Fitch Affirms Mexico's FCY IDR at 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms Mexico's ratings as follows:

--Foreign Currency Issuer Default Rating (IDR) at 'BBB';

--Local Currency IDR at 'BBB+';

--Short-term IDR at 'F2';

--Country Ceiling at 'A-'.

The Rating Outlook is Stable.

Mexico's ratings are supported by the country's well-anchored macroeconomic stability, low external imbalances, modest external indebtedness and a relatively healthy banking sector.

'Mexico's disciplined economic policies, improved external liquidity position as well as modest fiscal and external imbalances place the country in a good position to withstand the volatile international financial environment,' said Shelly Shetty, Head of Fitch's Latin America Sovereigns Group. External resilience will be supported by a stronger international reserves position than pre-crisis levels as well as access to the sizeable IMF's Flexible Credit Line.

Mexico's economy continues to recover from the steep recession in 2009. Better external trade performance and a recovery in domestic demand have aided this process. On the positive side, Mexican exports have been gaining market share in the U.S. market, benefiting from the country's favorable geographical location, sustained real exchange rate depreciation of the peso and a reduced manufacturing sector wage cost differential with China. However, external demand weakness will likely weigh on exports and eventually on domestic demand, with GDP growth forecasted to reach 3% in 2012. Inflation rate is expected to remain within the central bank's target range of 3%+/-1%.

The main downside risks to Mexico's growth outlook include a further escalation in the eurozone crisis and a weaker than expected U.S. economic performance. A significant increase in the foreign participation of local government securities market also exposes the country to the 'sell-off' risk in case of heightened risk aversion; however, Fitch notes that contagion from this channel has not materialized so far, highlighting the country's strong credit fundamentals.

Mexico's ratings are constrained by the structural weaknesses in public finances and the relatively moderate economic growth performance and future prospects. Despite the good recovery of the past two years, five-year and 10-year GDP growth has averaged 1.5% and 2.2%, respectively. Further growth-enhancing structural reforms are needed, although prospects for such reforms are currently limited. Reduced violence levels would also enhance confidence and growth prospects. Improved growth performance would increase the country's per capita income level and benefit fiscal performance and debt dynamics.

Fitch expects a slight fiscal consolidation with government debt projected to remain below 40% of GDP during the forecast period. 'While the stabilizing oil production, relatively high oil prices and moderate economic expansion should underpin fiscal stability in the near term, further increases in resources of the Oil Stabilization Funds and expansion of the relatively narrow tax base would enhance fiscal flexibility,' added Shetty.

Mexico will hold Presidential and Congressional elections in July 2011. The candidate from the main opposition party is currently leading the polls. Fitch does not expect any significant departure from the current macroeconomic settings following the election. However, it is unclear if the next administration will have the capacity to move faster on the long-pending slew of structural reforms.

Sustained good economic performance, increased fiscal flexibility, improved prospects for the oil sector, and progress on structural reforms would be viewed positively. On the other hand, a marked deterioration in public finances leading to unstable debt dynamics would be viewed negatively.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Sovereign Rating Methodology', dated Aug. 15, 2011.

Applicable Criteria and Related Research:

Sovereign Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648978

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