NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Mexico's ratings as follows:
--Long-term foreign currency (FC) Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--Long-term local currency (LC) IDR to 'A-' from 'BBB+';
--Country Ceiling to 'A' from 'A-'.
The Short-term FC IDR is affirmed at 'F2'.
The Rating Outlook is Stable.
The upgrade of Mexico's sovereign ratings reflects its strong macroeconomic fundamentals, including the absence of macro-financial imbalances, consistent adherence to its inflation targeting and flexible exchange rate regimes, as well as the greater than anticipated commitment of the new administration and Congress to pass structural reforms. Moreover, the resilience of the economy is supported by the stabilization of oil production and progress in addressing drug-related violence, albeit it remains high.
KEY RATING DRIVERS
Mexico's sovereign ratings reflect the following factors:
--Mexico's resilience in a relatively weak external environment including the sluggishness of the U.S., its key trading partner. Notwithstanding the weak performance of the U.S., Mexico's three-year growth average reached 4.5% in 2012. This resilience has been supported by the prudent macro-policy settings that have underpinned external and domestic balance, including low inflation, gains in labor cost competitiveness, and a recovery in domestic demand and credit growth.
--Mexico's conservative policymaking has resulted in moderate inflation, reduced inflation volatility, and small external imbalances. Moreover, increased international reserves enhance Mexico's shock-absorption capacity.
--The new Pena Nieto government has reinvigorated the reform momentum and passed some of the structural reforms that had languished for several years in Mexico. The 'Pact for Mexico', a multi-party alliance on a broad agenda has been instrumental in achieving success so far. Successful implementation of reforms already passed and those in the pipeline should boost the country's medium-term growth prospects by promoting competition and investment growth.
--Prospects for further economic reforms appear to be favorable. Fitch believes that there is sufficient political commitment to make further headway on the pending agenda, such as the fiscal and energy reforms that are slated for discussion in second half 2013 (2H13).
--The stabilization of oil production and reduced drug-related violence has eased Fitch's previous concerns. Fitch believes the diversification of the oil production base reduces risks of large declines in the future. The escalation in the drug related violence has abated, with the homicide rate showing a perceptible decline in recent months.
--Prudent liability management has resulted in extension of maturity and duration of government debt. Foreign currency debt is below 20% of total federal government debt. Mexico also benefits from excellent market access. However, the growing foreign ownership of government's domestic debt securities can be a source of vulnerability at times of high international financial volatility. Mexico's flexible exchange rate regime, higher international reserves buffers and access to the IMF's Flexible Credit Line mitigate this risk.
--Mexico's diverse economic structure, a well-capitalized banking system, and a moderate external debt burden are supportive of its ratings.
--Rating constraints include structural weaknesses in public finances, a low level of financial intermediation and the still high incidence of violence that continues to be an impediment to raising Mexico's potential growth rate.
--A narrow revenue base, significant fiscal dependence on oil income and low fiscal buffers detract from fiscal flexibility. A potential revenue-enhancing fiscal reform could provide the basis for accommodating spending pressures and reducing oil dependence.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently evenly balanced. A sustained period of high growth that bridges Mexico's wealth gap with the higher rated sovereigns and material gains in fiscal flexibility will be positive for the ratings. While not Fitch's base case, persistent economic under-performance and destabilizing debt dynamics would be credit-negative. Ineffective implementation of structural reforms that have been passed or those in the pipeline could undermine expectations of higher investment and growth dynamics.
KEY ASSUMPTIONS
Fitch assumes that economic growth in the U.S. (Mexico's largest trading partner) will pick up in 2014. Fitch assumes that the eurozone remains intact and that there is no materialization of severe tail risks to global financial stability that could trigger a sudden increase in investor risk aversion and financial market stress.
Fitch assumes that China will avoid a hard landing and that oil prices will remain at relatively high levels, thereby supporting Mexico's fiscal income. Crude oil is forecast to average USD105 and USD100 per barrel in 2013 and 2014 respectively, compared with USD112 per barrel in 2012.
Fitch assumes that the new Pena Nieto administration will continue to follow conservative economic policies and adhere to the main anchors of economic policy, including the Fiscal Responsibility Law and the inflation targeting and flexible exchange rate regimes. In addition, Fitch expects the administration will continue to pursue reforms that enhance Mexico's growth trajectory and fiscal flexibility in the medium term.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
--'Sovereign Rating Criteria', Aug. 13, 2012
--'Country Ceilings' Aug. 13, 2012
Applicable Criteria and Related Research
Country Ceilings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685029
Sovereign Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685737
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790735
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