Low inflation, tight public spending and a reduction in the debts of loss-making state oil giant Petroleos Mexicanos (Pemex) have helped improve Mexico’s so-called risk profile, which reached its “safest” level in five years in December.
According to Reuters
, risk premiums of investing in Mexico- as measured by traders in credit default swaps (CDS)- hit their lowest level since November 2014 despite business and investor concerns about the economic management of the leftist government under President López Obrador.
Economic growth has come to a halt during AMLO’s first year in office, who has repeatedly criticized excessive free market liberalism for ruining Mexico. Analysts expect growth to be weak next year too (Reuters
However, inflation is below the central bank’s 3% target and Lopez Obrador has lowered trade tensions with the United States, in addition to Mexico avoiding the widespread social unrest that has shook many emerging markets in 2019, especially in Latin America.
“Against this backdrop, Mexico’s five-year CDS - a barometer of a country’s default risk - was quoted at 75 basis points earlier this month. On Monday, it stood at 81 basis points.”
The current CDS level, also known as the spread, means that an investor pays about $8,100 annually to insure $1 million in Mexican sovereign debt against default.
“The stable debt-to-GDP ratio, contained inflation, a central bank with a good reputation and the government’s fiscal discipline” have made Mexican debt very attractive and low risk,” said Jose Luis Ortega, director of debt investments at asset management firm BlackRock
AMLO’s government, which is running a bigger primary budget surplus than planned this year, has promised to lower to 45% the debt-to-GDP ratio, which touched 50% in 2016. The president has also vowed to revive Pemex- the world’s most indebted oil company- cutting its financial debt by around $7 billion this year through refinancing operations.
Pemex’s debt still stands close to $100 billion, however, and is viewed as a major risk to the financial stability and creditworthiness of the Mexican economy.
The CDS risk rating hasn’t always reflected favorably on the administration of President Lopez Obrador, who worried investors by cancelling a part-built $13 billion Mexico City airport five weeks before taking office in December 2018. At their worst, CDS spreads on Mexico shot to 147 basis points after he assumed power.