In a double blow for Mexico, credit ratings agency Fitch downgraded the nation's sovereign debt rating on Wednesday, citing risks posed by heavily indebted oil company Pemex and trade tensions, while Moody's lowered its outlook to negative.

The Mexican peso weakened as much as 1.3 per cent on the news.

Tariff effect

Cutting Mexico's rating to BBB, nearing junk status, Fitch said the financial woes of state oil company Pemex were taking a toll on the nation's prospects. Fitch said mounting trade tensions influenced its view, according to a statement issued shortly after the end of a meeting in the White House in which Mexican officials tried to stave off tariffs US President Donald Trump has vowed to impose next week.

Also read:Trump says 'not enough' progress made in US-Mexico talks

Following a surge in mostly Central American migrants arriving at the US border, Trump threatened blanket tariffs on Mexican imports if it did not do more to stem the flow.

“Growth continues to underperform, and downside risks are magnified by threats by US President Trump,” Fitch said.

Mexican President Andres Manuel Lopez Obrador took office in December with ambitious plans to build a $8 billion refinery, a decision ratings agencies and investors warned would divert funds from its more profitable production and exploration business.

“Further evidence that medium-term growth is in decline, whether as a result of policies that actively undermine growth or because of continued policy unpredictability, would put downward pressure,” Moody's said in a statement.

Mexico's Finance Ministry declined to comment.

Lopez Obrador has said the ratings agencies were punishing Mexico for the “neo-liberal” policies of previous administrations.

A Reuters analysis of Pemex accounts from the past decade shows debt increased by 75 per cent during the term of Lopez Obrador's predecessor, Enrique Pena Nieto, amid a landmark energy reform.

The Pemex problem

Moody's highlighted the risks posed by Pemex, formally known as Petroleos Mexicanos, the world's most indebted oil company. “The impact of the contingent liability represented by Pemex weighs increasingly heavily on the sovereign credit profile,” Fitch said in a statement.

The latest moves by the ratings agencies on Mexico's sovereign rating could also ratchet up pressure on the oil company's own rating, which is teetering on the brink being downgraded from investment grade.

In March, S&P cut its stand-alone assessment of Pemex by three notches, following Fitch's move to downgrade its credit in January. S&P pegs the rating of Pemex to that of the sovereign rating and the stand-alone assessment does not equal a rating.

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