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S&P: United Mexican States FC And LC Ratings Lowered By One Notch; Outlook Stable

December 15, 2009 | Standard & Poor's

NEW YORK (Standard & Poor's) Dec. 14, 2009--Standard & Poor's Ratings Services
said today that it lowered its foreign-currency sovereign credit rating on the
United Mexican States to 'BBB/A-3' from 'BBB+/A-2' and the local-currency
credit rating to 'A/A-1' from 'A+/A-1'. Standard & Poor's also said that it
lowered the transfer and convertibility assessment on Mexico to 'A' from 'A+'.
In addition, Standard & Poor's affirmed the mxAAA/Stable/-- national-scale
rating. The outlook is stable.
"The downgrades reflects our assessment that Mexico's recent steps to
raise non-oil revenues and improve efficiencies in the economy will likely be
insufficient to compensate for the weakening of its fiscal profile," explained
Standard & Poor's credit analyst Lisa Schineller. "This weakening stems from a
combination of modest GDP growth prospects and diminished oil production over
the coming years." The revenue measures approved in the 2010 budget should
address immediate concerns about fiscal vulnerability to volatile oil
revenues. However, the inability to widen the tax base substantially, along
with a low likelihood of major tax reform in the next several years, suggest
that Mexico's debt profile will remain more in line with that of its 'BBB'
peers.
Mexico's net general government debt has recently increased and is
projected to remain at about 34% of GDP during 2009-2011, which is line with
the projected 'BBB' median for this same period. Its GDP growth prospects over
the next several years are also projected to remain moderate at 3%-4%,
limiting the upside to fiscal dynamics. Notwithstanding the efficiency gains
associated with the closure of Luz y Fuerza del Centro (the main supplier of
electricity in the central region of Mexico), new management of its assets,
and forthcoming telecommunications concessions, we believe that Mexico's
strong links with the U.S. economy will limit its growth prospects given our
diminished expectations for growth in the U.S.
In the midst of the deepest contraction in real GDP (estimated at 7%) in
decades, the Mexican Congress passed a number of tax increases, including
raising the controversial VAT. The measures replace lost oil revenue in the
short term. However, the government's forecasts are for overall public-sector
revenues to at best hold steady at about 22% of GDP; this is consistent with
general government revenues of 19% of GDP and is much lower than the 35% for
the 'BBB' median. Oil-related revenues have averaged about 35% of total
budgetary revenues.
The government's inability to broaden the tax base meaningfully and
address the many loopholes and exemptions in the tax regime weakens its
capacity to contain fiscal pressures from diminished oil production--even if
oil output declines more slowly than in recent years. General government
deficits are projected to average 3% of GDP (2009-2011), which is comparable
with that of the 'BBB' median. Projected deficits are higher than the deficits
Mexico ran during the years of buoyant oil prices, when investment-grade
credits with significant budgetary reliance on commodity revenue ran
surpluses.
The ratings on Mexico are supported by its track record of and commitment
to macroeconomic stability, as its prudent macroeconomic management, which
political parties at the national level support, demonstrates. The ratings
also reflect conservative management at the Finance Ministry, a formally and
operationally independent central bank, and recent steps to improve tax
administration at Servicio de Administractión Tributaria, the national
tax-collection agency.
In addition, Mexico's external accounts do not, in our view, pose the
same risk to its credit profile as they do in some other peer 'BBB' category
credits. Mexico's external debt, net of liquid assets, is in line with the
'BBB' median of about 31% of current account receipts. Despite the fall-off in
oil revenues, the current account deficit declined to an estimated 0.8% of GDP
this year from 1.5% in 2008. Although we expect that the deficit will widen
over the forecast horizon toward 1.4% of GDP in 2011, this is below the
projected 2%-2.5% for the 'BBB' median for 2009-2011. The absence of
imbalances feeds into comparatively strong external financing needs vis-à-vis
peer credits. Mexico's gross external financing needs as a percent of current
account receipts and usable reserves average 93% in 2009-2011 versus the 'BBB'
median of 114%.
"The stable outlook reflects our expectation that cautious macroeconomic
policies should contain the rise in Mexico's debt burden in coming years," Ms.
Schineller added. The government's commitment to maintaining macroeconomic
stability, combined with recent changes in taxation, should contain the
slippage in Mexico's fiscal and external indicators and keep them at levels
that are consistent with the 'BBB' median.
"The ratings could come under downward pressure if fiscal dynamics were
to deteriorate, such as if the recently passed tax measures fail to generate
sufficient revenues to offset lower oil revenue," Ms. Schineller notes. "The
ratings could benefit from stronger-than-expected GDP growth prospects that
facilitate better fiscal dynamics or other measures that enhance fiscal
flexibility."

Company: Mexico

Full company nameUnited Mexican States
Country of riskMexico
Country of registrationMexico

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