Mexico Oil Reform a Credit Positive for Sovereign, Moody’s Says

Mexico’s Congressional approval this week of an energy overhaul is a credit positive for the nation’s sovereign rating, Moody’s Investors Service senior credit officer Mauro Leos said.

Secondary legislation needed to implement the oil bill doesn’t necessarily need to pass before Moody’s decides the reform’s effect on Mexico’s Baa1 rating, which has a neutral outlook, Leos said in a telephone interview today.

Both houses of Mexico’s congress approved this week a bill to end a 75-year state oil monopoly that could generate as much as $20 billion in additional foreign investment a year. The bill will change Mexico’s charter to allow companies such as Exxon Mobil Corp. and Chevron Corp. to develop the largest unexplored crude area after the Arctic Circle.

President Enrique Pena Nieto’s administration was “able to deliver more than what we’d expected,” Leos said from New York. “There are enough elements for us to start to look closely at what has taken place and try to understand and explore what could be the potential impact of all the reforms on the economy, on growth, on investment, on fiscal accounts and consequently on the rating.”

The peso strengthened 0.6 percent to 12.8848 per dollar at 2:29 p.m. in Mexico City, extending gains by about 0.46 percent after Leos’s comments, which helped fuel the rally according to JPMorgan Chase & Co. and Credit Suisse Group AG.

Since Nafta

Oil companies will be offered production-sharing contracts or licenses where they will own the pumped oil and be allowed to log crude reserves for accounting purposes. Pena Nieto had originally proposed offering profit-sharing contracts when he presented his bill in August.

The nation’s most significant economic reform since the North American Free Trade Agreement secured the required two-thirds majority in a 353-134 lower-house vote yesterday after passing the Senate three days ago. The proposal must be ratified by state assemblies, the majority of which are controlled by the alliance backing the reform.

“There will be an upgrade sooner rather than later, considering the broad achievements of the new administration and the better-than-expected energy reform,” JPMorgan’s chief Mexico economist, Gabriel Lozano, said in an e-mailed response to questions.

Economic Growth

“Agencies could deliver an upgrade before the secondary legislation is debated,” Lozano said. “The approved bill already has sound information regarding the nature and content of the contracts to be allowed in the energy sector.”

The combined effect of this year’s economic overhauls may gradually boost potential growth to 3 percent to 4 percent from the current 2 percent to 3 percent, Leos said.

Since Pena Nieto took office last December, congress passed an education law to hold teachers more accountable for performances, along with a bill to boost competition in the telecommunications industry and a measure to jump-start bank lending.

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