Moody’s upgrades Mexico, Paraguay as Fitch sounds Brazil warning

Moody’s upgrades Mexico, Paraguay as Fitch sounds Brazil warning

Mexico Corporate & Sovereign Strategy

Mexico’s extensive program of economic reforms paid dividends on Wednesday when Moody’s lifted its rating on the sovereign to A3. The ratings agency cited Mexico’s structural reforms that it expects will translate into “firm but gradual” improvements in the country’s credit metrics, as it raised the rating by one notch, from Baa1.

“After 20 years of attempts by three different administrations to push through a reform agenda, the approval of reforms not only reflects strong political will and ability to deliver campaign promises, but in some instances also exceeds initial expectations,” the agency said.

The upgrade was “very well-deserved” in the eyes of Goldman Sachs analyst Alberto Ramos, who said the reforms would not “radically transform the country and the economy overnight”, but were nonetheless “unquestionably positive”.

“Furthermore, the upgrade into the “A-Class” rating bracket and the presence of orthodox, disciplined, and market-friendly non-interventionist policies should also contribute to positively differentiate Mexico from other large EM economies, particularly in the current global context of EM asset re-pricing,” he said in a research note published on Wednesday.

The news came after Moody’s lifted Paraguay’s rating a notch to Ba2 on Tuesday, as it praised the South American country for its lower debt ratios, recent fiscal reforms and political stability following the impeachment of former president Fernando Lugo in 2012.

“The positive outlook on the Ba2 rating reflects our expectation that, even though it will take time for the government to implement the various laws approved in late 2013, they are likely to improve fiscal oversight and allow for higher levels of infrastructure investment,” Moody’s said.

The ratings agency said the transition of power since the impeachment of Lugo was smooth and that there had been “no material impact on the economy or to the country's creditworthiness.”

Horacio Cartes, the business magnate who was sworn in as president in August, aims to attract foreign investment to diversify Paraguay’s economy from its dependence on agricultural exports. The landlocked country is considering a follow-up to its debut bond, as well as increasing its multilateral debt, to raise funds for infrastructure and fighting poverty, the country’s finance minister, German Rojas, told LatinFinance in September.

Moody’s warned that the Ba2 rating could be revised down if the government’s strives away from its “prudent” fiscal track, if commodity prices fall or if political instability flares up again. Paraguay is rated BB- by Fitch and Standard and Poor’s.

Brazilian warning

Meanwhile, Fitch cautioned Brazil on Tuesday to cut spending and reduce debt to support its BBB sovereign rating.

Economic growth in South America’s largest economy is slowing amid continued spending pressures and high inflation, the agency said.

“Fitch has emphasized that Brazil's public finances continue to represent a relative weakness for its credit profile,” the agency said in a statement.

President Dilma Rousseff, who is running for re-election in October, has pledged to cut spending this year, which could dampen support for her party.

Moody’s and Standard & Poor’s have also advised Brazil to tighten its fiscal policy. Moody’s changed the outlook on Brazil’s Baa2 rating to stable, from positive, in October. S&P put its BBB rating of the sovereign on negative outlook in June. LF