Mexico Captures Coveted Boost in Debt Rating

Mexico completed a long climb toward financial respectability Tuesday, winning an investment-grade rating on its debt that dramatically improves its prospects for attracting fresh investment.

The ratings upgrade by Moody’s Investors Service made Mexico the fifth Latin American country--and by far the largest economy in the region--to win the stamp of credit-worthiness for its government debt.

The Mexican stock market and peso both strengthened, and interest rates fell sharply on the expectation of significant inflows of new investment in Mexican government and corporate bonds and equities.

Many major investors such as pension funds only invest in countries with an investment-grade rating, which meant Mexican bonds and stocks were excluded from their portfolios until now.

“Now we open ourselves up to investments from a plethora of funds and companies that could not do so before,” said Finance Secretary Jose Angel Gurria.

Moody’s action raised the rating for the Mexican government’s long-term bonds and notes from Ba1 to Baa3, the first rung of the investment-grade ladder.

Moody’s also raised its ratings on all major Mexican banks and for the national oil company Pemex, which had been constrained in seeking affordable financing by the government’s non-investment debt rating.

Moody’s said its action “reflects a lower relative foreign currency debt burden underpinned by a dynamic export sector well-integrated into the North American economy and increasingly integrated with other regions in the world.”

The other major debt-rating agency, Standard & Poor’s, has said it will review Mexico’s debt rating sometime after the country’s July elections, so Mexico will have a split rating for now.

Noting S&P;’s lack of action, economist Rogelio Ramirez de la O, who runs the Mexico City consulting firm Ecanal, wondered whether Moody’s moved prematurely.

He noted that electoral uncertainties, the weak banking system, a possible drop in oil prices and a potential U.S. slowdown still could affect the Mexican economy in the next year.

Nevertheless, Ramirez de la O added, “The psychological effect [of the upgrade] is extremely important. It means that Mexico now is putting the icing on the cake in the final year of the administration and is presenting the best possible face to foreign investors.”

Since its 1994-95 peso crisis, Mexico has pursued severe fiscal and monetary policies designed to improve economic fundamentals and win back investor faith.

Moreover, in this presidential election year, the government has focused obsessively on avoiding a repeat of the crises that have accompanied the end of each six-year presidential term since 1976.

“This is a vote of confidence and a very strong statement that they believe, as we do, that for the first time we will have a transition with no crisis,” an ebullient Gurria told foreign correspondents.

Mexico’s benchmark 28-day government bond fell at the weekly auction Tuesday by more than a percentage point to 13.95%, the lowest level since late 1994.

Paulo Vieira da Cunha, chief Latin American economist for Lehman Bros. in New York, said the Moody’s upgrade would make it easier for mid-size Mexican companies to get access to affordable financing--one of the most serious obstacles to growth in the 1990s.

“Conceivably, Mexico could go into quite an investment-led boom next year even if the U.S. economy slows down if the medium-sized players who have been squeezed out now have access to cheaper financing,” Vieira da Cunha said.

Mexico’s five straight years of growth have largely been built on exports to the United States by large multinational corporations that have access to foreign financing. Smaller Mexican companies, by comparison, have struggled to get affordable capital.

The declining interest rates have tracked a fall in inflation from 52% in 1995 to 18.2% in 1998 and 12.3% in 1999. The government is aiming this year for single-digit inflation a shade under 10%--and for inflation to be similar to that of its major trading partners by 2003.