During the first two months of the Sheinbaum administration, Mexico's Congress approved amendments to revamp the judicial system and to limit the ability to challenge future constitutional amendments. Congress also revised the status of Petroleos Mexicanos (PEMEX) and Comision Federal de Electricidad (CFE) back to public companies. In addition, Donald Trump was successful in his bid to return to the White House for a second term. Here, S&P Global Ratings presents frequently asked questions from market participants regarding the impact of these events on the sectors that we follow.

Frequently Asked Questions

What impact does the judicial reform have on Mexico and our sovereign rating on it?

The judicial reform has raised considerable controversy in Mexico and posed questions about the effectiveness of checks and balances in the country's overall governance. We do not have a view on the structures of judicial systems across many countries that we rate, but focus instead on the implications, if any, of the recent reform on Mexico's long-term economic performance and on our institutional assessment of the country. Investor concerns about the reform could dampen investment and GDP growth, thereby potentially weakening the health of the economy. Mexico's long-term growth rate has been below that of its peers at a same level of economic development, which is incorporated into our sovereign rating. Continued sluggish growth could limit the rise of tax revenue, thereby straining the government's finances and hurting its creditworthiness. Moreover, we could revise our evaluation of the country's institutional framework and political setting to a weaker category if the reform were to result in unexpected bad outcomes.

What is your assessments of the prospects for nearshoring production in Mexico and the USMCA after the U.S. election?

Some data suggest that there is considerable interest among firms to increase their activities in Mexico. However, the actual inflows of foreign direct investment have been moderate thus far, suggesting some hesitation among investors or perhaps a lag between plans and implementation.

The advent of a new U.S. administration has boosted uncertainty about trade policies. We assume that the strong economic links between the U.S. and Mexico will remain in place, despite potential trade tariffs or other measures that may restrict commerce. Our expectation is that pragmatism will prevail on both sides as they discuss key issues such as trade, immigration, and the presence of Chinese firms and products within the common economic zone of the U.S., Canada, and Mexico.

Are you concerned about the auto industry in Mexico in light of potential tariffs?

The North American auto industry has had a significant degree of integration across the region since the 1990s. Therefore, any trade restriction, such as the potential increase in tariffs, could impair the auto sector's supply chains. We think that all industry participants would be absorbing the potential 25% tariff hike: original equipment manufacturers (OEMs), auto suppliers, and end consumers. However, there are significant economic incentives to maintain the current industry integration, mainly due to Mexico's competitive labor costs and already installed capacity in the country. In that sense, labor costs in Mexico are about 7 times lower than in the U.S. and moving current installed capacity from Mexico to the U.S. would obviously be costly and lengthy.

More specifically, whether auto suppliers in Mexico can mitigate the effects of potential tariffs and their effect on cash flows will depend on the size of their sales, their client and product concentration, their position in the production chain compared with other suppliers, the degree of product specialization, and the relationship with OEMs. Lastly, the auto suppliers that we rate are well positioned thanks to healthy financial metrics and sufficient liquidity positions to absorb potential tariffs, especially if they are temporary. However, the auto industry could take a hit, given that the potential price increases for final customers can depress vehicle sales in the region.

Moreover, we believe the Mexican auto suppliers' current competitive position, given the specialization of their products and strong market share, will allow them to negotiate with OEMs the pass-through of costs. This will enable them to jointly absorb 100% of tariffs, as we have seen with other cost increases in the past, such as raw material price hikes or shortages of certain components.

Can you comment on the outlook for local governments?

We do not expect major changes in the public finance system over the next several years. We expect broad continuity in Mexico's National System of Fiscal Coordination and Fiscal Discipline Law over the next several years. Likewise, we expect states and municipalities to generate nearly balanced fiscal results and keep low debt levels, limiting the impact of fiscal slippage. However, the system has failed to address underinvestment in infrastructure. Moreover, we expect federal transfers to subnational governments, which account on average for 90% of states' and 75% of municipalities' operating revenue, to slip in real terms during 2025. This underscores the opportunity for subnational governments to raise own-source revenue and strengthen their mid- and long-term financial planning.

Do you expect any rating impact on PEMEX and CFE because of their recent reclassification to "public companies"?

In our opinion, we view this change as neutral to the ratings on CFE and PEMEX, as we continue to view the sovereign rating as the main credit driver for both companies. We believe the companies will remain critical for the government, given the essential nature of the service they provide, and they will continue to have an integral link to the government, given the latter's full ownership of both companies and high involvement in all strategic decisions.

Although the reclassification prioritizes social and economic objectives over corporate profit, it underscores our assessment that the ratings on CFE and PEMEX should be in line with that on the sovereign.

We do not expect to revise CFE's 'b' stand-alone credit profile (SACP) in the next 12-24 months stemming from the reclassification. The SACP reflects the company's high leverage metrics. In addition, given its capital expenditure (capex) plan and cash flow, we continue to project EBITDA margins at 30%-35% and debt to EBITDA above 5.5x in the next 12-24 months.

PEMEX's 'ccc+' SACP reflects high leverage in its capital structure with debt to EBITDA above 6x and its significant liquidity needs with sizable debt maturities of about $8.9 billion for 2025 and $12.7 billion for 2026, which we don't expect to change because of the reclassification. Moreover, the company's leverage could further rise if oil prices trend lower, if PEMEX is unable to maintain production at 1.8 million barrels per day, or if the National Refinery System continues to underperform.

What's the impact of PEMEX and CFE's debt on the sovereign rating on Mexico?

We view the debt of these two entities as the sovereign's contingent liabilities, based on our view that CFE and PEMEX are almost certainly likely to receive extraordinary support if they run into problems servicing their debt. We have seen many examples of such support during previous administrations and expect that this will remain the case. Therefore, although the debt of these two entities is not officially guaranteed, we include it in our calculations of the sovereign's debt burden as substantial contingent liabilities.

Can you comment on the prospects for renewable energy?

Given CFE's focus on increasing its capacity through new combined-cycle gas turbine power plants, while private investments only added about 4.5 gigawatts (GW) of new renewable capacity (mostly distributed generation) in the past three years, Mexico's energy transition goals have been lagging initial projections. And for Mexico to 'catch-up' will be a significant challenge in the next few years. Moreover, CFE has limited financial room to bolster its generation capacity, while it needs to invest in strengthening the transmission grid.

Therefore, we expect private entities' participation in the nonconventional renewable generation sector will increase, as new renewable capacity is projected to rise by 9 GW in the next three years. Nonetheless, we'll monitor how this administration pursues the energy transition, given that confidence in Mexico's regulatory framework has weakened in the past few years.

What is your view regarding the government's new housing strategy and recent announcements from the public housing agencies?

The corporate sector.   We're cautiously optimistic about the strategy of building 1 million new homes during the administration's six-year term. While this could represent an opportunity for housing starts to rebound from historically low annual levels of about 130,000 in the past few years, we also believe it will be difficult to do so. In addition, there is currently a lot of uncertainty on how the new housing strategy will be implemented and its potential effect on the sector, if any.

On the one hand, the government announced that the National Housing Commission (CONAVI) will construct half of the new homes, targeting the low-income households, a segment of buyers that the rated homebuilders deem as too risky. As a result, we don't expect their competitive position to weaken.

On the other hand, the administration's strategy also includes the National Workers' Housing Fund Institute's (INFONAVIT) construction of the other 500,000 homes. This initiative, in our view, raises doubts and questions on how the institute will accomplish this goal, given that its traditional role as a mortgage lender. We understand that INFONAVIT would aim to develop and construct homes once it gets all required approvals to expand its role to develop housing. We also don't believe this initiative will jeopardize the traditional homebuilders' competitive position, given a large housing deficit in Mexico. Moreover, a decade ago, housing starts were double of the current level.

However, if INFONAVIT decides to subcontract partly or fully home construction to the private sector, we believe that homebuilders could take advantage of this opportunity, which would squeeze their profit margins but accelerate their working capital cycles. As part of the new housing strategy, the administration announced that 165,000 new homes will be built during the first year of its term. We believe this goal is challenging in terms of timing, given the business cycle of the housing industry's construction process.

The financial institutions sector.  We do not forecast an immediate impact on the mortgage lending dynamics, because private commercial banks and government mortgage lending agencies INFONAVIT and FOVISSSTE cater to different categories of prospective homebuyers. While INFONAVIT mostly grants mortgages to the low-income segment of the population, about 83% of private commercial banks extend home loans to middle- and high-income buyers. Likewise, mortgages represent only about 19% of private commercial banks' total loans, and we do not expect this to change soon.

For the new administration to implement its housing policy, INFONAVIT's operating structure and bylaws must be amended to enable it to construct homes. According to the government's announcements, we estimate that INFONAVIT will allocate about MXN288 billion to fund its portion of the new housing strategy, and financing for it could come from the mandatory contributions from private-sector workers. Over the past few years, INFONAVIT's housing fund has grown at double-digit rates, faster than the institute's mortgage lending pace. Therefore, the entity's available funding sources exceed its funding needs, resulting in a comfortable liquidity position. This could enable INFONAVIT to fund the home construction without weakening its liquidity position. Nevertheless, we will analyze the potential impact this could have on the institute's profitability and capitalization, which have been slipping over the past few years.

Additionally, INFONAVIT has recently announced modifications on the indexation rate to the outstanding amount of about 2 million mortgages. These were originated several years ago and indexed to Mexico's minimum wage. Starting in 2025, these mortgages will be updated each year at a rate of 0%. We estimate that this would have a negative--although manageable--impact on INFONAVIT's interest revenue and overall financial results, given it would only affect about 4% of its annual total interest revenue. On the other hand, it may help restrain a further deterioration of asset quality metrics, as these loans have fueled the increase in nonperforming assets over the past few years. Still, INFONAVIT's higher risk appetite, if the home construction's share of the balance sheet rises, may blunt this effect.

RMBS transactions.   We have not seen any new such deals issued in the past three years, and we expect issuance volumes will remain low during this administration, because INFONAVIT and FOVISSSTE, which historically have predominantly issued in this market, won't do so.

INFONAVIT has been absent from the RMBS market for several years, and there is no indication that it will return. On the other hand, FOVISSSTE's financial plan includes the possibility to continue issuing RMBS transactions for the next couple of years, yet we don't expect it to return to the market soon given still high interest rates.

As mentioned above, INFONAVIT announced that starting in 2025, the indexation rate applied for loans denominated in minimum wage units will be 0%. These proposed changes could affect the securitized portfolios backing INFONAVIT's RMBS transactions (CEDEVIS and CDVITOT). This, in our view, could expose such deals to an increased mismatch between the denomination of assets, for which the updating factor will now remain fixed, and liabilities denominated in inflation-linked units.

What are the prospects for private debt in Mexico?

Despite private debt's small proportion of the total global finance market, private credit is growing quickly in developed economies, especially in the U.S. However, Latin America represents a small share of this global trend, highlighting the huge potential for private debt expansion in the region, and particularly in Mexico. Nevertheless, we do not expect this to change significantly in the short term as some structural and regulatory aspects must be addressed.

We believe private debt could bolster and deepen the commercial credit market in Mexico, especially for mid-size companies given their insufficient access to long-term financing. Finally, private credit providers could also heighten competition for banks. For instance, in developing economies' financial systems, large banks usually originate and distribute most of broadly syndicated loans, while private credit funds have recently begun taking share from banks. They also compete directly with banks for certain types of credit assets that banks sometimes hold on their balance sheets. Still, rather than a direct competitor to traditional credit, we view private debt as an additional financing option to support capital markets' development, small and mid-size companies' (SMEs) access to financing, and economic growth.

We believe private debt in Mexico has a bright future, and structured finance could play a crucial role as a funding alternative for many originators. Namely, nonbank financial entities are facing increasing demand for financing solutions, particularly from SMEs. We believe securitization could provide these entities an attractive alternative to secured financing, while providing a collateralized obligation for lenders, which has proven to be effective even during challenging economic and financial conditions.

Some private credit funds have been incorporating securitization technology in their capital structures through credit tranching, defining associated payment waterfalls and coverage tests, and mitigating asset-liability mismatches. These features may provide structural protections and more predictable cash flows for secured creditors.

We have lately observed a pick-up in private financing from international funds and major investment banks that are entering the Mexican market (nonbank financial institutions and fintechs). In addition, retail banks have recured to private securitizations amid the historically low issuance volumes in the public market.

As these international players continue to engage with local businesses, the private debt market in Mexico is likely to expand, offering a variety of financing options and contributing to the overall economic development of the region.