UPDATE 3-Moody's boosts Mexico by affirming credit rating

(Adds improvement in Mexico consumer confidence data)

By Pedro da Costa and Daniel Bases

MEXICO CITY/NEW YORK Aug 5 (Reuters) - A top U.S. rating agency on Wednesday affirmed Mexico's credit outlook, citing "resilience" in the face of a deep recession, rampant political gridlock and falling oil production.

The vote of confidence from Moody's Investors Service took investors by surprise, particularly after a big opposition win in recent congressional elections appeared to complicate the prospect for economic reform, raising fears of ratings downgrades.

Mexico is also reeling from its worst recession since the Great Depression of the 1930s, with gross domestic product set to shrink at least 6.5 percent this year.

"It's very strange," said Bertrand Delgado, economist at RGE Monitor in New York. "There are still a lot of uncertainties out there," adding that he did not believe other rating agencies would follow suit.

The peso jumped sharply and bond prices surged following the decision, which left the country's rating at "Baa1," three notches into investment grade, with a stable outlook.

Moody's rivals Standard & Poor's and Fitch have both warned they may downgrade Mexico's sovereign rating due to the mounting fiscal challenges facing the country.

Both agencies cite Mexico's heavy reliance on dwindling oil production to fund the budget and a tax take that is far below that of other Latin American countries as big risks for the budget.

Mexico's star has been fading in recent years as other emerging markets like Brazil and Chile have registered much stronger growth. A brutal war between Mexican drug cartels which have killed 13,000 people since 2006 has also deterred investors.

The government has said it will present a package of fiscal reforms in September but analysts are unsure how much the opposition Institutional Revolutionary Party, or PRI, which triumphed in July's mid-term elections, will be willing to back tough measures.

Nevertheless the PRI has signaled some willingness to work with President Felipe Calderon's ruling National Action Party to implement some of the reforms that Wall Street has long clamored for.

This gave analysts at Moody's some comfort.

"We anticipate that corrective fiscal actions should be sufficient to prevent a significant deterioration in the government accounts during 2009 and 2010," said Mauro Leos, regional credit officer for Latin America at Moody's.

Nevertheless, Moody's recognizes the risks posed by reform inertia.

"The most likely scenario is one in which measures adopted will be only stop-gap without addressing fundamental revenue constraints," said Leos.

RIDING U.S. COATTAILS

But given the glacial pace of policy shifts in Mexico, Moody's appeared to be betting on the prospect that a potential U.S. recovery would lift its southern neighbor along.

"Growth prospects will have a strong influence on Mexico's credit outlook," added Leos.

Mexico's manufacturing sector is greatly dependent on the United States, which is the destination for about 80 percent of its exports. But the worst U.S. recession since World War II has sharply crimped consumer demand for Mexican-made goods such as cars and televisions.

What began as a reversal of fortune in the U.S. housing market quickly devolved into a full-fledged financial crisis that has crimped consumer appetite, with many seeing no prospect of an immediate rebound.

Against that backdrop, the Moody's affirmation was greeted with a cautious welcome.

"The move was a bit unexpected as the market was already pricing in a downgrade, prompting a rally in both foreign exchange and interest rates," said analysts at 4Cast Ltd.

There have been some signs of stabilization in the United States. Housing numbers have perked up of late and measures of sentiment among manufacturing managers, while still negative, have been slowly creeping higher.

Such inklings of hope have bolstered sentiment among Mexican consumers. The country's consumer confidence index, published on Wednesday, rose more than expected to 85.4 in July, having hit a record low in May.

Nonetheless, the American labor market remains grim, posing risks to near-term U.S. growth and, by extension, to a Mexican rebound.

"Without a bounce-back in the U.S., it's going to be tough," said Delgado at RGE. (Additional reporting by Manuela Badawy and Caryn Trokie in New York and Jason Lange in Mexico City; Editing by James Dalgleish)