthen the company's operations and address internal weaknesses.

Pemex and the sovereign have worked in the past to alleviate the company’s servicing of its commercial debt and other obligations. Should Pemex and the sovereign undertake future liability management operations, we would assess the impact on the ratings on the sovereign and Pemex based on:

• Prevailing circumstances and conditions;
• Our methodology for analyzing sovereigns, corporates, and government-related entities; and
• If applicable, our assessment of the implications of debt repurchases or exchanges.

Why do you cite economic growth as a challenge for Mexico?

Mexico’s poor track record of economic growth compared with peers at a similar level of income constrains our rating on the sovereign. Growth has picked up recently, with GDP expanding more than 3% in 2023 and likely to grow around 2.5% this year.

Recent developments have raised hopes for sustained higher private-sector investment, including foreign direct investment, to build a larger supply chain to cater to the North American market and reduce reliance on China. Some recent economic data, especially rising nonresidential construction, indicates growing investment prospects.

However, many years of underinvestment, especially in infrastructure (such as energy and electricity), constrain the supply side of the economy. Poor physical infrastructure, shortage of water in some areas, and capacity constraints on electricity (especially from nonthermal sources) limit Mexico’s growth prospects.

Do you expect continued stability under the new administration?

The economy has been relatively stable in recent years despite external shocks and an important change in political orientation following the election of Andres Manuel Lopez Obrador six years ago.

We expect broad continuity in fiscal, monetary, and trade policies that should help absorb potential external shocks in coming years. However, such stability may not necessarily translate into greater economic dynamism.

Like many Latin American countries, Mexico’s economic output has been increasing, mainly owing to greater use of inputs like labor or capital rather than better labor productivity. While the population is younger, on average, than in developed countries, Mexico is undergoing the same demographic shift (rising average age and slowing population growth rate) as other, especially advanced, countries. As a result, in our view, it will be key for Mexico to create new and better-paying jobs for its still-growing workforce to take advantage of its current demographic dividend.

However, while unemployment is low in Mexico, the productivity of workers is, on average, low as well, limiting the country’s ability to prosper.

Why is productivity not rising faster despite macroeconomic stability and close economic integration with the U.S.?

Although Mexico has made much progress in recent decades in improving living standards and creating a more stable economy, it has made less progress in tackling the administrative and microeconomic obstacles that continue to limit economic dynamism.

There are many likely explanations for poor productivity. The southern parts of the country have much less physical infrastructure compared with the central and northern parts (although large public investments made by the current administration in the south may alleviate this gap modestly). Segments of the economy remain dominated by a small number of companies, limiting competition and innovation. And the provision of basic public services is poor in many places, resulting in a less skilled labor force.

Crime and violence also take a heavy toll on the country, both at a personal level and by deterring consumption and private investment. In addition, the country’s financial system, while well-capitalized, is small in its coverage compared with many emerging market peers, limiting the access to credit.

What other things could affect Mexico's long-term rating trajectory?

Qualitative and quantitative factors shape our analysis, including institutional framework and track record of timely and adequate policymaking in key matters. This includes an assessment of political and administrative institutions, their transparency, predictability, and the checks and balances within them.

Mexico's democracy, close structural economic integration with the U.S., and economic institutions support stability and predictability. In particular, its political institutions have supported orderly changes of government (from different ideological backgrounds) for over two decades now at both the state and federal levels.

Moreover, Mexican authorities have typically responded with timely fiscal and monetary policies to safeguard economic stability and public finances. The credibility of Mexico's independent central bank (Banxico) and its ability to pursue an inflation-targeting monetary policy in the face of difficult circumstances play a prominent role in our analysis.

Greater centralization of political decision-making and mixed political signals under the current administration have reduced the independence of several agencies, essentially within the executive branch. Nevertheless, we continue to see important checks and balances across branches of government, including the judiciary and monetary authority, despite public controversy over proposed changes to important institutions. Measures that weaken checks and balances could affect private-investor confidence by creating perceptions of greater risk, potentially affecting economic growth and sovereign creditworthiness.

What impact could the U.S. national elections in November 2024 have on Mexico?

The elections could generate tensions about immigration, trade, and other issues, but we expect that both the U.S. and Mexican governments will be pragmatic and limit their disputes. Immigration will remain a politically polarizing issue regardless of the election outcome. The U.S. will likely keep using trade tariffs to achieve its policy goals. Mexico is likely to be less vulnerable to increased trade barriers than many other countries thanks to the USMCA, its trade agreement with the U.S. and Canada (which was approved by a majority in both political parties in the U.S. Congress and signed into law by then President Trump).

The growing use of industrial policies by the U.S., typically through subsidies and tax breaks to encourage investment in favored sectors, also offers opportunities to Mexico. Companies can undertake production of key products for the U.S. market from Mexico, subject to minimum thresholds of value added--to limit the scope for third countries to reroute their exports to the U.S. via Mexico.

Beyond bilateral issues, such as trade and immigration, the U.S. will continue to have an impact on Mexico through its own economic performance. Recent high GDP growth in the U.S. contributed to good growth in Mexico. Despite bilateral tensions, the two countries are highly integrated through trade, capital flows, and labor markets. Remittances to Mexico, mainly from Mexican-origin people living in the U.S., increased to $63 billion in 2023 (3.5% of GDP), more than double foreign direct investment inflows.

If the next U.S. administration can maintain good GDP growth and low unemployment, that should have a positive spillover into Mexico.

Primary Contact:	Joydeep Mukherji, New York 1-212-438-7351; joydeep.mukherji@spglobal.com
Secondary Contacts:	Omar A De la Torre Ponce De Leon, Mexico City 52-55-5081-2870; omar.delatorre@spglobal.com
	Christian Fajardo, New York ; christian.fajardo@spglobal.com