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Credit upgrade implications of Mexico’s energy reforms

Sr Emerging Markets Analyst

Must-know: Mexico proposes an influential energy reform (Part 4 of 4)

(Continued from Part 3)

A ratings upgrade would have deep implications for investors in Mexico due to several reasons

The first reason is that an upgrade of the sovereign rating would allow the price-to-earnings ratios to increase further, easily above 20 times. Mexico is trading relatively expensively compared to other Latin American peers—though an upgrade to the A rating category would get the country in line with Chile, justifying the higher multiples.

Another reason is that an upgrade would also strengthen the Mexican peso, which has depreciated significantly this year. A reversal back to the 12 MXN per USD level would result in a 10% FX gain for USD investors in the market. The effect on the short term, though, may be uncertain, given the volatility arising from noise from both European and U.S. monetary policy.

Plus, according to HSBC analysts, foreign direct investment could double from the current 2.5% to 5.0%. Such an increase would boost GDP and develop Mexico’s economy. Domestic private investment as well as government investment is also expected to rise significantly.

Overall, it appears that the current reform momentum would be a good entry point for investors interested in a medium-to-long-term horizon, yet short-term effects are uncertain and the market may move due to other factors.

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