For Want of Higher Taxes, Mexico's Debt Is Downgraded

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Although S&P had placed Mexico on a "negative" credit watch several months ago, the downgrade took some analysts and government officials by surprise. In a statement, the Finance Secretariat ratified its "commitment to continue advancing in paying attention to the structural weaknesses pointed out by the ratings agency." Gabriel Casillas, Mexico economist for JPMorgan Chase (JPM), said he had not expected S&P to consummate a downgrade. "I hope this will pressure Congress going forward," Casillas says.

finance minister: political loyalist

The S&P downgrade came just hours before Senate confirmation hearings began for Agustín Carstens, who was nominated Dec. 2 by Calderón to be the new head of the central bank. Carstens, 51, who holds a doctorate in economics from the University of Chicago and has served as deputy director of the International Monetary Fund, had served as Finance Secretary since 2006.

Carstens was replaced as finance minister by a relatively unknown appointee, Ernesto Cordero, a key political ally of Calderón and an actuary with a master's degree in economics. The choice of Cordero, an undeclared presidential hopeful who had been serving as Mexico's Secretary of Social Development, disappointed some observers who said they were concerned that Calderón was more interested in putting a political loyalist, rather than an experienced economist, in the country's most sensitive cabinet post.

Mexico, which suffered multiple financial and debt-repayment crises from 1976 through 1994, has enjoyed economic stability for the past 15 years. In 2000 it won an investment-grade rating on its sovereign debt from Moody's Investor's Service (MCO), with S&P and Fitch following suit. Moody's recently decided to leave Mexico's rating intact, with a stable outlook.

For Gray Newman, chief Latin America economist for Morgan Stanley (MS), Mexican policymakers have been too focused on short-term indicators and have taken their eye off the country's pressing structural problems, which will require more than stop-gap tax increases. Those include cracking down on monopolies to promote competition, improving the country's dismal public-education system, and investing more heavily in job-creating infrastructure projects. "Mexico's biggest challenge is finding a way to boost long-term growth, and it hasn't made much progress in tackling that problem," Newman says.

Smith is Bloomberg BusinessWeek's Latin American correspondent, in Mexico City.

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