Fitch Rts Republic of Mexico's 10-Yr EUR750MM Global Bond 'BBB-'.

Business Editors

NEW YORK--(BUSINESS WIRE)--June 4, 2003

Fitch Ratings today assigned a long-term foreign currency rating of 'BBB-' to the Republic of Mexico's global bond issued yesterday. The Rating Outlook is Stable. The EUR750 million of 10-year global bond was issued primarily

Mexico's ratings are supported by the reduction in its external debt burden, the country's prudent policy framework and liability management, and the ongoing 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 high regional and income inequality.

Mexico has experienced a sharp slowdown in growth over the past two years. Given the uncertainty regarding the U.S. and global growth, Mexico's growth would be subdued this year as well. However, the authorities have followed a restrictive fiscal policy to contain the increase in government indebtedness. The budget for 2003 aims to reduce the non-financial public sector deficit to 0.5% of GDP from 1.2% in 2002. Although GDP growth is likely to come under the 3% assumed in the budget, higher than budgeted oil prices should help the authorities in achieving this target. The fiscal outturns for the first four months of 2003 corroborate the improved fiscal position of Mexico, which has been primarily due to higher oil receipts. Moreover, Fitch believes that the authorities would employ automatic adjusters to cut spending if revenues fall short of expectations to meet the fiscal target.

Monetary policy has remained restrictive, responding to the rising inflationary pressures in the country. Inflationary pressures have shown a decline in recent months, although the annual inflation rate of 5.2% in April 2003 remains above the central bank's inflation target of 3% for this year. At the same time, external imbalances have also moderated, although exports of manufactured goods remain sluggish, given the slowdown in the U.S. growth.

Future rating changes will depend on improvements in Mexico's public finances, external debt burden and progress on key structural reforms. Given the high dependence of fiscal accounts on oil, further fiscal reforms are needed to place public finances on a stronger footing. Similarly, labor sector and energy sector reforms are critical to improving Mexico's competitiveness, attract greater foreign direct investment and place the country on a higher growth path. International competitiveness has gained even importance, given the increasing competition that Mexico faces from China. So far, the Fox administration has found it difficult to pass the energy sector reform in a divided Congress. In this context, Mexico's mid-term Congressional elections in July 2003 will be important, as its results could influence the passage of critical reforms in the country.