Nov. 10 (Bloomberg) -- Brazil’s credit rating probably will be raised next year while Mexico’s will be cut, giving Latin America’s two biggest economies the same risk level for the first time, said Doug Smith, chief economist for the Americas at Standard Chartered Plc.

Smith said he expects ratings companies to lift Brazilian debt one grade as its diversified trade helps pull the economy out of recession faster than most developing countries. Mexico’s rating likely will be lowered one level as a reliance on U.S. export demand and oil sales slows its recovery, he said.

“It is about who is moving in the right direction and who is maybe not moving in the right direction,” Smith said at an event in New York. The two countries sharing the same rating “is something people wouldn’t think was particularly likely five years ago, but I think this is something we should expect in the middle of next year,” he said.

Brazil won an investment-grade rating of Baa3 from Moody’s Investors Service in September, putting it one level above high- yield or junk at all three major ratings companies. Standard & Poor’s and Fitch Ratings have a negative outlook on Mexico’s BBB+ rating, the third-lowest investment-grade, amid concern declining oil production will swell the country’s budget gap.

Brazil is also benefiting from prospects investment will increase ahead of the 2014 World Cup and the 2016 Olympics in the country, as well as the oil discoveries in its offshore fields. Brazil’s pre-salt finds, which lie beneath a layer of salt under the sea bed, include the biggest oilfield discovery in the Americas since 1976. The deposits may more than double Brazil’s proven reserves in three years.

‘Sun Is Shining’

“It seems the sun is shining very much on Brazil in many, many ways,” Smith said.

Credit default swaps, conceived to protect bondholders against default, show it’s cheaper to insure Brazilian bonds.

The cost of protecting Brazil’s debt against default for five years was 1.2 percentage points, according to data compiled by CMA Datavision. By comparison, it costs 1.46 points to protect bonds issued by Mexico.

A basis point equals $1,000 on a swap protecting $10 million of debt against default. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Oil Slump

Brazil’s real has gained 35 percent against the dollar this year, the most among all currencies tracked by Bloomberg after the Seychelles rupee, while the Mexican peso has advanced 3.5 percent. The Brazilian currency slid 0.7 percent to 1.7117 per dollar today at 6 p.m. New York time, while the Mexican currency climbed 0.5 percent to 13.2131 per dollar.

Brazil’s Bovespa stock index has jumped 77 percent this year, double the 38 percent advance in Mexico’s Bolsa index.

Mexico’s government revenue tumbled this year as oil output, which funds about 38 percent of the budget, fell at the fastest pace since World War II. Oil production declined 4.5 percent in September from a year earlier to 2.599 million barrels a day.

Mexico’s Congress approved a 1 percentage-point increase in the value-added tax beginning next year, while blocking the creation of a new 2 percent consumption tax. The original proposal to increase the telecommunications tax to 4 percent was reduced to 3 percent and excludes Internet service.

Economic Rebound

Alberto Gomez, chief economist at Citigroup Inc.’s Mexico City-based Banamex unit, said Nov. 5 that Mexico’s deficit and debt are sustainable.

“We definitely don’t see Mexico losing its investment grade rating and we are confident we won’t even see a downgrade,” Gomez said at the Bloomberg Economic Forum in Mexico City.

Finance Minister Agustin Carstens said at the same forum that the 2010 budget should shore up the country’s finances enough to stave off a rating cut.

Moody’s has a stable outlook on Mexico’s Baa1 rating, also the third-lowest investment-grade rating. Lisa Schineller, an analyst at S&P, said in a telephone interview in New York Nov. 5 that the country still has “medium-term fiscal challenges” after congress opted to increase the sales tax rather than back Calderon’s proposal for the consumption tax that would have been free of exemptions.

‘Very Sound Country’

Mexico’s 2010 budget and tax increases are weaker than those proposed by Calderon and represent a “lost opportunity” to shore up public finances, Schineller said. Mexico’s sales tax increase is a “less optimal solution” than the creation of a consumption tax, Shelly Shetty, an analyst with Fitch, said in a Nov. 2 interview.

After rating changes next year, Mexico is unlikely to be downgraded further and Brazil probably won’t be raised again. The South American country needs to lower its debt-to-gross domestic product ratio and reduce the budget deficit, Smith said.

“Mexico is a good place and a very sound country, but this issue they have with oil is something that needs to be addressed,” Smith said. Mexico is “still a very highly-rated, well-regarded country,” he said. “So it is just about equalizing the two.”

To contact the reporter on this story: Fabiola Moura in New York at fdemoura@bloomberg.net

Last Updated: November 10, 2009 18:33 EST