By Tomas Sarmiento and Christine Murray
MEXICO CITY, Feb 5 (Reuters) - Mexico became only the second country in Latin America to earn a coveted "A" grade sovereign rating after Moody's upgraded it on Wednesday, citing major economic reforms that President Enrique Pena Nieto has pushed through Congress.
Mexican debt rallied and the peso currency also firmed after the upgrade, which should help to lower the country's borrowing costs, and could also underpin local assets amid a global emerging market sell-off.
The Moody's Investors Service decision comes after President Enrique Pena Nieto broke through gridlock in a divided Congress to push through Mexico's most significant economic reforms since the NAFTA trade deal with the United States and Canada in the 1990s.
Moody's upgraded Mexico's sovereign rating to A3 from Baa1, with a stable outlook. Only a handful of other emerging markets such as Chile, Poland and Malaysia have earned an 'A' rating.
Mexico's upgrade came even after battles between armed vigilantes and drug gangs in the western state of Michoacan spooked some investors and underscored the country's struggle to reduce drug violence that has dragged down growth.
Moody's expects last year's reforms, which include opening the state-run energy sector to private investment and a tax overhaul, to "strengthen the country's potential growth prospects and fiscal fundamentals."
Mauro Leos, the Moody's senior analyst, told Reuters the rating agency sees no further significant changes in Mexico's sovereign rating for two to three years.
Fellow ratings agencies Standard and Poor's and Fitch Ratings are expected to follow suit with upgrades.
"Confidence in Mexico in the world is growing," President Nieto said after the upgrade.
He is hoping that sweeping overhauls of the telecommunications and energy sectors will boost competition and economic growth in Mexico, which has been a regional laggard.
"I think it's very well deserved and to a large extent reflects the recognition of the major structural reform drive that was undertaken by the authorities last year," said Alberto Ramos, an economist at Goldman Sachs in New York.
The upgrade could not come at a better time for Mexico, which has suffered alongside other emerging nations as investor jitters over the winding down of U.S. monetary stimulus and the deceleration of the Chinese economy set off a massive sell-off of emerging market assets
The yield on the country's benchmark 10-year peso bond fell 13 basis points to 6.52 percent in its biggest one-day drop since the end of December, pushing its price up sharply. Bond prices move inversely to their yields, and the emerging market sell-off drove the 10-year peso bond's yield to its highest in over two years last week.