Mexico: Bracing for a Wave of Foreign Investment

Mexico is still mired in a recession, but spirits are high following Standard & Poor's Feb. 7 upgrade of the country's sovereign-debt rating to investment grade. The move will cut government and corporate borrowing costs and should make the country more attractive to foreign investors, who are expected to pour at least $20 billion into Mexico in 2002.

Moody's Investors Service had upgraded Mexico in 2000, but S&P waited to see if President Vicente Fox could win approval of an ambitious tax reform in December. Congress gave Fox about half of what he asked for. Mexico, with one of the lowest tax-collection rates in Latin America, remains dependent on volatile oil exports for a third of government revenues. S&P said its decision was "a difficult call," but it applauded the government's fiscal discipline during the recession.

Mexican officials know they must not let down their guard. Some analysts worry that a rush of new foreign investment will further strengthen the peso, which rose some 5% vs. the U.S. dollar in 2001, hurting export competitiveness. Unit labor costs rose 12% in the past year, compared with 2.2% in the U.S., as wage growth exceeded gains in productivity and prices.

The central bank's goal is to cut inflation to U.S. levels by 2003 by clamping down on liquidity, which will also buoy the peso. The rate on 28-day Treasury bills, or Cetes, is 8.21%. Consumer prices rose 4.4% last year, below the official 6.5% target, with this year's goal at 4.5%. Mexico's economy shrank by about 0.3% in 2001, after growing 6.9% in 2000. This year, officials are counting on a U.S. recovery to lift growth to 1.4%.

Closer U.S.-Mexico industrial integration means that Mexico is increasingly seen as part of North America, not Latin America, which is a big plus after Argentina's meltdown. Its main challenge is continued structural reform that will set it farther apart from its Latin peers. Next on the agenda: energy reform that could attract billions in new investment in natural gas and electricity.

By Geri Smith in Mexico City

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