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UPDATE 3-S&P upgrades Mexico credit rating, hails energy bill

Daniel Bases and Alexandra Alper
Thursday, 19 Dec 2013 | 9:14 PM ET

NEW YORK/MEXICO CITY, Dec 19 (Reuters) - Standard & Poor's on Thursday raised its sovereign long-term foreign currency credit rating for Mexico by one notch to BBB-plus days after the country approved the biggest shake-up of its energy sector since 1938 in a bid to boost growth.

The upgrade, which moves Mexico higher into investment-grade territory with a stable outlook, brings S&P in line with both Moody's Investors Service's Baa1 rating with a stable outlook and Fitch Ratings' BBB-plus with a stable outlook.

Calling the government's energy reform to open up Mexico's 75-year-old oil and gas monopoly to private investment "a watershed moment," S&P said Mexico's prospects were brightening.

"It's hard to ignore such a significant change that can make a meaningful change for the growth outlook," S&P sovereign credit analyst Lisa Schineller said.

The energy reform, supported by changes in the tax framework, bolstered Mexico's growth potential and fiscal flexibility in the medium term, S&P said in a statement.

The radical shake-up of the energy sector is the cornerstone of a raft of reforms championed by President Enrique Pena Nieto aimed at boosting growth in Latin America's No. 2 economy, which has long lagged emerging market peers.

Pena Nieto has overseen passage of laws to overhaul the education system, boost competition in telecommunications, spur lending, and increase a weak tax take, partly to ease the fiscal burden on ailing state oil giant Pemex.

"Tapping into Mexico's vast oil potential should energize investment and growth throughout the economy, but we also believe that we won't see its tangible effects on economic activity for a number of years," it added.

S&P said Mexico's rating reflects a track record of "cautious" fiscal and monetary policies that have resulted in low government deficits and inflation, bolstered economic resilience, and contained fiscal and external debt levels.

The rating, however, remains constrained by limited fiscal flexibility and moderate trend economic growth in Mexico.

RATINGS FUTURE

Mexican growth contracted in the second quarter on weak government spending and a sagging construction sector but rebounded in the third quarter as exports picked up.

S&P expects real GDP growth of 3 percent in 2014 and 3.5 percent in 2015, up from 1.2 percent in 2013.

Mexico has also struggled to boost its tax take, which remains the weakest in the 34-nation Organisation for Economic Co-operation and Development.

The finance ministry welcomed the upgrade, saying it would "benefit the federal government, the private sector and Mexican families by lowering financing costs."

The peso pared losses after the news.

Still, Rafael Camarena, an economist at Santander, said it was unclear whether the energy reform would end up lifting Mexico's rating into "A" territory.

A Mexico City-based fund manager who was not authorized to speak on the record said the move might encourage more participation from international investors.

That would be welcome, he said, "because there's going to be more debt next year and there are not many long-term investors in Mexico."

The government plans to run a budget deficit of 1.5 percent of GDP next year, up from a 0.4 percent deficit this year, as it boosts spending to shore up the tepid recovery.

On Thursday, the finance ministry released its latest capital market issuance plan, which foresees increasing debt sales in the first quarter of next year.