February 26, 2019 / 6:41 PM / 8 months ago

UPDATE 2-Spending vows create 'trilemma' for Mexico credit rating -Moody's

(Adds Moody’s analyst’s comments)

By Stefanie Eschenbacher

MEXICO CITY, Feb 26 (Reuters) - The Mexican government faces tough choices if it wants to honor promises to ramp up social spending and rescue state oil firm Petróleos Mexicanos , or Pemex, while preserving its credit rating, rating agency Moody’s said on Tuesday.

Markets have been paying close attention to Mexico’s credit profile since Fitch downgraded cash-strapped Pemex last month, sparking concerns that further rating reductions could raise the country’s borrowing costs.

Reviewing the outlook for Mexico, Moody’s said it expected the government to maintain fiscal responsibility, but warned that heavily indebted Pemex could require more government support by next year if market conditions do not improve.

“The authorities face a complicated balancing act as they attempt to reach three potentially conflicting policy objectives at the same time,” Moody’s said in its report.

Calling the situation a “trilemma” for the government, Jaime Reusche, Moody’s senior analyst on Mexico, told a news conference he did not expect the country to lose its investment grade rating, but warned that Pemex was hurting it.

“Pemex’s rating could suffer, but for now there’s more pressure on the sovereign because of the support it’s giving Pemex,” Reusche said.

Moody’s rates Mexico A3, with a stable outlook.

The government in December presented a budget for 2019 that helped to soothe concerns among investors rattled by decisions made in the five-month transition to leftist President Andres Manuel Lopez Obrador’s inauguration on Dec. 1.

Mexican markets dived in late October when Lopez Obrador canceled a $13 billion new Mexico City airport, and Moody’s said his “highly discretionary decision-making process on future economic policies are weighing on business sentiment.”

The ratings agency said it believed the budget “does not fully capture the breadth of this administration’s plans when it comes to public investment,” pointing to government support for Pemex and Lopez Obrador’s social programs.

As a result, Moody’s said, higher fiscal costs could become more evident in 2020-21, turning up pressure on the administration’s pledge to maintain sound finances.

Lopez Obrador has vowed to give priority to helping the poor, and on taking office he quickly promised to implement a range of measures to reduce inequality, including higher old-age pensions and welfare payments to unemployed young people.

“There are clear tensions between government objectives to promote socially-inclusive growth and achieve a more even distribution of wealth, and others aimed at preserving fiscal responsibility,” Moody’s said in the report. (Reporting by Stefanie Eschenbacher; editing by Dave Graham, Susan Thomas and Richard Chang)

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