October 31, 2018 / 11:18 PM / 19 days ago

UPDATE 1-Mexican peso falls on Fitch warning, fears over new government

(Adds comments from Fitch analyst, updates indices, peso)

MEXICO CITY, Oct 31 (Reuters) - Mexico's peso fell 2 percent on Wednesday after credit agency Fitch warned it could downgrade the country's debt rating due to concern about the incoming government's policies, dragging the currency down to its worst-performing month in two years.

Fitch revised Mexico's rating outlook to negative two days after leftist President-elect Andres Manuel Lopez Obrador said he would cancel a partly-built new Mexico City airport in which billions of dollars have already been invested.

There were also risks that Lopez Obrador, who takes office on Dec. 1, would undermine economic reforms, such as the outgoing government's opening of the oil and gas sector to private capital, and could take steps that hurt growth, Fitch said.

Charles Seville, Fitch's primary analyst for Mexico, said in an interview that the decision to ditch the airport "came as a shock to the markets."

Lopez Obrador said he would cancel construction of the partially-built $13 billion new airport after an informal referendum organized by his party backed his plan to ditch the hub for a cheaper alternative scheme.

Less than 1 percent of the electorate voted for the cancellation of the airport in the referendum, which was widely criticized for lacking controls to assure it was fair.

"There is the suggestion that other projects could be put to a popular vote, which would introduce more uncertainty," Seville said, pointing to a referendum to repeal the energy reform as the most worrying possibility.

The peso closed over 1.4 percent down against the dollar, having earlier fallen more than 2 percent.

It has weakened nearly 8.7 percent in October, its heaviest monthly loss since the election of U.S. President Donald Trump in November 2016.

The country's benchmark S&P/BMV IPC stock index is on track for a 11.2 percent decline in October, its biggest drop since January 2009, during the global financial crisis.

"The airport announcement came at a really bad moment for the peso because it basically clouded big investments and flows in uncertainty, erasing all the good will of the peaceful election in Mexico and the successful renegotiation of NAFTA," said Alfonso Esparza, an analyst at online forex broker OANDA.

Mexico, the United States and Canada agreed on an update to the North American Free Trade Agreement at the end of September.

The market declines early in the month in Mexico tracked losses in riskier assets around the world, due to concerns about global trade tensions. But Mexican markets suffered major losses on Monday following the decision to cancel the airport.

Seville said the negative outlook on Mexico meant there was a "fifty-fifty" chance of a downgrade over the next two years. (Reporting by Noe Torres, Miguel Angel Gutierrez and Michael O'Boyle; editing by Dave Graham and Rosalba O'Brien)

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