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Major rating agencies upgrade Mexico citing improved macroeconomic
fundamentals
Since the last
edition of the Consensus Forecast, the three major rating agencies have
upgraded their sovereign ratings for Mexico. Fitch opened the round on 15
January by upgrading Mexico's long-term foreign currency rating to “BBB-“
with a “stable” outlook from “BB+”, citing the resilience of Mexico's
macroeconomic policy framework and economic performance in the face of an
unfavorable external environment over the last year. Specifically,
continued fiscal discipline, reflected in the passage of a sound 2002
budget and the tax reform package, as well as the resilience of balance of
payments despite declining exports along with a strong peso underpinned
the rating action. Fitch noted further that Mexico's improved external
liquidity position and the decline in its external debt burden were
additional factors behind the decision to upgrade. However, the rating
agency cautioned that the sovereign ratings remain constrained by the
country's external liquidity position, which at under 100%, compares
unfavorably with most investment grade sovereigns.
Moody's
Investors Service followed suit on 6 February by upgrading Mexico's long-term
foreign currency country ceiling for bonds and notes from “Baa3” to
“Baa2”, two levels above investment-grade. In Moody's view, the adequate
and timely response of the Mexican authorities to economic shocks and an
increased resilience to financial contagion are contributing to
significantly improved country creditworthiness. The upgrade was a
challenge to Standard & Poor's, which had maintained its rating just below
investment grade status when Moody’s updated its rating to investment
grade in March 2000. Generally, the rating agencies do not differ
significantly in their credit assessments.
S&P reacted
promptly and just one day after Moody’s announcement, on 7 February,
decided to raise its long-term foreign currency sovereign credit rating to
“BBB-“ from “BB+”. Standard & Poor's said the decision to give Mexico an
investment grade rating was “a difficult call” as economic recession and
lower oil prices threaten to erode government finances. Moreover, the tax
reform, which was approved at the beginning of this year (for details see
LatinFocus Consensus Forecast January 2001) remained far below the
original proposal in terms of efficiency and even in terms of equity.
Finally, S&P said that Mexico was losing competitiveness with wage
increases and the exchange rate appreciation. However, S&P decided for
the upgrade because of the government's improved fiscal and monetary
policies. In particular, the agency was impressed by improvements in the
efficiency of Mexico's tax and customs administration that have allowed
increases in income and value added tax (VAT) collection even as the
economy slowed. Furthermore, S&P stated that improved transparency,
enhanced debt ratios, improved liquidity and deeper integration with the
United States underscored the improved credit fundamentals.
Fox administration only slightly
overshoots fiscal deficit target despite adverse economic conditions
On 4 February, the Finance Ministry announced that the
2001 overall public sector deficit reached 42.05 billion pesos, equivalent
to 0.73% of GDP. This represents a 34.8% drop in real terms compared to
the deficit recorded in 2000 but still exceeds the 2001 target by 2.1
billion pesos (or 0.16% of total public sector revenues). Public sector
revenues were 33.8 billion pesos below the level approved by Congress for
2001, mainly due to lower oil-related income. Finally, net budgetary
expenditures were 31.7 billion pesos lower than planned. Despite the
slight overshooting of the deficit – 0.08% of GDP above the 0.65% of GDP
commitment – the execution of public finances is generally considered a
success given the adverse circumstances for revenue flows resulting from
the lower economic activity in general and lower oil prices in
particular. Consequently, panellists trust the Fox administration to keep
the renewed pledge of a fiscal deficit of 0.65% of GDP this year, which is
reflected in the lowering of fiscal deficit forecasts to 0.7% from 0.8%
last month.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Mexico. For more details please click here.
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