* Upgrade comes on heels of banking reform plans
* Surprise move pushes peso past 12 per dollar
* Analysts say more upgrades could come
* Fitch analyst says bar higher for any move to 'A'
By Michael O'Boyle and Krista Hughes
MEXICO CITY, May 8 Fitch Ratings upgraded
Mexico's sovereign foreign currency credit rating by one notch
to BBB-plus on Wednesday, pointing to the country's solid
economic foundations and welcome progress on reforms.
The surprise move will help reduce Mexico's already-low
borrowing costs. It boosted the peso, which firmed past
the 12-per-dollar level for the first time in nearly two years.
Mexico's first ratings upgrade since 2007 came amid optimism
about a reform agenda which has already made changes in
telecommunications, labor and education laws. Plans for banking
reform were announced just hours earlier.
"The reform momentum has surpassed our expectations and we
have seen structural reforms that we think would enhance
confidence in Mexico as well as investment and growth dynamics
in the medium term," Fitch senior ratings analyst Shelly Shetty
Shetty also cited surprisingly strong growth in Mexico amid
a sluggish global economy and stabilization in oil production in
President Enrique Pena Nieto, who took office in December,
has promised changes to Mexico's tax system and its state-run
energy sector in a bid to attract more investment and boost
growth to 6 percent a year, about three times the average of the
Moody's Investors Service has Mexico at Baa1 with a stable
outlook, similar to Fitch, which also has a stable outlook.
Standard & Poor's rates Mexico one notch lower at BBB with a
The upgrade means Mexico is just one rung short of A
territory on the scales of two ratings agencies. Of major Latin
American economies, only Chile is rated in the A category.
"This is really aggressive because the fiscal and energy
reforms haven't even been presented," said Nomura analyst Benito
Berber. "My view is that once Congress passes fiscal and energy
reform Fitch and Moody's will upgrade Mexico to 'A' universe."
But Shetty said to earn another upgrade, Mexico would have
to show a material impact from the reforms on trend growth and
increased budget flexibility.
"The bar would be a bit higher in moving Mexico from the 'B'
category to the 'A' category because the focus of the discussion
would be different," she said.
Mexico has attracted investor attention over the last year
on buzz about the promised reforms and as the country's economic
growth outpaced Brazil's.
Investor sentiment was further bolstered by a cut in
benchmark borrowing rates in March to a record low of 4.0
percent from 4.5 percent. Rather than reducing the appeal of
domestic assets, the decision was seen as boosting Mexico's
Solid U.S. demand has been supporting Mexican factories amid
sluggish global growth and the government is sticking with a
growth forecast of 3.5 percent this year, accelerating to 4
percent in 2014, despite a slowing at the start of 2013.
But policymakers are concerned the strong peso will dampen
growth, and the upgrade intensified speculation that officials
may take further steps to check peso gains.
Santander economist Rafael Camarena said it was possible the
peso, already at its strongest since August 2011, would
appreciate further if big reforms were passed.
"We think there's a favorable environment for the peso,
although we also think that the Bank of Mexico and the finance
ministry could reactivate the mechanism for reserve accumulation
now that we are breaking past 12," he said.
Investors are watching to see if Mexico will reinstate a
mechanism of auctioning dollar "put" options, which could slow
the pace of peso gains. The put options allow banks to sell
dollars to the central bank at a better rate when the cost of
dollars in pesos falls below its 20-day moving average.
Mexico has absorbed $160 billion in new foreign investment
to its financial markets in the last three years, pushing stocks
and bonds to record highs.
Foreign holdings of Mexican peso debt have surged six-fold
since 2008 to 1.6 trillion Mexican pesos ($133 billion), nearly
40 percent of the total on issue, central bank data show.