MEXICO CITY, March 26 (Reuters) - Credit ratings agency S&P on Thursday cut Mexico's sovereign rating to BBB from BBB+ in anticipation of an economic hit from the coronavirus pandemic and a plunge in oil prices, piling pressure on the government to lift the struggling economy.
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 a sharper downturn this year.
"The pronounced COVID-19 and oil price shocks, in our view, exacerbate Mexico's already modest growth," S&P said in a statement, leaving the sovereign rating two notches above junk.
The downgrade, though expected by a number of analysts, hit the peso, pushing it down by 2% against the dollar.
The decline in Mexico's creditworthiness is a blow to President Andres Manuel Lopez Obrador who has made steep cuts to some government departments to keep public finances stable.
Still, the leftist's retreat from the previous government's opening of the oil and gas sector, and his determination to revive heavily indebted, loss-making state oil company Petroleos Mexicanos (Pemex) have alarmed some market analysts.
S&P said potential increases in "contingent liabilities from the energy sector could worsen the sovereign's debt burden and lead to a downgrade." It added that Pemex's financial profile had weakened significantly over the past five years.
Luis Gonzali, a portfolio manager at Franklin Templeton, said though the downgrade was expected, the outlook was a worry.
"We wouldn't be surprised to see another downward revision within the next 12 to 18 months," he said. "At the same time, Moody's doesn't take long to act, and we expect that their decision will go in the same direction."
Further downgrades could push Pemex's bonds into junk territory, triggering a sell-off by a number of major investors whose mandates require them to hold investment grade assets.
Mexico's finance ministry did not immediately reply to a request for comment.
S&P said it expected Mexican gross domestic product (GDP) to shrink between 2% to 2.5% in 2020, an outlook which is less pessimistic than some forecasters'. Next year, the economy should rebound by a little over 2%, the rating agency said.
"The downgrade reflects our revised expectations that real per capita GDP growth will remain below that of peers with a similar level of economic development," S&P added.
S&P put Mexico's outlook on negative and lowered its long-term local currency sovereign credit rating to BBB+ from A-.
Coronavirus has infected more than 500,000 people and killed over 22,000 worldwide, causing economic chaos across the planet.
Mexico's economy shrank 0.1% last year.