Morgan Stanley downgrades Mexico bonds view on fiscal, USMCA uncertainty

LONDON, March 2 (Reuters) - Wall Street bank Morgan Stanley downgraded its view on Mexico's sovereign debt on Monday, citing risks of a wider-than-forecast budget deficit and Washington potentially playing hard ball in upcoming U.S.-Mexico-Canada trade agreement (USMCA) talks.

• Morgan Stanley's analysts removed the bank's "like" stance on Mexico's sovereign bonds due to the issues and said they were "awaiting better entry points to become more bullish again".

• The new USMCA was unlikely to be wrapped up by July 1 given the current lack of progress, they said. There are also "clear risks" of more negative news, including the U.S. announcing it was withdrawing from the pact as a way of putting pressure on Mexico and Canada.

• "The challenging part in assessing asset price reactions is that we think the market will assume it’s part of negotiations, especially given that it can easily be rescinded at any point," the bank said in a research note.

• Mexico's fiscal situation is also under pressure, which likely means high debt issuance. Already back in September, when the 2026 budget was unveiled, Morgan Stanley expected a wider 2026 public sector deficit at 4.7% of GDP compared to authorities’ 4.1% forecast, largely driven by revenue shortfalls on both the oil and non-oil side. "Since then it would seem that fiscal risks have risen further," Morgan Stanley said.

• Morgan Stanley analysts highlighted that every 1 percentage point GDP in deficit widening represents another $3 billion in external debt issuance.