Mexican economy is "on autopilot"; country could lose investment grade if trend continues, warns Franklin Templeton

Mexico's economy is functioning on "autopilot" with sluggish growth and weak public finances, a trend that could lead to the loss of its investment-grade credit rating in the coming years, Franklin Templeton warned. Nadia Montes de Oca, Senior Portfolio Manager at the investment firm in Mexico, described the situation as "low growth autopilot."

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We are on autopilot with low growth.

This trajectory puts the country at risk of losing its highest credit rating, which guarantees sovereign debt repayment. Montes de Oca projected this could happen within three to six years if the current growth path does not change drastically. She also noted that public finances are not improving as expected, highlighting a need for a stimulus to break the current cycle.

Franklin Templeton's analysis points to insufficient tax revenue and a lack of consumer spending as critical issues. The firm's central scenario forecasts Mexico's Gross Domestic Product (GDP) to grow by only 1% this year. Inflation is expected to remain contained, close to the Bank of Mexico's target of 4.2%, with a benchmark interest rate of 6.50%.

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Growth cannot be fixed with public finances where there is no revenue, nor consumer spending, stimulus is needed to break this streak, otherwise there will be a significant correction in ratings.

The expert emphasized that the lack of sufficient tax revenue and public resources for projects poses a risk to the sovereign credit rating. She stated that "something is needed to increase growth more structurally," identifying Fixed Gross Investment as a key area needing improvement. Despite potential benefits from trade dynamics, particularly concerning the US-China trade war, the underlying economic performance remains a concern.

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Something is needed to increase growth more structurally.