Sept. 7 (Bloomberg) -- Plans by Mexico's ruling party to levy a tax on soft drinks would cost Coca-Cola Femsa SAB, Latin America's biggest bottler, more than 3 percent in sales and profit growth, JPMorgan Chase & Co. analyst Alan Alanis said.

“If there is an excise tax, they'll have to pass it all to the consumer,” New York-based Alanis said in a phone interview.

Mexico's Congress will begin to discuss how to offset the effects of a slowing economy and declining tax revenue on government income tomorrow, when Finance Minister Agustin Carstens, 51, discloses his 2010 budget. Luis Enrique Mercado, a lawmaker for the ruling National Action Party, said Sept. 3 that his bloc would back a soda tax, increased duties on beer and the elimination of tax exemptions on junk food.

Alanis said he had been forecasting earnings before interest, taxes, depreciation and amortization at Mexico City- based Coca-Cola Femsa would rise next year in line with an estimated 3 percent to 4 percent increase in sales volume.

“If we put a tax increase of 10 percent, I'll have to put my volumes essentially flat,” said Alanis, who has an “overweight” recommendation on Coca-Cola Femsa, which sells 26 brands of soft drinks.

On Aug. 28, Reforma newspaper, citing a Finance Ministry document, said the proposed tax rate for soft drinks was 10 percent. Finance Ministry spokesman Rodrigo Brand declined to give details of the budget, saying they would be disclosed tomorrow.

Coca-Cola Femsa's profit rose 17 percent in the second quarter to 2.16 billion pesos ($162 million) as sales climbed 30 percent.

Arca Sales

Carolina Alvear, a spokeswoman for Fomento Economico Mexicano SAB, the parent company of Coca-Cola Femsa and the country's second-largest beer brewer, declined to comment on possible tax changes.

A new levy on sodas would have a similar effect on sales and profits at Embotelladoras Arca SAB, Mexico's second-largest Coca- Cola bottler, as on Coca-Cola Femsa, said Alanis, who has a “neutral” recommendation on the Monterrey-based company. Arca's profit fell 6 percent in the second quarter to 766.3 million pesos.

Arca spokesman Guillermo Garza declined to comment.

Mexico's tax collection has fallen as Latin America's second-biggest economy contracted 10.3 percent in the second quarter from a year earlier. Oil revenue, which provides the government with 38 percent of its income, has dropped because of a 37 percent decline in prices over the past 12 months and diminishing production at state-owned Petroleos Mexicanos.

The government estimates the deficit will widen to 3 percent of gross domestic product this year from 2.1 percent in 2008.

IVA Increase

Mercado ruled out any increase in the 15 percent rate of value added tax, known as IVA, or an end to the exemption from the tax for medicines and food, other than those with high calories and low nutritional value.

The opposition Institutional Revolutionary Party, or PRI, which has more deputies than any other group in the 500-member lower house, opposes any increase in IVA, PRI congressman Jesus Alberto Cano Velez said in an Aug. 11 interview. The party would support increased duties on beer and tobacco, said Cano Velez.

“Nobody wants to touch the IVA, it's a political taboo in Mexico,” Jose Antonio Crespo, 54, a political analyst at the Center for Economic Research and Teaching in Mexico City, said in a telephone interview. “Politicians portray the IVA as an attack on the poor.”

Sweet rolls, snacks and candies produced by Grupo Bimbo SAB, the world's biggest bread maker, would be subject to IVA if exemptions were lifted for junk food, said Eduardo Estrada Lopez, an analyst at Citigroup Inc.'s Banamex unit in Mexico City.

Price Increases

Recent price increases mean the Mexico City-based food maker would probably absorb the tax itself rather than risk a drop in sales by passing it on to consumers. Estrada said he couldn't calculate the effect on earnings until details of any new tax were known.

Bimbo spokeswoman Monica Breton declined to comment for this article. Bimbo second-quarter profit rose 70 percent to 1.43 billion pesos.

Any increase in the 25 percent excise tax on beer would probably cause Mexicans to reduce consumption, JPMorgan's Alanis said.

An increase in the duty to 30 percent would reduce sales of Grupo Modelo SAB, the country's largest brewer and maker of Corona, and Fomento Economico Mexicano, by 1.7 percent, Alanis said. Fomento Economico is the maker of Dos Equis beer.

Grupo Modelo said it opposes increased duties.

“Mexico is currently one of the countries with the highest beer taxes,” the Mexico City-based company said in a statement.

Markets Last Week

Mexico's Bolsa index fell 1 percent last week to 28309.55. Grupo Mexico SAB, Mexico's biggest mining company, led advances in the index, climbing 9 percent after a judge said the company should be allowed to regain control of its bankrupt U.S. copper mining unit. Axtel SAB, Mexico's second-largest fixed line phone operator, dropped 7.4 percent.

Mexico's peso weakened 0.9 percent against the dollar last week. The currency fell to 13.3631 pesos per dollar from 13.2478 pesos on Aug. 28.

Yields on Mexico's 10 percent local-currency bond due December 2024 fell 11 basis points, or 0.11 percentage point, to 8.3 percent last week. The bond's price rose 1.1 centavos to 114.66 centavos per peso, according to Banco Santander SA.

The following is a list of events in Mexico this week:

Event                                  Date         Forecast
Aug. Consumer Prices Month-on-Month    Sept.  9      +0.25%
Aug. Consumer Prices Year-on-Year      Sept.  9      +5.10%
Aug. Consumer Prices Core              Sept.  9      +0.25%
July Trade Balance                     Sept. 10       ----
June Gross Fixed Investment            Sept. 11      -10.8%
July Industrial Production             Sept. 11       -9.1%

To contact the reporter on this story: Carlos M. Rodriguez in Mexico City at carlosmr@bloomberg.net; Thomas Black in Monterrey at tblack@bloomberg.net.

Last Updated: September 7, 2009 01:00 EDT