Mexico Rating Outlook Raised to Positive From Stable by S&P

Mexico had the outlook on its credit rating raised by Standard & Poor’s on the prospect that proposed legal changes will boost growth in Latin America’s second-largest economy.

The outlook on the BBB rating, the second-lowest investment grade, was changed to positive from stable, meaning it is more likely to be raised than lowered. Mexico’s currency advanced to its strongest level in more than a year while yields on benchmark peso bonds fell to a record.

“The prospects for the passage of policies that further strengthen the country’s fiscal room for maneuver and medium- term growth have improved under” the administration of President Enrique Pena Nieto, who took office Dec. 1, S&P analyst Lisa Schineller wrote today in a report.

Pena Nieto won support from his party last week to advance an agenda that includes ending state-owned Petroleos Mexicanos’s 75-year monopoly on the oil industry. The party also removed its opposition to taxing food and medicine, giving Pena Nieto the option to propose such a strategy to raise revenue. He already signed a bill to improve education by making teachers more accountable for performance, and last year as president-elect helped pass a labor-system overhaul designed to boost productivity.

Finance Minister Luis Videgaray said today in a post on Twitter that S&P’s change in outlook is “good news and motivates us to keep working.”

Peso Rallies

The peso extended gains after the announcement, rallying 0.8 percent, the most among major emerging-market currencies, to 12.4451 per U.S. dollar, the strongest level since September 2011.

Yields on peso bonds due in December 2024 fell nine basis points, or 0.09 percentage point, to 4.92 percent, the lowest on a closing basis since they were issued in 2005, according to data compiled by Bloomberg.

Mexican central bank Deputy Governor Manuel Sanchez, in a report dated March 11, said it’s “necessary” that investors and banks take into account that interest rates will rise sooner or later.

“A challenge to confidence in Mexico is the prudent management of capital inflows,” he said. “The possibility of a reversal of capital flows requires prudence.”

Rate Cut

The central bank cut its benchmark interest rate 50 basis points, or 0.5 percentage point, to 4 percent on March 8, the first reduction in more than three years after Sanchez in a Feb. 27 interview said he didn’t see a case for a rate cut because inflation and inflation expectations have remained above the central bank’s 3 percent target.

S&P and Fitch Ratings lowered Mexico’s rating one level in November and December 2009, respectively, as the economy contracted 6.2 percent and crude oil output from Petroleos Mexicanos declined. Moody’s Investors Service has kept Mexico’s Baa1 rating unchanged since 2005.

In a telephone interview today, Schineller said that passage of Mexico’s key economic bills must precede any upgrade in the nation’s credit rating.

“We want to see passage and evaluation of the likely impact of any kind of reform” before an upgrade can be considered, she said.

Yields on sovereign securities moved in the opposite direction of what ratings suggested in 53 percent of 32 increases, decreases and changes in credit outlook last year, according to data compiled by Bloomberg published in December. Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.

Mexico’s BBB rating from S&P is five levels below Chile’s AA- rating. Moody’s rates Mexico one level higher at Baa1. Mexico last received an upgrade from S&P in October 2007.

To contact the reporter on this story: Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net; Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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