Fitch Ratings Assigns 'BBB-' to Mexico's US$1B Issue.

NEW YORK -- Fitch Ratings, the international rating agency, today assigned a long-term foreign currency rating of 'BBB-' to the Republic of Mexico's 2015 fixed interest rate global bonds issued yesterday. The bonds were reopened yesterday, with an additional issuance of US$1 billion taking the total amount outstanding for this tenure to US$2 billion. The Rating Outlook is Stable.

Mexico's ratings are supported by the reduction in its external debt burden, the country's prudent policy framework and liability management, and the continued integration of the country with the U.S. The ratings remain constrained by the structural weaknesses in public finances, slow progress on structural reforms, and weak social indicators.

With the improvement in the U.S. economy, the Mexican economy recovered smartly, with growth expected to reach 4% in 2004 and moderate to 3.5% in 2005. Growth has become broad-based, with a recovery in exports, investment, and continued strength in private consumption, owing to the easing of financing constraints. However, the recovery will be largely dependent on U.S. growth and will remain vulnerable to rising domestic interest rates. In response to higher inflation, the central bank has tightened monetary policy several times last year and is likely to maintain a tightening bias until inflationary pressures subside.

Mexico's public finances continue to benefit from high oil prices, which have enabled higher spending by the states and Pemex, the state-owned oil company. The nonfinancial public sector deficit is estimated to decline to 0.4% of GDP in 2004 and is budgeted to be at 0.2% of GDP in 2005. Steady liability management efforts have led to an increase in the average maturity of public external and domestic debt and increased the proportion of domestic debt securities issued on fixed interest rates. On the other hand, structural weaknesses in the public finances remain, such as the high dependence on oil revenues and low non-oil tax intake. Moreover, the authorities have not used the opportunity presented by higher oil prices to build significant resources in the oil stabilization fund to reduce their vulnerability to an eventual decline in oil prices.

Despite the rebound in the economy, Fitch believes that Mexico needs to implement structural reforms in to increase its potential growth rate and address issues related to its lagging competitiveness. Reforms in the labor market and electricity sectors and further improvements in the regulatory and business environment should help Mexico regain some share of its export markets and attract higher foreign direct investment flows. At the same time, fiscal reform aimed at improving the tax-to-GDP ratio needs to be pursued. However, the infighting over the 2005 budget between the Fox administration and the PRI-dominated Congress reflects the deteriorating political environment in which it will be harder to pass the above-mentioned reforms.