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S&P cuts Mexico's debt rating; investors shake it off

Mexico’s credit rating took another hit today, edging closer to “junk” status, on worries about the country’s growing budget deficit and dwindling oil revenue.

But stock and currency investors continue to give Mexico the benefit of the doubt in the short run. Some investors may well wonder why the country deserves a lower debt rating than Greece, given the latter's far more desperate budget situation.

Standard & Poor’s lowered its rating on Mexico's foreign-currency debt to BBB from BBB-plus, after a cut of the same magnitude by Fitch Ratings on Nov. 23.

If Mexico were to fall to a BB rating its debt would be considered non-investment-grade, or junk. That would wipe out the progress the country made regaining investment-grade status early in this decade, after the financial crisis and peso devaluation of the mid-1990s.

Mexicanflag For now, S&P said it considered Mexico’s credit status “stable,” meaning another rating cut wasn’t imminent.

S&P said the downgrade reflected its view 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.” Mexico has raised taxes this year to boost revenue but the measures haven’t gone far enough given declining oil production, S&P said.

Bloomberg News notes:

Lawmakers approved on Nov. 1 a permanent 1 percentage-point increase in the sales tax to 16% after rejecting President Felipe Calderon’s proposal for a 2% consumption tax that would have generated more than double the revenue. The failure to approve the consumption tax was a “lost opportunity,” S&P analyst Lisa Schineller said on Oct. 21.

Still, S&P's projection that Mexico's budget deficit will average 3% of gross domestic product through 2011 looks modest compared with Greece's deficit, which is expected to near 13% of GDP this year. S&P still rates Greece A-minus, waiting to see what steps the government will take to rein in spending.

The Mexican stock market briefly got hit after S&P’s announcement, but buyers quickly returned. The IPC index closed up 108.19 points, or 0.3%, to 32,009.88, on a mostly good day for stocks worldwide after Abu Dhabi threw a $10-billion lifeline to help neighboring Dubai with its crushing debt burden.

The Mexican market has surged 43% this year, compared with a 23% gain for the U.S. Standard & Poor’s 500 index.

The Mexican peso also strengthened today, to 12.73 per dollar from 12.88 on Friday.

-- Tom Petruno

 
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