Mexico whacked with second debt downgrade

MEXICO CITY (Reuters) - Mexico was hit with a second sovereign debt downgrade on Monday, reflecting the country's battle with a severe recession, sliding crude oil output and a failure to overhaul its clunky economy.

Standard & Poor's cut its credit rating on Mexico by one notch to BBB from BBB-plus, exactly three weeks after Fitch became the first ratings agency to downgrade the country in more than a decade.

The downgrades, which raise borrowing costs and leave Mexico one notch above the lowest investment grade, are a blow to President Felipe Calderon, who came to power promising economic reforms and job creation but has seen his time in office dominated by drug gang violence and a painful recession.

The latest rating cut could give Mexico's beleaguered peso a lift in the weeks ahead, however, by removing the question mark over S&P's stance. The Fitch and S&P downgrades had long been reflected in Mexican securities' prices and rival agency Moody's affirmed its Mexico rating earlier this year.

"So long as the external backdrop remains supportive, near-term Mexican asset downside may be relatively limited, with some investors potentially looking to add Mexican risk exposure now that downgrade risks are out of the way," said analyst Nick Chamie at RBC Capital Markets in Toronto.

Calderon, a conservative, has managed to introduce timid pension, tax and oil industry reforms in his three years in office, but his party's weak position in Congress after losing mid-term elections has dimmed his chances of harder-hitting reforms.

Meanwhile drug cartels have slaughtered more than 16,000 people since late 2006, the U.S. downturn has cost hundreds of thousands of jobs, and bad publicity from the swine flu outbreak earlier this year hurt the key tourism industry.

STABLE OUTLOOK

S&P said recently approved tax increases, watered down from Calderon's initial plan, would not be enough to fix weak public finances and that the prospects for fiscal reforms in the remainder of Calderon's term were diminishing.

It kept a stable outlook on the new rating, however, as did Fitch last month when it also cut its rating one notch to BBB.

Mexico's government depends on oil revenues for more than a third of the federal budget but crude oil production has slid by around a quarter from 2004 peaks due to a lack of big new projects to make up for the declining Cantarell field.

Held back by state control of the oil industry and poor competition in other key sectors, Mexico is being overshadowed by current emerging markets darling Brazil, which is bouncing back more quickly from recession and has glowing oil and commodities prospects.

Mexico's peso briefly retreated from its highs on S&P news, but later bounced back to trade at 12.7565 per U.S. dollar, or 0.97 percent stronger from Friday and around the same levels it was trading before the news. Mexican stocks were firmer.

Analysts were reassured by the stable outlook and said the S&P move had removed a key element of uncertainty and should mean a period of steadier trading for Mexican securities.

(Additional reporting by Robert Campbell and Michael O'Boyle in Mexico City; Walter Brandimarte in New York and Guillermo Parrabernal in Sao Paulo)

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