Mexico must cut deficit to keep investment grade, warns Franklin Templeton

Mexico faces a critical juncture regarding its investment grade rating, with Franklin Templeton urging the government to focus on fiscal deficit reduction rather than solely on economic growth. Luis Gonzali, vice president and co-director of investments at Franklin Templeton Mexico, warned that a failure to consolidate the deficit more rapidly could lead to a credit rating downgrade as early as 2029 or 2030.

Gonzali indicated that the country's sovereign debt rating, currently stable according to two major rating agencies but with a negative outlook from S&P, could see its perspective shift to negative by 2028. This outlook hinges on persistent sluggish GDP growth and continued borrowing. He cautioned that a reduction in Mexico's credit rating would push it into "speculative" territory, losing its investment grade status.

The investment firm observes that the federal government seems more inclined to prioritize economic expansion, potentially through initiatives like Plan Mexico, rather than implementing stringent spending cuts. Gonzali suggested that if growth targets are not met in the next two years, the government may be forced to address the deficit and cut spending to avoid losing its investment grade.

Franklin Templeton noted that public spending increased significantly for the 2024 elections and has remained stable without substantial cuts. The firm revised its assessment partly because Mexico's economic growth has been below expectations in recent years. While growth is a key factor, the broader public deficit, measured by financial requirements, remains a crucial element in maintaining the country's financial standing.