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Fitch Cuts Mexico's Sovereign Rating, Moody's Downgrades Outlook

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Mexico's rating and outlook were downgraded on Wednesday by Fitch Ratings and Moody's Investor Service, respectively, citing the worsening outlook for the economy, especially in the backdrop of rising trade tensions.

Fitch downgraded Mexico's sovereign ratings to 'BBB' from 'BBB+', citing risks to public finances from the state oil company Pemex amid weakness in the macroeconomic outlook.

The agency revised the country's rating outlook to 'Stable' from 'Negative'.

Moody's lowered Mexico's rating outlook to 'Negative' saying that the government's policy-making is undermining investor sentiment and growth prospects of economy.

Fitch said the rating downgrade reflects a combination of the increased risk to the public finances from the state oil company, Pemex and the current weakness in the macroeconomic outlook in the face of trade tensions and fiscal constraints.

Mexico's growth is expected to underperform further as downside risks are magnified by threats by U.S. President Trump to impose tariffs on Mexico from June 10. The five-year GDP growth averages 2.6 percent, which was below the 'BBB' median of 3.6 percent, the rating agency noted.

Further, Fitch viewed that meeting fiscal targets will become more difficult heading into 2020 and could result in tighter policy that creates a further headwind to growth.

Moody's said unpredictable policy-making along with the changes in the role of Pemex in the context of Mexico's energy policy, threaten to lift debt in years ahead, thereby eroding the fiscal strength of the nation.

Late May, Trump announced that new tariffs will be imposed on Mexican imports if the country does not take steps to curb immigration. He has threatened to slap a 5 percent tariff on all imports from Mexico starting June 10.

The White House warned that if Mexico did not act as Trump demanded, tariffs would rise by 5 percent each month until October 1, when the rate would reach 25 percent.

Economists at Goldman Sachs see a 70 percent chance of the US following through on its threat against imports from Mexico on June 10. They also expect the tariffs to be raised to 10 percent at the start of July.

A major concern for both Mexico is Trump's threat to raise tariffs on automobile imports.

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