By Stefanie Eschenbacher
MEXICO CITY (Reuters) - Fitch Ratings on Wednesday downgraded Mexico's sovereign rating to one notch above speculative grade on fears that the economic shock caused by the novel coronavirus will cause a "severe recession" in Latin America's second-largest economy this year.
Mexico's declining creditworthiness is a blow to President Andres Manuel Lopez Obrador who has made steep cuts to keep public finances stable but retreated from the previous government's opening of the oil and gas sector.
Its new rating is BBB- with a stable outlook.
Fitch forecast the Mexican economy will contract by at least 4% this year and the general government deficit will widen.
Even a recovery starting in the second half of this year would likely be held back by the same factors that have hampered recent economic performance, it said.
The government of Lopez Obrador also faces the contingent liability represented by the debt of national oil company Petroleos Mexicanos [PEMX.UL], which totals $105.2 billion, or 9% of gross domestic product.
Pemex "remains a key risk factor, particularly in view of the sharp fall in oil prices and the widening discount of prices to global benchmarks", Fitch said.
Earlier this month, Pemex, as the company is known, slid deeper into "junk" territory after Fitch cut the rating of its bonds by another notch with a negative outlook amid concerns its standalone-credit profile will deteriorate further.
"The Fitch downgrade is justified because the deterioration of the economic outlook continues," said James Salazar, an analyst at Mexican bank CI Banco. "It is difficult to anticipate how much the fall will be, how deep and for how long."
Last month, S&P Global Ratings downgraded both Mexico and Pemex amid similar concerns over the impact of the coronavirus pandemic on the country's already struggling economy and ailing Pemex.
Mexico's economy had already tipped into recession in 2019 and the coronavirus, which causes a respiratory illness called COVID-19, has stoked fears of an even sharper downturn this year.