Investors see risks in Mexico despite "positive" budget

Investors see risks in Mexico despite "positive" budget

Economy & Policy Corporate & Sovereign Strategy Capital Markets Debt Bonds Politics Mexico

Investors still see risks in Mexico, even if the first budget presented by the new leftist government keeps a lid on spending, sources told LatinFinance.

After the government outlined a non-financial public sector deficit of 2.5% of GDP and a 1% primary budget surplus for 2019, Mexico's bond prices got a lift and the peso strengthened against the dollar. 

Fitch Ratings applauded the budget, saying it shows "fiscal discipline with realistic macro and oil price assumptions and a steady debt-to-GDP ratio through the medium term." 

Alberto Ramos, an analyst at Goldman Sachs, said the budget's projections are realistic "on balance" and pointed out that total spending is set to decline to 23.2% of GDP in 2019 from 23.7% in 2018, despite an increase in net interest payments.

But one investor in New York called for caution, saying the government's decision to stick to the terms of a bond buyback for the cancelled airport project could still anger investors and spoil their appetite for future debt sales.

"People tend to overreact to everything. What I say is let him govern, and then we'll see how it goes," the investor said of President Andrés Manuel López Obrador, who took office on December 1.

"The budget is positive, but he has just started, so there is still time to cause damage," he said, adding that some people in the market wonder if AMLO will keep open the oil and gas sector open to private investors and follow through on reforms to the mining sector and labor market. 

An analyst from Fitch said investors have concerns about the government's planned spending increase for the state-owned oil company Pemex. 

"The budget only includes a modest spending increase. The company will continue making significant transfers to the government but have negative free cash flows and continue to increase net borrowings in 2019," he said. "Credit quality continues to deteriorate and put downward pressure on ratings."