Calderon’s Looming Defeat May Hurt Mexico Rating, Moody’s Says

By Valerie Rota

March 25 (Bloomberg) -- Mexico’s credit rating could be hurt by a defeat for President Felipe Calderon’s National Action Party in mid-term congressional elections, said Mauro Leos, a sovereign analyst at Moody’s Investors Service.

A loss of seats for Calderon’s party in the July elections would hamper his ability to push through legislation needed to boost tax revenue and stem a decline in oil production, Leos said. A March 7 poll by Mexico City-based Consulta Mitofsky showed Calderon’s party would take 26 percent of the lower house seats in the vote, down from its current 41 percent.

“It would almost guarantee that it’ll be very difficult” to get legislation passed, Leos said in a telephone interview from New York. “The fundamentals will erode away at a faster pace. It raises the risk of a change in the credit profile.”

The looming congressional defeat adds to concerns that Mexico’s economic growth will keep lagging its peers. Mexico averaged annual growth of 3 percent over the past six years, 2 percentage points below the rest of the region, Moody’s said in a report yesterday.

Latin America’s second-biggest economy shrank 1.6 percent in the fourth quarter, its first quarterly contraction in more than five years, as the deepening U.S. slump curbed demand for Mexican exports and trimmed foreign direct investment and remittances from migrant workers. Growing drug-related violence is also curbing growth, Finance Minister Agustin Carstens said last week. The government estimates that crime shaves 1 percentage point off of gross domestic product per year.

Region’s Deepest Slump

Moody’s rates Mexico’s foreign debt Baa1, its third-lowest investment-grade rating, in line with South Africa and Latvia. Standard and Poor’s and Fitch Ratings rate Mexico BBB+, also three levels above junk. Fitch lowered the rating outlook to negative from stable in November and said on March 23 that Mexico’s economy will contract 2.5 percent this year, the most in the region.

There will be a “significant” slump in Mexico’s economy this year that may extend into 2010, Leos said on a conference call with investors yesterday. He didn’t provide forecasts.

The Mitofsky poll shows that the opposition Institutional Revolutionary Party, or PRI, will take 34 percent of lower house seats in the July elections while the opposition Party of the Democratic Revolution wins 13 percent. Mitofsky surveyed 1,000 people between Feb. 20-23 for the poll, which has a margin of error of 3.1 percentage points.

‘Complicate Things’

“Until now, preliminary information indicates” a victory for the PRI, Leos said in the interview. That “would complicate things further. We wouldn’t be surprised if there were no more significant reforms the rest of the year.”

There are no senate seats up for vote in the elections.

Legislation approved last year allowing state-run oil monopoly Petroleos Mexicanos to hire private and foreign companies won’t be enough to shore up growth, Leos said.

Production of oil, Mexico’s biggest export and the source of about 37 percent of government revenue, fell last year at the fastest pace since 1942. More legislation is needed to stem that slide, Leos said. Mexico’s tax revenue equaled 20.5 percent of GDP in 2007, the lowest among the members of the Organization for Economic Cooperation and Development, an October study from the OECD showed.

Mexico’s currency and bonds have slumped amid the economic slowdown. The peso plunged 24 percent over the past six months, the worst performance among the world’s 16 most-traded currencies against the dollar. The yield on the government’s dollar bonds maturing in 2034 climbed to 7.18 percent from 6.65 percent six months ago and 5.89 percent a year ago, according to JPMorgan Chase & Co. The bonds’ price fell to 95 cents on the dollar from 111.5 cents a year earlier.

To contact the reporter on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net.