SOUTH PADRE ISLAND, Tex. -- Wall Street analysts yesterday said the turnaround in the Texas economy is being reflected in ratings this year as the number of downgrades again equals that of upgrades.

Chris Evangel, assistant vice president at Moody's Investors Service, told a gathering here of the Government Finance Officers Association of Texas that after downgrades peaked in 1987, they have declined while upgrades of credits have remained stable.

"Since last year, we have an almost equal number of upgrades to downgrades," he told local financial officials attending the two-day conference. "From a credit point of view, we think the worst is over."

Mr. Evangel noted that downgrades peaked at nearly 100 credits in 1987 -- the year after a crash in the state's oil industry. The figure has declined steadily through this year, with about 12 downgrades in the first nine months of 1991.

At the same time, the number of upgrades, which peaked at 45 in 1986, has fallen to around 10 credits a year.

Mr. Evangel said the turnaround can be linked to the diversification in the state's economy. Now, he said, downgrades will not reflect a softness in the economy as much as fiscal conditions in individual cities.

One city finance officials questioned whether Moody's stresses higher taxes over budget cuts to address such problems. "Obviously, in the ideal world, we want you to keep raising taxes," Mr. Evangel said. "Our concern is when you start to cut back, at what point do you hurt your services."

Steve Levine, assistant vice president at Moody's, said the agency also is concerned if budget reductions are long term or one-shot solutions.

"We're looking for the long haul," he said. "The recurring nature of their action is very important ... As the economy rebounds, most of those kinds of problems are short-term."

Analysts agreed the long-term outlook for the state is good.

In a separate presentation, Richard Raphael, senior vice president of Fitch Investors Service, noted that economists project that the Texas economy will continue to outpace the nation's over the next 20 years despite anticipated cuts in defense and aerospace.

While the economy in much of the state has become more closely linked to the nation's, Mr. Raphael noted that the Valley region along the U.S.-Mexico border was not subject to the volatility that affected Texas during the 1980s.

In fact, while much of Texas was struggling with a recovery, the border area began to prosper in the last five years as Mexico liberalized tariff restriction that spurred growth from El Paso to Brownsville and South Padre Island.

Mr. Raphael noted that the border area economy is tied closely to the Mexican economy, the value of the peso, and that country's trade policy. However, he said it was uncertain how the proposed U.S.-Mexico free trade agreement might affect the Valley's economy. "That is the big question," he said.

Many Texas economists predict that in the short term, the region will benefit because it is already prospering under friendly trade conditions. However, they say the pact could have negative long-term implications for the border area as companies locate elsewhere.

Analysts from Fitch and Moody's both noted that the strong economic outlook is a plus for state and local credits in the coming years, but both agencies have sharply contrasted perspective on Texas credits.

Revamped in 1989, Fitch currently rates a dozen better-known credits, including Houston, Austin, and two major university systems. State officials who solicited a rating on its note sale this fall are expected to discuss a possible statewide general obligation rating.

With some 1,500 ratings at all levels, Moody's has the broadest base of any of the Wall Street agencies in Texas. In fact, the credits the agency reviews include hundreds of small issuers such as schools and municipal utility districts.

Mr. Evangel said the large number of such credits is the main reason 64.6% of Texas GO ratings are rated below A, while nationally 32.6% of such ratings are in the same range.

"That has to be taken into perspective," he said. "If we were to carve out some of those smaller districts, the average would reflect the country as a whole."

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