S&P Downgrades Mexico

Standard & Poor’s, following rival rating agency Fitch, on Monday downgraded Mexico’s sovereign rating, but left its outlook for the country at “stable”.

S&P cut the foreign-currency sovereign credit rating on Mexico to ‘BBB/A-3′ from ‘BBB+/A-2′ and the local-currency rating to ‘A/A-1′ from ‘A+/A-1′.

S&P commented along with its downgrade:

Despite recent tax increases and steps that could bolster growth prospects, we expect that Mexico’s fiscal challenges will persist over the coming years.[RW note: Paging Arthur Laffer. Wow, S&P doesn't believe raising taxes will damamge growth and ultimately lower tax revnues.]

In addition, the prospects for substantial fiscal reform or other measures to enhance GDP growth in the second half of the Calderón Administration are, in our view, diminishing.

The stable outlook reflects fiscal and external indicators that are consistent with the ‘BBB’ median, the absence of macroeconomic imbalances in the Mexican economy, and the Mexican government’s longstanding commitment to macroeconomic stability.

“The downgrades reflects our assessment that Mexico’s recent steps to raise non-oil revenues and improve efficiencies in the economy will likely be insufficient to compensate for the weakening of its fiscal profile,” explained Standard & Poor’s credit analyst Lisa Schineller. “This weakening stems from a combination of modest GDP growth prospects and diminished oil production over the coming years.” The revenue measures approved in the 2010 budget should address immediate concerns about fiscal vulnerability to volatile oil revenues. However, the inability to widen the tax base substantially, along with a low likelihood of major tax reform in the next several years, suggest that Mexico’s debt profile will remain more in line with that of its ‘BBB’ peers.