Fitch Affirms Mexico's IDRs at 'BBB+'/'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Mexico's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB+' and 'A-', respectively. The issue ratings on Mexico's senior unsecured foreign and local currency bonds are also affirmed at 'BBB+' and 'A-' respectively. The Rating Outlooks on the Long-term IDRs are Stable. The Country Ceiling is affirmed at 'A' and the Short-term foreign currency IDR at 'F2'.

KEY RATING DRIVERS

Mexico's IDRs reflect the following key factors:

-- Mexico's ratings are supported by the country's disciplined policy framework, well-anchored macroeconomic stability, low external imbalances and an adequately capitalized banking sector. The reinvigoration of the reform momentum under the Pena Nieto administration bodes well for future competitiveness, investment and growth prospects. These strengths sufficiently counterbalance Mexico's rating constraints which include its relatively low level of financial intermediation, a still high incidence of violence, and structural weaknesses in its public finances such as the government's narrow revenue base, and limited fiscal buffers in the context of the high oil dependence of public sector revenues.

-- Mexico has proven to be resilient to the international financial volatility related to U.S. Fed Tapering. This is especially notable in the context of increased foreign participation in the government's domestic markets which can be a source of vulnerability. Mexico's flexible exchange rate, relatively narrow current account imbalances, enhanced international reserves position, and access to the IMF's Flexible Credit Line support its external shock-absorption capacity.

-- Mexico's economic growth should recover to 3% in 2014 from a mere 1.1% in 2013 underpinned by the U.S. economic recovery, accommodative fiscal and monetary policies, and a reversal in some of the domestic transitory shocks that Mexico faced last year. Growth should accelerate further in 2015 and beyond as the impact of some of the recently passed structural reforms begins to transmit.

-- The structural reform agenda has continued to progress over the past year although the impact of these initiatives will be felt in the medium term. Crucially, the magnitude of the spill-overs to the broader economy and potential GDP growth will depend on reform implementation. The most notable reform with potentially the richest dividend in the medium term is the energy reform. The secondary laws for energy sector reform are pending final approval. Even with the expected energy sector liberalization, material gains in oil production will take time.

-- Mexico is making progress in improving its fiscal framework to promote better use of the budgetary 'excess revenues' and ensure fiscal consolidation when the economy grows above trend. Caps on current spending growth as well as targeting consolidation on a broader public sector basis are steps in the right direction. Moreover, the potential establishment of an Oil Fund to accumulate long-term fiscal savings will be positive for fiscal maneuverability, although resources will likely be built over the medium term.

-- The fiscal reform passed last year will gradually increase the government's narrow revenue base and support the consolidation plan over the medium term. Nevertheless, in the near term, Mexico's fiscal accounts are expected to deteriorate. In addition, the government debt burden will increase in 2014, as the authorities are targeting a non-financial public sector deficit (excluding Pemex's investment) of 1.5% of GDP in 2014, up from 0.3% last year. On the positive side, Mexico's prudent liability management, good debt composition, and excellent market access mitigate risks.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.

The main factors that individually, or collectively, could trigger a positive rating action include:

-- A higher growth trajectory that supports government debt reduction and reduces Mexico's income gap with higher-rated sovereigns;

-- Material gains in fiscal flexibility and buffers to confront shocks.

The main factors that individually, or collectively, could trigger a negative rating action include:

-- Sustained economic under-performance and fiscal deterioration that undermine government debt dynamics;

-- A sharp and sustained fall in oil income that seriously challenges Mexico's fiscal flexibility.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions:

-- Fitch assumes that economic growth in the U.S. will reach 2.8% in 2014 and 3.1% in 2015, providing a boost to the Mexican economy.

--Fitch projects that oil prices (Brent) will average USD105 in 2014 and USD100 in 2015, which should be supportive to Mexico's fiscal income.

-- Fitch assumes that the Mexican government will adhere to its medium-term fiscal consolidation plan with the non-financial public sector deficit (excluding Pemex's investment) reaching a balanced position by 2017.

--Fitch assumes that the drug-related violence does not seriously threaten the overall governability of Mexico.

Additional information is available on www.fitchratings.com

Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com.

Applicable Criteria and Related Research:

Sovereign Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685737

Country Ceilings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715618

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Shelly Shetty
Senior Director
+1 212 908 0324
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Santiago Mosquera
Director
+1 212 908 0271
or
Committee Chairperson
Tony Stringer
Managing Director
+44 203 530 1219
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Shelly Shetty
Senior Director
+1 212 908 0324
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Santiago Mosquera
Director
+1 212 908 0271
or
Committee Chairperson
Tony Stringer
Managing Director
+44 203 530 1219
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com