June 17, 2019 / 3:34 PM / a month ago

UPDATE 1-Moody's flags risks to Mexican economy, criticizes policymaking

(Updates with details from Moody’s statement)

MEXICO CITY, June 17 (Reuters) - Unpredictable policymaking by the Mexican government and challenges facing debt-laden state oil firm Pemex are clouding the economic and fiscal outlook for Latin America’s no. 2 economy, rating agency Moody’s Investors Service said on Monday.

“We continue to anticipate a challenging year for Mexico’s economy and forecast growth will slow to 1.2% in 2019 from 2.0% in 2018,” Moody’s Associate Managing Director Alejandro Olivo said in a statement.

The warning to the administration of President Andres Manuel Lopez Obrador from the agency follows a downgrade in Mexico’s sovereign credit rating by Fitch earlier this month as well as a lowering of the outlook by Moody’s the same day.

Moody’s saw risks that tax revenues may undershoot the government’s estimates, which could mean spending cuts are needed to meet Lopez Obrador’s target of posting a primary budget surplus of 1 percent of gross domestic product this year.

The agency forecast Pemex would need additional financial assistance from the government to fund its planned capital investment and resulting negative free cash flow.

“Pemex will need even more government support if it is to achieve ambitious production growth targets and could also need help for its large debt maturities,” Moody’s said. “This uncertainty has only added to the market’s concerns regarding policy predictability and sapped investor confidence in Pemex.”

Pemex has financial debts of $106 billion.

The agency noted there was still appetite to invest in Mexican infrastructure, but said Lopez Obrador’s decision in October to cancel a partly-built $13 billion new Mexico City airport had “undermined market and investor confidence.”

Despite slowing growth, Moody’s said it expected Mexican banks to maintain strong financial fundamentals. (Reporting by Karina Dsouza and Nishara Karuvalli Pathikkal in Bengaluru Writing by Dave Graham in Mexico City Editing by Susan Thomas)

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