Mexico dances on the investment grade tightrope, according to Moody’s
It looks like the Federal Government spending party could have a pretty painful hangover, and not exactly because of the price of tequila. The prestigious agency Moody’s Ratings, in its role as official spoilsport of the global economy, has issued one of those warnings that makes finance ministers break out in a cold sweat. It turns out that the high level of Government debt – a concept so far-fetched that they need to clarify that it is not the same as broad public debt, because in the world of sovereign finance they love to complicate the simple – has us on the verge of a change in credit profile. Or, in Christian: Mexico is a couple of bad decisions away from losing the coveted investment grade. Do you remember that status that makes us look serious and trustworthy? Yes, the one that cost us so much to get.
Moody’s, with the precision of a surgeon but with the joy of a dentist, estimates that, if we do the incredibly wise exercise of excluding the always generous Pemex from the calculation, the Government’s debt would reach an elegant 50% of the Gross Domestic Product (GDP) by 2027. Of course, this is assuming we don’t decide to finance another ghost airport or a refinery with the profitability of a lemonade stand.
The clear beads and the thick chocolate… and expensive
The messenger of this happy news was Renzo Merino, vice president and senior analyst at Moody’s, who with the calmness of someone announcing that it will rain at a picnic, sized up the problem: “Mexico’s debt burden would be between 45 and 50 percent; this does not include Pemex.” Thank goodness it doesn’t include Pemex! Because if we include it, we better start practicing how to request a bailout from the International Monetary Fund.
Merino, a poet of finance, added: “We have a base scenario that tells us that the debt burden would be approaching 50% of GDP by 2027-2028, depending on how much fiscal consolidation there is.” “Fiscal consolidation” is that wonderful euphemism that means “either we cut spending or we raise taxes, and both will make someone hate us.”
To add salt to the wound, the official figures from the Secretary of Finance already show that, as of July, the net debt of the federal government amounted to 44.4% of GDP. And here comes the best: in the framework of a forum with a name as pompous as “Inside LatAm: Mexico 2025”, Merino revealed that said debt rose around 5 percentage points last year alone. That is to say, it grew at a rate that would make weeds pale with envy.
But the real juice of the story, the part that should keep us awake at night, is not only the size of the debt, but how expensive it is for the country to maintain it. Merino explained it with a clarity that hurts: “The problem for Mexico is that maintaining that debt is expensive. When we measure the burden of the Government’s interests with respect to income, we see that Mexico is one of the weakest.” Come on, we’re paying more interest than a college student with their first credit card.
The analyst stressed – never better said – that the federal government consumes around 17% of its income solely in interest payments. Think about that: of every peso that comes in, 17 cents disappear just for the privilege of owing money. This, as is logical (even for a politician), implies that there is less room to allocate resources to infrastructure, education, health and other minor details such as the future of the country. Do you want roads? Schools? Hospitals? I’m sorry, that money has already gone to pay the interest on the debt we contracted for… what exactly was it for?
The elephants in the room: Pemex and rigid spending
Moody’s final call is to address the structural problems of the country’s fiscal accounts. Among them, the increase in rigid spending (that which is as easy to cut as a diamond with a spoon), the “problem that Pemex represents” (a very polite way of referring to a financial black hole) and transfers, which include social expenses. Basically, they ask us to fix everything that is politically difficult to touch. Easy, right?
Moody’s maintains for now the credit rating for Mexico at Baa2, which is the penultimate step of the investment grade. In other words, we are in the front seat of the bus that is going straight to the precipice of the “speculative grade”, but we still have time to pull the handbrake. Only two steps separate us from losing our status. Two. Like two elections, two six-year terms, or two bad excuses.
So, my fellow Americans, the next time you wonder why things are not improving as quickly as we would like, remember that a significant portion of our money is busy paying the bill for past excesses. Moody’s has serenaded us, now it remains to be seen if our rulers decide to dance to the tune or simply turn up the music so as not to hear the bad news.
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