UPDATE 3-S&P revises Mexico ratings outlook to 'positive'

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By Noel Randewich

MEXICO CITY, July 2 (Reuters) - Standard & Poor's revised Mexico's credit ratings outlook to "positive" from "stable" on Monday, citing growing prospects for tax reform and a lighter external debt burden.

Mexico's President Felipe Calderon sent Congress a long-awaited reform plan last month aimed at boosting government revenues by closing corporate tax loopholes.

"A sustained increase in non-oil tax revenue would accelerate the gradual strengthening of Mexico's financial profile, likely resulting in a higher sovereign rating," the ratings agency said in a statement.

Mexico's tax take is one of the lowest in Latin America and the government depends heavily on oil exports, which are expected to decline in coming years, for about a third of its revenues.

Improved sovereign debt ratings make it cheaper for governments to issue debt. The new S&P outlook affects Mexico's "BBB" long-term foreign-currency debt, as well as the country's "A" long-term local-currency bonds.

Investors bought stocks following the news, pushing the IPC benchmark index .MXX up to a gain of 0.87 percent.

Mexico's peso MEX01 MXN= traded at 10.7595 per dollar after the announcement, maintaining a gain of about 0.5 percent for the session. The yield on Mexico's benchmark 10-year peso bond MX10YT=RR dipped 4 basis points to 7.65 percent.

MORE TO COME

Gaining legislative approval of the tax package is a top priority for Calderon, who won last year's presidential elections by less than a percentage point.

He wants Congress, where his National Action Party lacks a majority, to pass the bill by September, opening the way for him to tackle politically tricky reforms to the energy sector.

S&P also praised Mexico for converting a sizable portion of its foreign debt to local obligations, reducing the country's exposure to swings in the value of the peso.

Increased confidence in Mexico has led foreign investors looking to beat relatively low returns on U.S. Treasuries to sink growing amounts of money into peso bonds.

"An upgrade to the debt, especially due to more responsible fiscal policy, is one reason not to liquidate holdings of that peso-denominated debt that investors have accumulated over this higher liquidity period," said Naomi Fink, a senior currency strategist at BNP Paribas in New York.

In March, Fitch Ratings improved its outlook on Mexico's long-term debt rating to "positive" from "stable" after Calderon pushed a landmark pension reform through Congress.

Fitch rates Mexico's long-term local debt "BBB+".

Moody's Investors Service has said future improvements in its ratings for Mexico depend on Congress approving a tax overhaul. All three ratings agencies already rate Mexico as investment grade.

Mexico's economy expanded 4.8 percent last year and is seen growing less in 2007 because of the U.S. economic slowdown.

The economy has become increasingly stable in recent years, and interest rates have stabilized as the central bank maintains a tough stance on inflation and the government brings spending in line with its revenues. (Additional reporting by Walter Brandimarte in New York and Hugh Collins in Mexico City)