Nov. 3 (Bloomberg) -- Mexico’s sales-tax increase fails to resolve “medium-term” fiscal problems and raises the chance ratings companies will downgrade its credit rating and keep a negative outlook, Banco Santander SA said.

The opposition-controlled congress this weekend approved a permanent 1 percentage-point increase in the sales, or value- added, tax to 16 percent after rejecting President Felipe Calderon’s proposal for 2 percent consumption tax that would have generated more than double the revenue. Calderon is seeking to bolster tax revenue to offset a decline in oil production, which funds 38 percent of the budget.

“Markets have already started to weigh the possibility of an upcoming credit downgrade,” analysts led by Gonzalo Fernandez wrote in a note to clients. “The question arising now is, will they go further and downgrade the country’s debt with a negative outlook due to the failure to both significantly reduce its dependence on oil revenues and to expand the taxable base despite the modest increase in the VAT?”

Both Standard & Poor’s and Fitch Ratings have Mexico’s BBB+ rating, the third-lowest investment grade rating, on outlook negative on concern the fastest drop in oil output since World War II will swell the budget gap.

The peso declined 1.1 percent to 13.3573 per U.S. dollar at 8:56 a.m. New York time, from 13.2156 yesterday.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

Last Updated: November 3, 2009 09:22 EST