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WRAPUP 1-Mexico earns upgrade, outlook could support bonds

Michael O'Boyle
Friday, 20 Dec 2013 | 12:39 AM ET

Dec 19 (Reuters) - Mexico earned a higher debt rating from Standard & Poor's on Thursday and expectations of more upgrades to come could help support Mexican assets in the coming months even as the government borrows more.

Standard & Poor's raised its main credit rating for Mexico by one notch in the latest sign of growing confidence in this month's move by the government to open the state-run energy sector to private investment.

S&P had lagged the other two main agencies, Moody's Investors Service and Fitch Ratings, which both have Mexico just one notch shy of an "A" rating. Chile is the only Latin American nation that has an "A."

Analysts, fund managers and Mexico's government think the country could earn another upgrade by at least one of the agencies as soon as early next year.

"We are closer today than we have ever been to an 'A' category," Alejandro Diaz de Leon, head of Mexico's debt office, told Reuters in a telephone interview. "There is a lot of upside in the near future if the implementation of the energy reform continues as planned."

The approval of President Enrique Pena Nieto's energy reform bill by a divided Congress this month caps a year of major economic legislation, including bills to boost lending, lower telecommunications costs and improve tax collection.

But lawmakers still need to flesh out the energy overhaul with legislation that will determine whether Mexico will offer tax rates that are lucrative enough to spur an investment boom.

MEXICO BONDS

S&P's upgrade was largely expected by the market, and the country's peso only briefly pared losses amid concerns that less U.S. monetary stimulus will sap demand for emerging market assets in the coming year.

Expectations the U.S. Federal Reserve could keep cutting back its monthly bond purchases are seen driving yields on emerging market debt higher next year. But Mexico's peso and its local-currency bonds have already suffered less than other emerging markets and optimism about Mexico could help bond yields continue to perform better than other riskier assets.

Analysts said strong progress once Mexican lawmakers resume work in February on the energy reform's secondary legislation could spur the next ratings upgrade.

Alonso Cervera, an economist at Credit Suisse in Mexico City, said Moody's would likely put Mexico into the "A" category next year and that bond yields would likely fall.

"I think the curve is way too steep and we are likely to see a flattening trend in the next few months, even if the Fed continues to taper," Cervera said in an emailed response to questions.

The yield on Mexico's benchmark 10-year peso bond has spiked more than 80 basis points higher since late October to 6.40 on Thursday, near a three-month high.

MORE DEBT

The flurry of reforms this year has made Mexico stand out from other emerging markets, such as Brazil, which have been raising concerns among investors for more interventionist and protectionist economic policies.

"It is very important that an economy like ours, which is a small open economy, does what we can to improve the perception about the resilience of the economy," Diaz de Leon said.

Meanwhile, Pena Nieto's government is milking international optimism by boosting the amount of debt it will issue next year. On Thursday, the finance ministry released its latest capital market issuance plan, which foresees increasing shorter-term debt sales in the first quarter of next year.

After originally promising to stick to a balanced budget this year, the government got lawmakers to support a deficit of 0.4 percent of gross domestic product this year and an even wider 1.5 percent deficit next year.

The government is seeking more debt to help fuel stronger growth. Mexico's economy slumped this year to around a 1.3 percent annual expansion from a 3.8 percent rate in 2012.

Analysts in a central bank poll issued on Thursday lifted their outlook for growth next year to 3.41 percent, up 7 basis points from a poll late last month before the energy reform bill was approved.

In the latest sign of stronger growth, a separate report on Thursday showed Mexican retail sales rose in October at the fastest pace in nine months, following two months of declines.