Mexico's credit trajectory will be influenced by the progress the new administration makes on reforms to boost competitiveness, productivity, economic growth and fiscal flexibility, according to a new Fitch Ratings report published today. Improving domestic demand dynamics would be essential for Mexico to maintain a healthy growth trajectory, given the sluggish U.S. economy.
"The labor and education reforms passed in December are steps in the right direction to boost formal jobs, improve education standards and engender faster productivity growth in the medium term," said Shelly Shetty, Head of Fitch's Latin America Sovereign Group.
"However, while the initial progress on reforms is encouraging, complicated political negotiations lie ahead with regard to pending reforms. The content and scope of future reforms is still uncertain making it difficult to decisively assess the impact of future reforms on Mexico's creditworthiness," said Shetty.
Delays are already evident for the much-needed energy reform, and political resistance and opposition by the Pemex union may ultimately undermine the scope of this reform. Similarly, other pending reforms may be susceptible to delays and dilution as vested interests lobby against material changes.
High on the priority list are fiscal reforms. Revenue-enhancing measures to reduce the current reliance on oil income and address the high levels of tax evasion, mainly caused by significant labor informality, would allow the government to increase expenditures without compromising fiscal responsibility.
The new administration also intends to submit reform proposals that establish fiscal rules for states' budget balances to control debt at the local level, which has been steadily increasing. The government also plans to promote financial intermediation and expand the scope of development banks.
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