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INSTANT VIEW-Investors react to double whammy of Mexico downgrade

Stefanie Eschenbacher and Aaron Saldanha

MEXICO CITY, June 6 (Reuters) - Investors said on Thursday that the downgrade for Mexico's sovereign was overdue, given the ample risks posed by heavily indebted state oil company Pemex and recent trade tensions with the United States. Credit ratings agency Fitch downgraded the nation's sovereign debt rating late on Wednesday while Moody's lowered its outlook to negative.

CATHY HEPWORTH, CO-HEAD OF EMERGING MARKETS DEBT AT PGIM FIXED INCOME

"The recognition that Mexico, the sovereign, is overrated at A3 and BBB+ should not be a surprise given the policy uncertainty under the current regime, and more specifically, the more explicit support that the sovereign will likely give Pemex." "There may be a more formal recognition that in analyzing Mexico, one needs to consider the combined picture. This could mean that Pemex remains investment grade."

ABBAS AMELI-RENANI, PORTFOLIO MANAGER, GLOBAL EMERGING MARKETS, AT AMUNDI

"The outlook change from Moody's was more expected than the rating cut from Fitch. We expect Mexico's ratings to stabilize at BBB for the rest of the year before further pressure arises in 2020 as the policymaking framework deteriorates." "The sovereign's approach towards Pemex has been inconsistent under the new administration and a turnaround strategy is still missing." "The most supportive policy from the government would be tax breaks that would allow Pemex to become cash flow positive in the long run. We are yet to see meaningful signs of that materializing."

SHAMAILA KHAN, DIRECTOR OF EMERGING MARKET DEBT STRATEGIES AT ALLIANCEBERNSTEIN

"Mexico sovereign downgrade has less of an impact directly on sovereign bonds as spreads already reflect credit deterioration. However, it is probable that the sovereign downgrades lead to junk status for Pemex debt in the near term and that is the greater risk."

AARON GIFFORD, EMERGING MARKETS SOVEREIGN ANALYST, FIXED INCOME DIVISION, AT T. ROWE PRICE

"Mexico has been in the eye of the storm with policy uncertainty domestically, a flare-up in trade and immigration tensions with the U.S., lower oil prices, and general risk-off." "At times like these, Mexico needs to tread lightly. Unfortunately, the government has chosen a path that many investors view as unsustainable." "For the sovereign, it doesn't mean much as it's still safely investment grade. However, it does put downward pressure on ratings for cooperates on the brink of losing investment grade, including Pemex."

GORKY URQUIETA, GLOBAL CO-HEAD OF EMERGING MARKET DEBT AT NEUBERGER BERMAN

"It's no surprise and largely, if not fully, priced in. The market has been anticipating a fiscal deterioration, mostly related to Pemex large funding requirements dragging down the sovereign's balance sheet." "The Mexican sovereign trades like it has a BBB- credit already. However, the silver lining is this at the margin could make (Mexican President Andres Manuel Lopez Obrador) rethink his approach to dealing with Pemex and oil reforms at large."

JAMES BARRINEAU, HEAD OF EMERGING MARKETS DEBT RELATIVE, SCHRODERS

"For Mexico, the downgrades will not come as a surprise to investors. The so far muted reaction of the currency seems to reflect that." "Although growth is slow as long as fiscal discipline is maintained we do not see Mexico at risk of further downgrades that would imply a risk of losing investment grade status."

LUIS GONZALI, PORTFOLIO MANAGER, FRANKLIN TEMPLETON INVESTMENTS

"Even if this is not good news, the decisions of both ratings agencies were widely expected, considering how Mexican sovereign bonds and credit default swaps have traded in recent months." "It is positive that Fitch has changed the outlook from negative to stable, which eliminates de possibility that there will be another downgrade in the short term."

(Reporting by Stefanie Eschenbacher in Mexico City and Aaron Saldanha in Bengaluru; Editing by Lisa Shumaker)