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Mexico’s Credit Outlook Cut by Moody’s on Constitutional Overhaul

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A taxi cab passes in front of the Mexican flag flying at the Plaza de la Constitucion (Zocalo) in Mexico City, Mexico, on Friday, April 13, 2018. Mexico's peso extended losses for a third day amid profit-taking outflows as the currency failed to stay strong past 18.00 key level. Photographer: Alejandro Cegarra/Bloomberg (Alejandro Cegarra/Bloomberg)

(Bloomberg) -- Mexico’s credit outlook was lowered to negative from stable by Moody’s Ratings, which said recent constitutional changes risk hurting Latin America’s second-biggest economy. 

The ratings company affirmed Mexico’s rating at Baa2, two notches above junk, it said in a statement Thursday. Moody’s said fiscal consolidation is challenging for the country amid worsening debt affordability and a wider deficit in 2024.

“The constitutional overhaul risks eroding checks and balances of the country’s judiciary system, with potential negative impact to Mexico’s economic and fiscal strength,” Moody’s said in a statement Thursday. 

Mexico has fallen out of investors’ favor since June, when the ruling party won congress by a landslide, opening the door for constitutional changes, including to the judiciary. Both houses of Congress approved a proposal that changes the way Mexico’s federal judges — including at the top court — are elected. 

Mexico’s peso slipped 0.3% after the announcement. The rating company’s move should contribute to the peso continuing to weaken, strategists at Banco Bilbao Vizcaya Argentaria wrote in a note. 

The pressure from credit ratings agencies could push the government toward a fiscal reform, BBVA added. Earlier on Thursday, Ricardo Monreal, head of the ruling Morena party in the lower house, said that Mexico needed a deep tax reform soon, local media reported. 

Mexico should benefit from US companies moving their supply chains closer to home, but the reforms may hurt investor confidence, the credit assessor said in its outlook change. 

Moody’s also sees higher odds that liabilities from state-run oil giant Petroleos Mexicanos are partially or fully absorbed by the government’s balance sheet. 

“While the way that the authorities may carry out this transaction is unclear at this time, it may result in a further increase in the federal government’s debt and interest burdens,” it said.

Fitch Ratings assigns Mexico BBB-, the lowest level above junk, while S&P Global Ratings has it a notch higher. Both have stable outlooks. 

--With assistance from Michael O'Boyle.

(Adds currency move, analyst comment in paragraph five.)

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