MercoPress. South Atlantic News Agency

S&P lowers Mexico’s foreign currency debt rating to BBB

President Felipe Calderón reshuffles cabinet

Mexico’s credit rating was cut one level by Standard & Poor’s after tumbling oil output and the worst recession since the 1930s swelled the budget deficit.

S&P lowered Mexico’s foreign-currency debt rating to BBB, the second-lowest investment grade, from BBB+, with a stable outlook. The cut follows a downgrade by Fitch Ratings on November 23.

S&P cited “diminishing” prospects for widening Mexico’s tax base in the second half of President Felipe’s Calderón administration, according to a statement. The government last month adopted a 2010 budget that RBS Securities Inc. says calls for the biggest deficit in two decades.

“The government’s inability to broaden the tax base meaningfully and address the many loopholes and exemptions in the tax regime weakens its capacity to contain fiscal pressures from diminished oil production -- even if oil output declines more slowly than in recent years,” S&P analysts Lisa Schineller and Joydeep Mukherji said in the statement.

Spokesmen at Mexico’s Finance Ministry and central bank declined to comment on the downgrade.

Calderon reshuffled his economic cabinet last week and urged new Finance Minister Ernesto Cordero to make further fiscal reform a top priority. Cordero, currently Social Development Minister, will replace Agustín Carstens, who was nominated to take over as central bank governor from Guillero Ortíz.

Carstens on December 8 said he expected S&P to decide against lowering the country’s credit rating after the government raised taxes and cut spending to contain its budget deficit.

The Mexican economy was the hardest hit in Latinamerica by the recession in the US, the buyer of 80% of Mexican exports. Mexico’s 1.09 trillion USD economy will shrink as much as 7.5% this year, the most since the 1930s, according to the central bank.

S&P forecasts Mexico’s economy will grow 3% in 2010 and as much as 3.7% in 2011, Schineller said in an interview. Last week’s changes at the Finance Ministry played no role in the decision to cut Mexico’s credit rating, she said.

Oil, which funds 38% of Mexico’s budget, has fallen 53% from a high of 147.27 USD a barrel in July 2008. Output at state-owned Petroleos Mexicanos fell last year at the fastest rate since 1942, costing Mexico almost 30 billion USD in lost revenue.