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IHS Global Insight Report: Mexico (Country Intelligence) Report printed on 26 October 2010

CONTENTS Country Reports > Executive Summary

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Current as of Tue 26 Oct 2010

Executive Summary: Key Issues to Watch
 Six-Factor Country Risk - Mexico
 Risk  Political  Economic  Legal  Tax  Operational  Security Overall  Score 2.75 3.00 2.50 2.25 3.25 3.75 2.88  Description Medium Significant Medium Moderate Significant High Medium Negative Trend

Success of Electoral Pacts: The Institutional Revolutionary Party (PRI) has failed to extend its grip on the sub-national political level, after it lost three states to an alliance between the centre-right National Action Party (PAN) and the political left in theJuly state elections. The unexpected success of the electoral pacts suggests that similar agreements will play a crucial role in the run-up to the 2012 presidential elections. There is an increasing chance that the PAN will team up with the left for the 2011 elections in Mexico state in an effort to weaken Enrique Peña Nieto, the incumbent governor and one of the favorites for the PRI presidentialnomination. Immigration Takes Centre Stage in U.S. Relations: The decision of a federal judge in late July to revoke the most contentious aspects of a tough immigration law in the U.S. border state of Arizona has been welcomed in Mexico. But immigration will remain at the centre of bilateral relations, as moves for an all-encompassing immigration reform are likely to remain stalled over theshort-term as the U.S. administration prepares to fight the November mid-term elections.

 12-Month Rating Trend

Note: 1 = minimum risk, 5 = maximum risk. Ratings form part of enhanced Country Analysis & Forecast suite of services. Subscribers can access full table and methodology here.

 Sovereign Risk Ratings - Mexico
 Medium-Term Supportive Credit 30(BBB+) Fundamentals

Lack of FiscalFlexibility Puts Recovery at Risk: The Mexican  Sovereign Risk Negative government announced budget cuts in mid-2009 to reduce the size Outlook of the fiscal deficit and to ward off the potential downgrade of its Note: 0 = minimum risk, 100 = maximum risk. Ratings form Sovereign Risk Rating. This happened in the midst of the worst part of enhanced Economic and Sovereign Risk services. Subscribers canaccess full table and methodology here. economic crisis in many decades when the rest of the world was actively pushing fiscal stimuli. In Mexico, public finances depend heavily on oil revenue, and lower prices and much lower output are reducing revenue and widening the fiscal gap. Fitch has already downgraded Mexico's rating, although it is still better than the ratings of both Brazil and Peru, twoeconomic success stories in the region. At IHS Global Insight we firmly believe that Mexico does not have a problem with its external accounts, so far, but oil dependency is taking its toll on public finances and fixing the problem poses an upward risk on the road to economic recovery. Banxico Finishes Expansionary Cycle, Will Not Cut Rates Again Before H2 2010: Beginning in January 2009, thecentral bank started an expansionary cycle that lasted through July 2009 and brought the reference rate down from 8.25% to 4.50%. As inflation is still relatively high, there is no room for further cuts and IHS Global Insight does not foresee any additional move by the monetary authority, at least in terms of the policy rate (the central bank discount rate—fondeo bancario). As inflation continues toslow down, the monetary authority will have more room to cut interest rates; the reference rate in Mexico is substantially higher than in developed nations, where policy rates are close to zero. Nevertheless, the impact of lower rates on the real economy, i.e., consumption and investment, will be limited as private banks become more risk averse and reduce lending. Oil Revenue Dependence...