Moody's Cuts Mexico's Rating to Baa3 on Pemex and Fiscal Woes

Moody's Ratings downgraded Mexico's sovereign debt one notch to Baa3 from Baa2, citing the country's weakening fiscal position, which has been exacerbated by persistent budget deficits and the financial burden of supporting the state-owned oil company, Petróleos Mexicanos (Pemex).

"Mexico's fiscal position has weakened relative to Baa-rated peers and its vulnerability to fiscal shocks has increased," Moody's said in its statement.

The downgrade reflects a continued deterioration in Mexico’s fiscal strength, with government gross debt climbing to 49.3% of GDP in 2025. The government provided around $35 billion to Pemex in 2025 and plans to allocate another $14 billion in 2026. Moody's now expects Mexico's GDP growth to be below 1 percent in 2026.

The downgrade to the last notch of investment grade signals rising investor risk and could increase borrowing costs for Mexico. The stable outlook indicates that another downgrade is not imminent, but hinges on the government's ability to stabilize its debt, which Moody's projects to approach 55% of GDP by 2028 if current trends continue.

Fiscal Pressures Mount

The ratings agency pointed to a "sustained weakening in fiscal strength" as a primary driver for the downgrade. Mexico's fiscal deficit remained near 5% of GDP in 2025, and Moody's expects deficits to stay above 4% of GDP through 2027. This has led to a steady increase in the country's debt burden, which rose from 39.8% of GDP in 2023 to 49.3% in 2025.

A significant portion of this fiscal pressure comes from continued support for Pemex. The government has repeatedly provided financial assistance to the heavily indebted oil company, including a $13.8 billion debt issuance last year to help capitalize the firm. Moody's warned that further assistance will likely be necessary unless Pemex sees significant operational improvements.

Subdued Growth Outlook

Compounding the fiscal challenges is a weak economic growth forecast. Moody's lowered its GDP growth projections for Mexico to below 1% in 2026 and 1.3% in 2027, eventually returning to a trend growth of around 2%. The agency noted that structural weaknesses constrain Mexico's economic potential, despite its large, diversified economy and access to the U.S. market.

The stable outlook reflects Moody's expectation that Mexico's macroeconomic stability and resilient institutions will help offset the gradual weakening in its fiscal profile. However, the agency also highlighted that repeated breaches of fiscal targets since 2023 have weakened confidence in the country’s fiscal policy framework.

This article is for informational purposes only and does not constitute investment advice.