Standard & Poor’s today downgraded Mexico’s sovereign rating by one notch, to BBB for foreign currency debt, and A for domestic currency debt. S&P also improved the outlook to ‘Stable’. According to their report,
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. 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.
The rating action leaves Mexico one notch higher than Brazil and India (BBB-), equal to Russia, and below China (A+) among major emerging economies. Among the major countries in Latin America, only Chile (A+) has a higher sovereign rating.