Mexico Wins Upgrade of S&P; Foreign Debt Rating

Standard & Poor’s Corp. raised Mexico’s foreign debt rating to investment grade Thursday, a long-awaited seal of approval for President Vicente Fox’s economic policies that recently have included steep budget cuts and unpopular tax and electricity rate hikes.

The upgrade to BBB-minus from BB-plus by the rating agency often viewed as the most influential will reduce Mexico’s cost of borrowing on international markets and generate a significant increase in foreign investment, analysts said. The move follows similar upgrades by Moody’s Investors Service and Fitch Inc.

Mexico’s sound fiscal and monetary policy, low inflation and improved tax collections have improved economic stability and enhanced Mexico’s status of “safe haven” for foreign investment, said S&P; Latin America Managing Director Jane Eddy in explaining the upgrade.

A pleased President Fox told German reporters that the upgrade is a “recognition of Mexico today. I dare say that in this moment Mexico is the best destination for investment in the world.”

The political price President Fox has paid to attain the rating has been considerable, said Pamela Starr, a professor at the Autonomous Technological Institute of Mexico.

Last month, Fox raised the value-added tax--which is similar to a sales tax--to as high as 20% on some luxury items, while proposing the elimination of billions of dollars in electricity subsidies. As a result, Fox’s popularity with the middle class, which swept him to power in July 2000, has fallen, Starr said.

The new rating will reduce Mexico’s borrowing costs, because it now can pay investors who buy Mexico’s bonds less interest, a trade-off for reduced risk that the upgrade implies.

Henry Garrido, senior emerging market analyst at Montgomery Asset Management in San Francisco, said the upgrade is a result of fiscal policies that began under President Ernesto Zedillo, who preceded Fox.

The upgrade could generate $5 billion in additional foreign investment in Mexico because it gives a green light to mutual and pension funds and insurance companies barred from investing in countries with ratings of anything less than investment grade, said Alfredo Coutino, a macroeconomist with Philadelphia-based Ciemex-Wefa.

“This converts Mexico into an attraction for investors for whom previously it was not an option,” Coutino said. The $5 billion in additional foreign investment the upgrade may attract would come on top of the $14 billion already projected for Mexico in 2002, he said.

Chile and Uruguay are the only other countries in Latin America that have an investment-grade rating from S&P.; In the Caribbean, Barbados and Trinidad also have it.

The upgrade comes as no surprise to investors, who have bid up Mexico’s shares this year in anticipation of the upgrade, Garrido said. Mexico’s leading stock index is up 6.5% year to date, while Brazil’s market, for example, is down 12.4%. Mexico’s IPC index fell 0.1% in Thursday trading.

The year-to-date rise in Mexico’s stock index also compares favorably with Nasdaq, down 8.6%, and the Dow Jones industrial average, which is off 4%. European markets are down 5% to 8%, Garrido said.

Starr said some of the taxes, such as the one on cellular telephone services, could be struck down on appeal by the Supreme Court.

Observers said the upgrade should not be taken as a guarantee of economic success for Mexico. Enrique Dussel Peters, a political economist at National Autonomous University of Mexico, said the economy remains vulnerable to a continued U.S. slowdown and to increased foreign competition, especially from China.

“The risk is that fiscal authorities get too comfortable and get derailed. But I don’t think that’s where Mexico is heading,” said Montgomery’s Garrido.