Mexico's fiscal strength weakened, debt burden increased: Moody's

Mexico's fiscal strength has weakened, leading Moody's to downgrade its sovereign rating to Baa3, the lowest investment-grade level. Renzo Merino, vice president and senior analyst at Moody's, explained that this reflects a gradual deterioration in public finances, diminishing one of Mexico's historical advantages.

The rating cut follows observations that reducing the fiscal deficit has been more challenging than anticipated, exacerbated by low economic growth and increased public spending pressures. Despite government efforts to boost revenue and control some expenses in 2025, financial support for Pemex counteracted some progress. Consequently, the federal government and social security deficit narrowed to 4.9% of GDP in 2025 from 5.3% in 2024, a smaller reduction than initially projected.

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The recent downgrade of Mexico's sovereign rating by Moody's reflects a gradual deterioration in public finances that has reduced one of the country's main historical strengths compared to other investment-grade economies.

Moody's also highlighted a rapid increase in public debt, estimating it rose from 40% of GDP in 2023 to nearly 50% in 2025. Under its base scenario, this proportion is expected to climb towards 55% by 2028. This level aligns Mexico more closely with the average debt-to-GDP ratio of Baa-rated countries, eroding its previous relative advantage.

Furthermore, the financial cost of servicing the debt has escalated. Merino noted that the government now allocates about 17% of its revenue to interest payments, a significant jump from 10-11% in 2021. This rise restricts funds available for critical areas like infrastructure, education, health, and security, while also hindering deficit reduction efforts. The agency also pointed to a weakening of fiscal discipline in recent years.

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Historically, fiscal policy was also a strength. Beyond the fact that fiscal policy in Mexico has always tended to be relatively pro-cyclical, it previously supported the stability of government debt metrics, and that implied that the other factor, the fiscal one, has also historically been a point of relative strength compared to its Baa peers. What we have seen, especially since 2023, is that with this deterioration of government metrics, Mexico's fiscal side of the credit profile is now more aligned with its Baa peers.