Upgrade is likely to lower borrowing costs, increase investment

By BRENDAN M. CASE / The Dallas Morning News

MEXICO CITY – Standard & Poor's boosted Mexico's sovereign credit rating to investment grade Thursday, a milestone in the country's dogged drive for
economic respectability.

The upgrade by the Wall Street ratings agency should generate an array of long-term benefits for Mexico, economists said, lowering borrowing costs and opening the
door to billions of dollars in fresh investment.

The move also reflected Mexico's ongoing ascent from a crisis-ridden basket case to a major trade partner of the United States. Mexico already buys more Texas
exports than any other country, but it has suffered repeated economic meltdowns over the last three decades.

"What separates us from First World countries is the accumulation of physical and human capital," said Salvador Moreno, an economist in the Mexico City branch of
Santander Central Hispano Investment, an investment bank. "To generate capital, you need confidence. This upgrade symbolizes the way in which that confidence is
increasing."

Mexico is the third Latin American country to get an investment-grade rating from Standard &Poor's. It follows Chile and Uruguay.

The S&P upgrade was widely expected this month, in light of recent upgrades by two other ratings agencies. But the IPC index of the Mexican Bolsa actually fell .09
percent to 6,870.94 points Thursday. The exchange rate weakened to 9.16 pesos per dollar mostly on the news of an uptick in inflation in January.

Moody's Investors Service Inc. gave Mexico an investment-grade rating two years ago, and boosted it another notch this week. Moody's also upgraded the credit
rating of Petróleos Mexicanos SA, the state-owned oil monopoly. Fitch Inc., another ratings agency, upgraded Mexico's government debt to investment grade in
January.

But the upgrade from S&P had been widely seen as a major test of the country's economic outlook. On Thursday, S&P boosted the long-term foreign currency
sovereign rating for government debt. It also upgraded the short-term rating and the local currency rating for government debt.

What this means for Mexico is lower interest rates on foreign debt, a broader investment base, and an opportunity to develop local markets.

Graciana del Castillo, S&P's lead analyst on Mexico, praised President Vicente Fox and the independent central bank for their sound economic management. She
added that Mexico's tougher tax collection and ongoing economic integration with the United States helped persuade her to grant the upgrade.

But Ms. Del Castillo described a recent tax reform package as disappointing. She also criticized the country's "weak prospects" for structural reform in the energy
sector, its narrow tax base and the public sector's large borrowing needs.

"It was a difficult call," she said on a conference call.

Likely effects

Mexico's investment grade status is likely to generate several happy effects on the country's economy over the next few years, such as:

• Lower interest rates. Benchmark interest rates on the Mexican government's domestic debt fell by about 10 percentage points in 2001. But the Mexican
government must currently pay a risk premium on its foreign bonds in order to attract investors. On its 10-year bond, it pays 290 basis points above the interest rates
on comparable U.S. debt, said Mohamed El-Erian, who manages $7 billion at Pacific Investment Management Co. in Newport Beach, Calif.

El Salvador pays a premium of only 236 basis points, while Chile pays only 170 basis points more than U.S. debt. Obtaining lower interest rates would mean millions
of dollars in savings for the government. Corporate borrowers might see indirect benefits as well.

Mexico's benchmark interest rates have fallen to 8.15 percent, helped by slowing inflation, which dropped last year to a record 4.4 percent. Inflation for January was
.92 percent, the biggest jump in consumer prices since September.

• More investment. Some institutional investors may not purchase securities unless they carry an investment-grade rating from all ratings agencies.

Now that the Mexican government boasts such a rating, more investors such as insurance companies and pension funds might buy its bonds. Investors who already
own such securities might boost their stakes.

Moreover, insurance companies and pension funds typically hold securities for longer than the nimble portfolio investors who dominate many emerging markets. That
could translate into increased stability for a country that has been plagued by a boom-bust cycle.

"Investment grade is really quite important in terms of attracting longer-term investors," said Lawrence Goodman, the managing director of Globalecon LLC, a
consulting firm in New York.

• Developing local markets. Last December, the Mexican Bolsa played host to the first issues of state and municipal debt in decades. The ratings upgrade could
provide more buyers for such issues, jump-starting local financial markets as well.

"By anchoring your investor base, it's much easier to promote your local markets," Mr. El-Erian said.

Fueling development

Those improvements could also help fuel a process of financial development in Mexico, which has long struggled to convince lenders of its integrity. The task will be
easier with an investment-grade rating, economists said.

"This is part of Mexico's transformation from a dedicated emerging-market investment to having a wider range of investors," Mr. El-Erian said. "Mexico now enters
as a full member of a much bigger club."

Bloomberg News contributed to this report.