TEXT-Fitch affirms Mexico’s ratings

(The following statement was released by the rating agency)

Jan 12 – Fitch Ratings affirms Mexico’s ratings as follows:

–Foreign and Local Currency Issuer Default Ratings at ‘BBB’ and ‘BBB+’,
respectively; –Short-term Issuer Default Rating at ‘F2’;

–Country Ceiling at ‘A-‘.

The Rating Outlook is Stable.

Mexico’s ratings and Stable Outlook are underpinned by its disciplined
macroeconomic policies, a relatively healthy banking sector, resilient external
accounts, a modest external debt burden, and the sovereign’s manageable
external amortization profile.

These strengths sufficiently counterbalance the structural weaknesses in
Mexico’s public finances and the country’s modest growth prospects.

‘While the near-term economic outlook of Mexico appears generally favorable
aided by the expected rebound in the U.S. and some further recovery in domestic
demand, sustaining higher growth in the medium-term is likely to require
additional structural reforms,’ said Shelly Shetty, Head of Latin America
Sovereigns.

Despite the GDP growth rate of about 5% in 2010, Mexico’s five-year GDP
growth average of 1.7% compares less favorably with the ‘BBB’ median and barely
exceeds the five-year average population growth, highlighting the importance of
achieving a higher growth trajectory in the medium term. Fitch notes that
recent economic performance has been aided by the favorable external trade
performance. However, despite the supportive economic policies and job
creation, domestic demand (especially investment) conditions remain relatively
subdued.

‘The rising wave of drug-related violence appears to be dampening
confidence, retail and commerce activities, possibly weighing on a more robust
investment and economic outlook,’ added Shetty. Fiscal performance continues to
be in line with Fitch’s expectations, and the agency expects the general
government debt burden to remain close to 40% of GDP, in line with the peer
median. Fiscal performance has been boosted by the economic recovery and the
tax reform approved in 2009.

Elevated oil prices and a gradual stabilization in oil output are also
providing some fiscal flexibility to authorities. However, the limited
resources in the Mexican government’s Oil Stabilization Fund (OSF) leave the
country’s public finances vulnerable to swings in oil income, which represents
over 30% of total public sector revenue. While the recent gradual stabilization
of the oil platform is a positive development, Fitch notes that it is unclear
whether production would stabilize at current levels over the medium term.
Also, despite revenue-enhancing tax measures in recent years, the non-oil tax
base of about 10% of GDP remains quite narrow and limits fiscal flexibility. In
the past, political actors in the country have shown resistance to increasing
the revenue base significantly.

Moreover, Fitch notes that the political window to further enhance the
non-oil tax base or to pass material structural reforms is narrowing owing to
the several state elections in 2011 and the presidential election in 2012.
Mexico’s external accounts are not a source of significant vulnerability as the
current account deficit is small and a large proportion of it is covered by
foreign direct investment (FDI) flows. Moreover, Mexico continues to have
access to the IMF’s Flexible Credit Line (FCL) in case the external conditions
deteriorate markedly and unexpectedly.

More importantly, the Mexican authorities are appropriately exploiting the
opportunity provided by increased capital inflows to the country by building
international reserves to strengthen their capacity to face future external
shocks. Looking ahead, sustained high economic growth, greater fiscal
flexibility, and a significant improvement in the international liquidity ratio
will be positive for creditworthiness.

Improvement in the outlook for the oil sector will also be viewed
positively. While not Fitch’s base case, the agency would view significant
fiscal deterioration or renewed economic weakness that undermines public debt
dynamics negatively.