While a decision to cancel the completion of a multi-billion government airport project in Mexico City has placed pressure on the peso exchange rate and the equity and fixed-income markets, it will not have a material impact on A.M. Bests assessment of the countrys risk level.
Mexico President-Elect Andrs Manuel L³pez Obrador announced the cancellation of the estimated USD 13 billion project on Oct. 30, a step that has also increased pressure on the countrys sovereign ratings. In a new special report, A.M. Best notes that it currently classifies Mexico as a Country Risk Tier 3 country, demonstrating a low level of economic risk and a moderate level of political and financial system risk.
According to the Bests Briefing, titled, Cancellation of Mexico City Airport Project – Negative Signal for the Peso and Markets, there may be added uncertainty in Mexicos important surety segment in the event of similar developments in other projects. Mexicos insurance industry depends highly on the liquidity of sovereign bonds to match its liabilitiesgovernment-related securities as described by the regulator CNSF (Comisi³n Nacional de Seguros y Fianzas)which constituted around 64.6% of the insurance industrys investment portfolio as of June 2018. With potentially difficult times ahead for Mexicos macroeconomy, the countrys interest rates could rise to match rate hikes in the United States.
Additionally, an increased perception of risk in Mexico could also drive the Interbank Equilibrium Interest Rate (TIIE) higher, diminishing the value of the bondsdeterioration that would be reflected in the surplus or results of the countrys insurance companies, depending on their liquidity needs.
A.M. Best will closely monitor the impact of rising interest rates on the valuations of companies investment portfolios, but given the industrys adequate capitalization and good liquidity, rating changes seem unlikely over the short term.
To access the full copy of this Bests Briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=279928.
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