Markets skeptical on Mexican fiscal reforms
Enrique Peña Nieto’s sweeping overhaul of Mexico’s fiscal architecture could disappoint markets surprised by plans for a large fiscal deficit
Plans to overhaul Mexico’s fiscal system have met
with a mixed market reaction as analysts digest the
implications of a watered down reform which could mean a total public deficit as
high as 3.5% of GDP for 2014.
||Mexican President Enrique Peña Nieto, July
Source: Presidencia de la República Mexicana
Luis Videgaray, Mexican finance
minister under president Enrique Peña Nieto, announced
plans Sunday to increase the top individual tax rate, introduce
a capital gains tax and lower the rate levied on Pemex, as part
of a broader fiscal reform package which
he first outlined in an interview with LatinFinance
government’s investment in state oil company
Pemex, the reforms could lead to a fiscal deficit of 2.4% of
GDP this year.
The plan will address some of the
loopholes that weakened tax collection, says Benito Berber,
Latin America strategist at Nomura. Overall though, he says the
reform has potential to disappoint.
But the measures did not include a
widening of a sales tax to food and medicine – a move
which analysts say would have proved a significant boost to
"Mexico didn’t want
to tax food and medicine, and on top of that they are asking
congress for a [larger] fiscal deficit, one of the largest
since the 1990s, and there is the possibility of dilution by
congress. If [you] put everything together, the message might
disappoint the market."
Still, ratings agencies will take
their time to assess the impact, he says.
"Probably we will see ratings
agencies more cautious next year and will probably wait a year
or two before considering Mexico for an upgrade," he tells
The bill is likely to be passed by
congress, winning broad support by removing value-added tax on
food and medicine, say analysts at Barclays. The bank deems the
tax changes positive. But increases in the deficit could put up
problems, they say. The 3.5% of GDP deficit projected for 2014
would be the highest since 1989, they say. Funding it could be
difficult at a time when the US is rolling back an
extraordinary period of stimulus.
"Financing the deficit by the
federal government, which will be 35% higher in nominal terms
to the one planned in 2013, could be quite challenging in a
context in which the Federal Reserve is signaling the end of
the monetary stimulus, increasing the sovereign rates for the
emerging markets," Barclays analysts said.
Meanwhile, the reforms only partly
tackle the government’s high dependency on oil
revenues, Capital Economics economists said. The firm
calculates that a $10 fall in the per-barrel oil price would
cut government tax revenue by 1% of GDP.
"The reforms announced over the
weekend will help to raise revenues and broaden the tax base
— but only up to a point." LF