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Fitch: Brazil's Economic Momentum Stronger than Mexico's; Ratings Gap Unlikely to Close in Near Te

NEW YORK--(BUSINESS WIRE)--Brazil is better positioned to recover from the economic crisis and experience stronger growth than Mexico in 2010, although the one-notch rating gap between the two countries is unlikely to close in the near term as reflected by the Stable Rating Outlooks on both sovereigns, according to a Fitch Ratings report published today.

Fitch forecasts a growth rate of 5.5% for Brazil's GDP in 2010 after an estimated contraction of 0.4% in 2009. By contrast, Fitch predicts Mexico's GDP will grow 4% in 2010 following a contraction of 6.5% in 2009.

'While Mexico's economy will recover this year, the expected sluggish growth in the U.S. will limit its ability to grow at a faster pace owing to its close trade ties with its northern neighbor,' said Shelly Shetty, Senior Director, Fitch Ratings Sovereigns Group. 'Brazil's economy will benefit from the strength of the private consumption, a pick-up in investment as well as the modest recovery in commodity prices,' said Shetty.

Fitch affirmed Brazil's 'BBB-' Long-Term Issuer Default Ratings (IDR) in May 2009 and downgraded Mexico's Long-Term Foreign currency IDR one notch to 'BBB' in November. Despite Brazil's stronger external balance sheet and a greater economic dynamism, the one-notch difference between Brazil and Mexico is justified by Mexico's structural strengths and its lower government debt burden. Mexico also has a longer track record of prudent macroeconomic policies which has resulted in a lower volatility of its main macroeconomic indicators.

Economic contraction and lower average commodity prices in 2009 led to a decline in inflation rates in both countries. Nonetheless, both will face challenges in conducting their monetary policies in 2010 but for different reasons. Brazil could experience a demand-pull inflation due to the expected above-potential growth, while Mexico is facing a supply-side inflation shock because of its recently approved tax increase package.

Fitch expects that the gross general government debt burden in both countries will broadly stabilize this year after increasing in 2009. 'Brazil's gross general government debt burden of over 70% of GDP will remain approximately 30 pp above Mexico's, underscoring the need for Brazil to embark on fiscal consolidation as the economic recovery takes hold,' said Shetty.

Fitch expects account deficits to deteriorate in both countries due to the economic recovery, although higher capital inflows should allow both the Brazilian and the Mexican central banks to accumulate additional reserves in 2010 to increase their cushion against potential external shocks. Brazil is likely to do so at a faster pace, thus further increasing the gap between its favorable external credit metrics and those of Mexico.

Fitch does not anticipate any significant economic reforms in either Brazil or Mexico during the remainder of 2010 given the particular political environments in both countries.

Source: finance.yahoo.com


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