Mexico Peso Surges to 2-Month High After Moody’s Affirms Rating

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Mexico’s peso surged to a two-month high after Moody’s Investors Service affirmed the government’s bond ratings and stable outlook, damping speculation the country will suffer its first downgrade since 1995.

The peso gained 0.7 percent to 13.0400 per U.S. dollar at 5 p.m. New York time, from 13.1257 yesterday. It earlier touched 12.9981, the strongest since June 1. Its gain today was the biggest among the world’s 16 major currencies.

Moody’s kept Mexico’s foreign debt rating at Baa1, the third-lowest investment-grade level, saying the government’s commitment to fiscal discipline offset concern that potential growth is weak. Standard & Poor’s revised Mexico’s debt outlook to negative from stable in May, six months after Fitch Ratings, as a drop in the country’s oil output widened the budget gap.

“This takes some of the pressure off of the currency,” said Flavia Cattan-Naslausky, a strategist with RBS Securities Inc. in Greenwich, Connecticut. “The peso was looking for a trigger to catch up to the rally in the rest of the region.”

The 1.5 percent gain in the peso over the past month has lagged a 7.7 percent rally in Brazil’s real, a 5 percent gain in the Colombian peso and a 2.2 percent advance in Peru’s sol.

Mexico’s revenue will fall short of the budgeted amount this year by 480 billion pesos, the largest gap in the nation’s history, Finance Minister Agustin Carstens said last month. To make up the difference, Mexico will draw on oil hedges contracted last year and rainy-day funds as well as reducing spending by 85 billion pesos.

“We anticipate that corrective fiscal actions should be sufficient to prevent a significant deterioration in the government accounts during 2009 and 2010,” Mauro Leos, a New York-based analyst at Moody’s, said in a statement today.

Budget Deficit

Mexico’s public sector budget deficit will grow to 3 percent of gross domestic product this year from 2.1 percent in 2008, according to the government. The gap will likely swell next year, Miguel Messmacher, the Finance Ministry’s chief economist, said last week.

Moody’s decision to affirm the stable outlook on Mexico’s debt “adds to the positive momentum behind the peso,” Morgan Stanley analysts wrote in a note. “The peso has much ground to gain, especially considering our expectations for a sharp rebound” in the U.S. economy in the third quarter, they said.

Mexico’s peso has plunged 24 percent against the dollar over the past 12 months as a slump in the U.S., Mexico’s biggest trading partner, trimmed dollar flows from exports, remittances, foreign direct investment and tourism.

Latin America’s second-biggest economy will contract as much as 7.5 percent this year, the most since 1932, Banco de Mexico said last week. The economy probably shrank 10.4 percent in the second quarter after contracting 8.2 percent in the first quarter, the Finance Ministry said last week.

‘Growth Prospects’

Mexico’s “need to repeatedly rely on spending containment measures will limit the government’s ability to undertake countercyclical policies to mitigate the impact of external shocks on the economy,” Leos wrote. “Growth prospects will have a strong influence on Mexico’s credit outlook.”

Mexico’s average annual gross domestic product growth of 3 percent during the past six years is 2 percentage points below the average for Latin America, Moody’s said in a March report. The Mexican economy will contract the most in Latin America this year, according to the International Monetary Fund.

Ratings Outlook

Today’s gain in the peso may be short-lived, said Gabriel Casillas, chief economist for Mexico at UBS AG. The peso will slide to 14.5 per dollar by the end of this year as President Felipe Calderon fails to muster support from opposition legislators to pass tax laws that “significantly” ease Mexico’s dependence on oil income, Casillas said.

He is predicting S&P or Fitch will reduce Mexico’s BBB+ foreign credit rating before October and maintain a negative outlook on the country.

“Moody’s is seeing the Mexico we would like to have and not the one we really have,” said Mexico City-based Casillas.

Yields on Mexico’s 10 percent bond due December 2024 fell five basis points, or 0.05 percentage point, to 8.35 percent, the lowest since July 24. The bond’s price rose 0.48 centavo to 114.19 centavos per peso, according to Banco Santander SA.

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