Fitch Ratings today issued a comment that explores some of Mexico's possible post-July 2006 election scenarios and discusses the possible rating implications of these scenarios. Fitch believes that at this stage it is too premature to predict with any certainty who will be the next Mexican president. In Fitch's view, unless the new administration departs significantly from the current policy framework, Mexico's investment-grade ratings should not be affected. Fitch rates Mexico's foreign and local currency debt obligations 'BBB-' and 'BBB', respectively. The rating outlook is stable.
'The critical question is whether the new administration will be able to muster sufficient support to pass the much-needed reforms in public finances, the labor market, and the electricity sector. In this regard, the composition of the new congress will be important for determining the success of future reforms,' said Fitch Senior Director Shelly Shetty. A divided congress could again lead to political gridlock.
In recent months, polls have shown Manuel Lopez Obrador of the left-wing PRD party leading the presidential race. However, it is uncertain whether he will be able to maintain his lead and win the presidency. Even if he were to get elected for the top position, his ability to pursue populist policies is likely to be constrained by congress, as his party is not likely to enjoy a simple majority. Moreover, his recent comments show that he is moving to the center of political spectrum, partly to appease the private businessman and others who fear his radical policy stance in the past. Still Mexico's ratings could be vulnerable if he were to follow a highly populist fiscal policy or undermine the business climate significantly.
Fitch says that if the PRI candidate were to win the presidency, then the current macroeconomic settings are likely to remain in place, though a slight widening of the fiscal deficit cannot be totally ruled out. However, the success of structural reforms in public finances and in other areas under PRI's leadership is more difficult to judge. Similarly, if the PAN candidate were to win the presidency, then the current policy framework would be maintained, although political gridlock could still hamper progress on structural reforms.
If Mexico were unable to pass reforms, then over time its growth performance would lag that of other emerging markets. Additionally, unless non-oil tax revenue is increased, slower GDP growth could endanger fiscal performance especially if oil prices were to fall considerably.