April 26, 2017

12049

MexicoChief Analyst
xxxxx Analyst

Atsushi Masuda
Sakura Yamamoto

Long-term Rating

A-Outlook*

StableShort-term Rating-*Long-term Rating refers to Long-term Issuer Rating in principle.

investors. Amid the stagnant oil prices, the bidding
rounds have been progressing steadily albeit slowly. As
part of its energy reforms, the administration raisedenergy prices such as gasoline and gas in January 2017, ayear ahead of schedule. It also enacted the National
Anticorruption System legal framework in July 2016 withthe goals to create strong and autonomous institutions
to prevent and sanction corruption as well as reformed
the National Criminal Procedure Code which unifies thecriminal justice procedure of the federation and thestates to facilitate coordination among authorities. The
administration continues its efforts to prevent
corruption and to promote transparency of the publicservices.
The approval rate of President Pena Nieto declined to
17% in February 2017 from 55% at the time of his
inauguration (according to Consulta Mitofsky) as his
structural reforms had put burdens on the public. The
next presidential election is scheduled for July 2018.
Reelection of the president is prohibited by theconstitution. According to the recent opinion poll, theapproval rating for the ruling PRI is declining in contrast
to the rising rates for the main opposition party PAN andthe left-wing party MORENA.

1. Overview
In 2015, Mexico had a population of about 120
million and a nominal GDP of approximately USD1.2
trillion, the largest next to Brazil in Latin America. Its
GDP per capita stood at around USD9,500. Mexico
signed the North American Free Trade Agreement(NAFTA) with the US and Canada in 1994. The country
has since established the status of an export-oriented
industrial base for the North American market bycapitalizing on massive foreign direct investment inflows.
Its interdependence with the US has been deepening
through the supply chain of manufacturing industries
such as automobile and home electronics.
The US President Donald Trump who took office inJanuary 2017 called for renegotiation of the NAFTA,
construction of a wall along the US-Mexican border anddeportation of undocumented immigrants. The
environment surrounding the Mexican economy is still
uncertain, although the financial market has recently
recovering calmness comparing to the situation before
his inauguration.

2.

Political and social situation

Since taking office in December 2012, theadministration of President Pena Nieto from PRI, thecentrist party, has been pushing ahead with bold
structural reforms involving wide-ranging sectors such asenergy, finance, telecommunications, education andpublic finance by enacting a series of related bills. In theenergy sector, among others, it has abolished the statemonopoly and opened not only oil exploration andproduction but also refinery, marketing and power
generation to private companies including foreign

3. Economic trend
The country’s annual exports accounted for 36% ofGDP in 2016. Nearly 90% of the exports weremanufacturing products and over 80% were bound for
the US. The growth of the automobile industry has been
particularly prominent in recent years. It produced 3.47
million cars and exported 2.77 million in 2016, ranking
seventh and fourth respectively in the world. Those
numbers have been renewing record highs since 2010.

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Issuer Report
The economy grew 2.3% in real GDP terms in 2016,
almost unchanged from a year earlier. The growth wasled by the service sector such as transport,telecommunications, financial and real estate, which
accounts for 62% of GDP, while the mining sector such as
oil and gas which accounts for 6% of GDP remained
lackluster. Given the growing uncertainty in its traderelations with the US, JCR projects that the real GDP
growth may slow down to around 1% in 2017 on pullingback aggressive investments.
The year-on-year increase of the consumer priceindex has been staying just lower than 5% since January
2017, topping the 4% upper limit of the inflation
targeting range set by Banco de Mexico, the central bank,due mainly to the Mexican peso’s depreciation against
the US dollar and the hikes of energy prices. JCR expects
the central bank to keep its tight monetary policy stanceamid the prospect of additional policy rate hikes by theUS FRB.

4. Fiscal policy
Mexico’s public finance, which was used to becharacterized by the low level of non-oil-related tax
revenues, had been susceptible to changes in domestic
oil production and international oil prices. However, theefforts made by the Pena Nieto administration tobroaden the tax base and build a framework to alleviate
the impact of oil price fluctuations have proved
successful in lowering the country’s fiscal dependenceon oil-related revenues.
Following the plunge of oil prices since the latter halfof 2014, the public sector’s oil-related revenues tumbled
to 4.1% of GDP in 2016 from 7.1% in 2014. In contrast,
the ratio of non-oil-related revenues rose to 21.0% in2016 from 16.0% in 2014 due partly to a payout from oil
hedging deals. In 2016, the government implemented
additional spending cuts and allocated surplus of thecentral bank, to pay down debt, to repurchasegovernment bonds, to accumulate assets (mainly in theBudgetary Revenues Stabilization Fund) and generated
fiscal space to provide financial support to the state-run
oil corporation PEMEX. The ratio of Public Sector
Borrowing Requirement (PSBR) to GDP, the broadest
measure of fiscal deficit, was trimmed from 4.1% a year
earlier to 2.9% in 2016, or below the initial target of
3.5%. Adding up the central bank’s 2016 surplus received
by the government in March 2017, will bring down PSBR
ratio to an estimated 1.4%.
The government is firmly committed to maintain thePSBR ratio at 2.9% in 2017 despite the revision of thegrowth assumption from 2.0-3.0% to 1.3-2.3%. The
government holds fast to its target at 2.5% from 2018
onward. For the first time since 2008, a primary balanceis prospected to be surplus in 2017, its GDP ratio will be
0.5% without the Bank’s surplus and 1.6% including it.
The PSBR’s Historical Balance, the broadest measure of
the country’s public sector’s debt, is expected to go
down in 2017 from 50.2% of GDP in 2016 to 49.5% of
GDP without the Bank’s surplus and to 48.0% including it.

5. External position
The country’s current account deficit stayed slightly
smaller than 3% of GDP due to a large income deficit. In
2016, the current account deficit narrowed to 2.7% of
GDP from 2.9% in 2015 due partly to the surge ofremittances and revenues from travel services in thelatter half of the year.
The financial account is susceptible to changes in thecross-border capital flows due to its highly open capitaltransactions regime. The Mexican peso has kept
depreciating against the US dollar since a policy rate hikeby the US FRB came into sight in 2015. Before the recent
appreciation to the pre-US Presidential election level,
Peso plunged to a historical low of 21.9 pesos per US
dollar in January 2017. During that period, the Mexican
authorities responded flexibly with policy rate increases,
refraining from active intervention in the foreignexchange market. The central bank raised its policy rateon eight occasions by a cumulative 350 bps between
December 2015 and March 2017. The official reserves
stood at USD176.5 billion at the end of 2016, equivalent
to about 5.2 times of the short-term external debt ofthat time. Apart from the reserves, the country has
secured an IMF Flexible Credit Line totaling SDR62.4
billion (about USD88.0 billion).

6. Financial system
Mexico’s banking system has stayed stable and sounddespite the peso’s sharp depreciation. Its nonperforming
loan ratio and capital adequacy ratio stood at 2.2% and15.2%, respectively, at the end of October 2016, ascompared to 2.5% and 15.0% at the end of 2015. The
authorities are making efforts to facilitate bank lending
by promoting competition among banks and enhancing
the legal framework for collateral execution.
Bank lending to the private sector centering on
business corporations has been expanding at a robust<2>Issuer Reportpace. Credit to the private sector grew at 12.4% in realterms, with that to non-financial corporations swelling
17.4%. As to the share of the foreign currency loans in
total bank lending, it remained low at 13.2% as ofOctober 2016. This was mainly due to residents are, inprinciple, not even allowed to open foreign currencydenominated bank accounts. Foreign currency
borrowings by firms are also restrained.

Overall assessment and rating outlook
The ratings are supported by the country’s (i) solid
export-oriented industrial base built under the NAFTA,(ii) adherence to fiscal discipline, (iii) resilience toexchange rate fluctuations and (iv) progress on structuralreforms. Meanwhile, the ratings are constrained by (a)the Trump administration’s protectionist policy stanceand (b) remaining requirement for compressing theinformal sector and growth-impeding factors such as theentrenched vested interests.
The environment surrounding the Mexican economy
is still uncertain, although the financial market has
recently recovering calmness. However, JCR expects thatthe country will keep responding appropriately to thedifficult external conditions as it has been preserving
fiscal discipline and soundness of the financial system
while steadily advancing structural reforms in wider
segments including the energy sector. JCR will closely
monitor the possible impacts of the trade negotiations
and the immigration policy of the Trump administration
to have them reflected on its future ratings.

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12049● Ratings

Mexico(millions of yen)

RatingOutlook*Japanese Yen Bonds 14th Series (2012)

A--

Japanese Yen Bonds 16th Series (2013)

A--

Japanese Yen Bonds 17th Series (2013)

A-

Japanese Yen Bonds 18th Series (2014)

Rate (%)

Issue Date

Maturity Date

Release30,0001.56

2012.06.08

2017.06.08

2017.04.11

15,0001.39

2013.08.08

2018.08.08

2017.04.11-

17,0001.54

2013.08.08

2019.08.08

2017.04.11

A--

33,8000.80

2014.07.24

2019.07.24

2017.04.11

Japanese Yen Bonds 19th Series (2014)

A--

13,9001.44

2014.07.24

2024.07.24

2017.04.11

Japanese Yen Bonds 20th Series (2014)

A--

12,3002.57

2014.07.24

2034.07.24

2017.04.11

Japanese Yen Bonds 21st Series (2016)

A--

45,9000.40

2016.06.16

2019.06.14

2017.04.11

Japanese Yen Bonds 22nd Series (2016)

A--

50,9000.70

2016.06.16

2021.06.16

2017.04.11

Japanese Yen Bonds 23rd Series (2016)

A--

16,3001.09

2016.06.16

2026.06.16

2017.04.11

Japanese Yen Bonds 24th Series (2016)

A--

21,9002.40

2016.06.16

2036.06.16

2017.04.11

Foreign Currency Long-term Issuer Rating

A-Stable----2017.04.11

Local Currency Long-term Issuer Rating

A+Stable----2017.04.11● History of Long-term Issuer Rating
DateAmount(Foreign Currency Long-term Issuer Rating or its equivalent)

RatingOutlook*Issuer Name

1998.06.17

BB+-Mexico

2000.11.02

BBB-

Mexico2005.01.26

BBB

StableMexico2006.01.20

BBB+

StableMexico2008.01.28

A-

StableMexico*Outlook for Foreign Currency long-term issuer rating, or direction in case of Credit Monitor

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