Standard & Poor's raises Mexico's credit rating to positive

There has been plenty of controversy over the appointment of Grupo Aeroportuario del Sureste (ASUR), as new administrator of Puerto Rico's Luis Muñoz Marín Airport.

Ironically, while Standard & Poor's Ratings Services (S&P) recently lowered its rating to negative for the Commonwealth of Puerto Rico general obligation (GO) debt, it also revised the outlook on its long-term sovereign credit ratings on Mexico to positive from stable. Standard & Poor's also said that it affirmed its 'BBB/A-2' foreign currency and 'A-/A-2' local currency sovereign credit ratings on Mexico.

"The ratings on Mexico reflect its track record of cautious fiscal and monetary policies, which have contributed to low government deficits and inflation, bolstered economic resiliency, and contained fiscal and external debt levels. However, the sovereign's limited fiscal flexibility and modest medium-term growth prospects constrain the ratings. About 35% of the country's total budgetary revenues come from the oil sector, which renders the government vulnerable to volatile oil prices and potential declines in oil production over the medium term, especially since the non-oil tax base is low."

"The positive outlook reflects a greater than one-in-three chance that the government will successfully advance policies to further strengthen Mexico's fiscal room for maneuver and medium-term growth prospects-–two key rating constraints," said Standard & Poor's credit analyst Lisa Schineller.

Since assuming office in December 2012, the administration of President Enrique Peña Nieto has reiterated its commitment to policies to foster macroeconomic stability, improve competitiveness and productivity throughout the economy, and strengthen Mexico's fiscal accounts. The president and his team suggest that their reforms will be far reaching, though details on the much-anticipated fiscal and energy measures will be available in the second half of 2013. The previous administrations found it difficult to pass such reforms during the last decade, given their contentious nature and need to coordinate across party lines in Mexico's divided congress, as is still the case today. "Standard & Poor's believes that the government now has a higher likelihood of gaining approval for such policies, due in part to the president's stronger political capital," said Ms. Schineller. "However, passage is by no means assured."

S&P believes that the Mexican government's ability to capitalize on its recent political momentum during its first 12 to 18 months will be crucial for the country's credit rating.

S&P said it could raise Mexico's ratings over the next 18 months based on its evaluation of the impact of the reforms that seek to strengthen the general government (central and local) non-oil revenue base and encourage more investment. For example, ratings could be raised if the reforms reduce the public finances' vulnerability to sharp drops in oil revenues and enact steps that enhance the country's long-term growth prospects.

Conversely, the outlook could be revised downward to stable if the government fails to obtain approval for its substantial policy proposals, or if the reforms are insufficient to materially strengthen public finances and contribute to greater economic resilience, said S&P.