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Moody's Sector In-Depth Summary: Low Oil Prices Weaken Mexico's Credit Risk Sentiment (29 August 2016)

Core Content

This report from Moody's Capital Markets Research (CMR) analyzes the impact of low oil prices on Mexico's credit risk sentiment and provides a comparative overview of sovereign credit risk across various countries in the Asia-Pacific and Europe regions.

Key Findings

Mexico's Credit Risk

• Sovereign EDF (Expected Default Frequency):

  • Mexico's five-year Sovereign EDF increased to 0.67% in January 2016, up from 0.33% at the end of 2014.
  • The EDF improved to 0.40% in August 2016 as oil prices rebounded, but then increased again due to recent developments.
  • The country's 10-year government bond yield rose from 5.1% to 5.84% since the beginning of the year, correlated with the EDF.

• Economic Indicators:

  • Mexico's GDP fell by 0.2% in Q2 2016, marking the first decline in three years.
  • Industrial production decreased, while service sector activity remained unchanged.
  • The finance minister revised the growth forecast for 2016 to 2%-2.6%, down from 2.2%-3.2%.

• Debt Levels:

  • Mexico's net government debt as a percentage of GDP is 43%, lower than Venezuela (49%) and Brazil (66%).

• Pemex Impact:

  • State-owned oil company Pemex's crude production fell by 2.2% year-on-year to 2.18 million barrels per day.
  • Pemex posted a $4.4 billion loss in Q2 2016, marking its 15th consecutive quarterly net loss since 2012.
  • Pemex's EDF increased from 0.81% in 2014 to 2.13% as of August 2016.
  • The Mexican banking system's loans to Pemex amounted to 6% of all outstanding loans, contributing to increased risk for the banking sector.
  • Moody's Investors Service changed its outlook on the Mexican banking system from stable to negative, citing rising asset risk and exposure to Pemex.

• Currency and Interest Rates:

  • The Mexican peso weakened by 6% this year after the Fed's key rate rise in December.
  • The peso reached a record low of 19.18 per US dollar in June 2016.
  • Rising interest rates have contributed to the increase in credit risk.

Asia-Pacific Overview

Europe Overview

Main Points

• Mexico's Credit Risk:

  • The country's credit risk has been affected by low oil prices, a depreciating peso, lower trade volume with the US, and rising interest rates.
  • The recent economic contraction and Pemex's financial struggles have caused a rise in sovereign credit risk.
  • Despite lower debt-to-GDP than some peers, the banking system's exposure to Pemex has raised concerns.

• Market-Based Credit Measures:

  • Latin American sovereign EDFs are significantly higher than European ones, with Mexico being an exception that has now worsened.
  • CDS-implied and bond-implied ratings in the region remain elevated, indicating ongoing concerns.

• Regional Comparison:

  • The Asia-Pacific and Europe regions show varying levels of sovereign credit risk, with most countries maintaining stable or slightly declining EDFs.
  • Greece stands out with the highest EDF in Europe, indicating significant credit risk.

Key Information

• Moody's Analytics provides market-based credit risk analysis, while Moody's Investors Service offers fundamental ratings.
• The report highlights the importance of oil prices, economic performance, and debt levels in assessing credit risk.
• The Mexican peso has weakened significantly, impacting the country's economic stability and credit risk.
• Pemex's financial health is a major concern for Mexico's credit risk, with its EDF increasing and its losses continuing.
• Moody's Investors Service has revised its outlook on the Mexican banking system due to increased exposure to Pemex and muted economic growth.

Conclusion

The report emphasizes that while Mexico had previously been a stable credit risk in Latin America, recent economic challenges and Pemex's financial issues have increased its sovereign credit risk. The analysis also provides a comparative view of sovereign credit risk across other regions, highlighting the impact of various economic factors on credit profiles.