U.S. rating agency Moody's said on Tuesday it was lifting its rating on Mexican government debt to investment grade for the first time, crowning Mexico's long haul back from a bone-jarring recession in 1994-95.

With the economy humming along at a growth rate of more than four percent, inflation set to fall below 10 percent this year and the public-sector deficit well under control, Mexico's state finances have rarely looked in better shape.

So why the worry that the fruits of five years of hard labor, as the economy has been nursed back into shape after the worst recession in half a century, might be frittered away?

The attainment of investment grade status, enjoyed by only a select club of emerging economies such as Chile and South Korea, allows a broader range of U.S. institutional investors -- such as pension funds -- to invest in Mexican paper.

It will also make it cheaper for Mexican companies to finance expansion plans and for the country to fund its current account deficit.

This has prompted fears that a flood of speculative capital into the economy could force the peso to rise to uncompetitive levels, resulting in a dangerous overheating in stock and bond markets and a widening current account deficit ahead of presidential elections in July.

Financial markets have already discounted the rating upgrade. The peso, which was trading on Wednesday at 9.2642/9.274, has strengthened steadily and bond spreads with U.S. Treasury bills have narrowed.

President Ernesto Zedillo, whose administration suffered a heavy blow in its early days with the shock devaluation of the peso in December 1994, has repeatedly stated his commitment to handing over a stable economy to his successor when he stands down at the end of the year.

Speaking at a bankers' conference last week, Zedillo warned of the dangers of high oil prices and stock market exuberance.

"The lessons of 1994 are still very firmly implanted," said Damian Fraser at Warburg Dillon Read's Mexico City office.

Concerns over a possible investment binge turning into a bust are fueled more by memories of previous booms in 1978-80 and in 1993-94 which turned sour than by any real risk of the economy spinning out of control.

"Mexico has shown in the past too much capital can be a bad thing if the capital is not well spent," said Fraser.

The biggest fear is that after years of fiscal belt-tightening, a fresh cycle of complacency could set in.

"It would be a real shame if after handling the curse of a hard landing they now suffer the curse of complacency," said Gray Newman, chief Latin American economist at Merrill Lynch in New York.

However, Mexico faces little near-term risk of seeing the current account deficit, which ended 1999 at 2.9 percent of gross domestic product, balloon out to anything approaching the 7.3 percent deficit in 1994, the year of the last meltdown.

But a new administration, due to take over the reins of power in December, might be tempted to loosen its grip on the public purse. The government is targeting a 1 percent fiscal deficit this year after last year's 1.15 percent.

Others see worries over the benefits of investment grade status being wasted as a sign of growing maturity. "I think it's positive that people see the risks," said Adolfo Alba, chief economist at BBV-Probursa.

Alba said Mexico needed to work on reducing its inflation rate to U.S. levels to neutralize any loss of competitiveness that might result from a strengthening peso.