March 5, 2025/Fitch Ratings

The new 25% U.S. tariffs imposed on Mexican goods and uncertainties around trade relations significantly worsen the business environment for Mexico’s corporates, exacerbating macro concerns and threatening Mexico’s nearshoring prospects, says Fitch Ratings. The diversified industrials and autos sectors will be more directly affected, with issuers already having Negative Rating Outlooks most vulnerable.

An increasingly likely domestic recession would broadly impact other corporate sectors, such as homebuilding, construction, and discretionary retail. Continued currency depreciation would have more idiosyncratic effects, depending on the FX mismatch between debt and EBITDA generation, with domestically focused issuers likely more negatively impacted.

The tariffs will immediately impact Mexico’s auto suppliers and diversified industrials sector, given a high level of supply chain integration with the U.S. Fitch does not expect the auto industry to completely reorient the supply chains to avoid tariffs, as it would take years and might not be financially viable. Mexican suppliers will likely pass along incremental costs to OEM customers, who will raise prices to compensate. Higher prices will lead to lower sales and production, which increases suppliers’ volume risk.

Among Fitch’s rated portfolio of global automakers, Honda (A/Stable), General Motors (BBB/Positive), Nissan (BB+/Negative) and Stellantis (BBB+/Negative) have the largest presences in Mexico and Canada. Fitch’s rated corporates in Mexico also include several auto suppliers that will be directly affected by the tariff changes. Two of these issuers, Nemak (BBB-/Negative), Metalsa (BBB-/Stable), have investment grade ratings, with Nemak at risk of a downgrade to high-yield, as highlighted in Fitch’s recently published Global Corporates Credit on the Cusp Monitor.

Both Nemak and Metalsa provide critical components to the auto industry and have significant market share, making them difficult to substitute. Nemak has a global footprint with 38 plants in 15 countries, but the rating has a Negative Outlook, reflecting slower-than-expected deleveraging in recent years. Metalsa’s ratings reflect its strong business position as a Tier 1 supplier of body-on-frame light vehicle chassis and structural parts for commercial vehicles. It is more exposed to the U.S. market but has better leverage headroom.

For other Mexican corporate sectors, direct exposure to U.S. tariffs is moderate to low, mitigated by product and geographical diversification or access to alternative markets.

Downside risks to earnings estimates are high, as most Mexican corporates have not yet incorporated the impact of U.S. tariffs in their earnings guidance. Many issuers had also assumed economic activity would pick up in 2H 2025.

Fitch’s international ratings for Mexican corporates are heavily skewed towards low-to-mid investment grade, with ‘BBB-‘ ratings accounting for more than a-third of the portfolio. Additionally, 11% of the internationally rated portfolio has Negative Rating Outlooks, including three ‘BBB-‘ rated issuers.

The 25% tariffs took effect on March 4, after a one-month postponement. This development is more negative than Fitch’s previous baseline economic assumptions, which assumed a 25% tariff on a smaller basket of dutiable imports, though the tax’s duration remains uncertain. Fitch had previously considered the possibility of the postponement or revision of the tariffs. The situation continues to evolve, and Mexico’s President, Claudia Sheinbaum, responded by saying Mexico would try to negotiate a solution before announcing its retaliatory measures.

These uncertainties have already damaged business confidence and threaten to upend Mexico’s structural nearshoring hopes, which Fitch previously saw as a multi-year tailwind for corporates. Infrastructure and security concerns have been constraints. More recently, Mexico’s business environment suffered from emerging concerns about judicial reform, a weakening fiscal position, energy security, and labor cost inflation.