Tax Revamp Under Pena Nieto Outweighs CPI Impact, Carstens Says

Mexican central bank Governor Agustin Carstens said that the benefits of a fiscal overhaul raising taxes, as Mexico’s incoming president is expected to propose, would outweigh any short-term inflation increase.

“What we know about tax reforms worldwide, when they are implemented they have a once-and-for-all impact on CPI, but then the effect on inflation gets diluted,” Carstens said yesterday in an interview in Mexico City following the conclusion of Group of 20 meetings. Carstens said increasing government revenue would provide “a much stronger basis for stronger growth” and help limit inflation in the “medium and long term.”

President-elect Enrique Pena Nieto has said he plans to push for changes in the nation’s tax system to wean the federal government off its dependence on state-run oil company Petroleos Mexicanos, whose revenue provides about a third of Mexico’s public budget.

Carstens is grappling with inflation that’s remained above the central bank’s target range of 2 to 4 percent since June and said yesterday the lender is “very concerned” about price increases. Banxico said in its Oct. 26 decision that it could raise the 4.5 percent reference rate “soon” should price increases fail to slow.

Tax Bill

Pena Nieto, who takes office Dec. 1, wants to simplify and expand tax collection with a bill he plans on presenting next year and which would take effect in 2014, Luis Videgaray, co-head of the incoming president’s transition team, said in an Oct. 26 interview.

The fiscal overhaul would seek to boost taxes as a percentage of gross domestic product by at least four percentage points, another Pena Nieto top economic adviser, Ildefonso Guajardo, said in an Oct. 3 interview.

Asked if Pena Nieto would extend a 16 percent value-added tax to food and medicine, which are currently exempt, Guajardo said it would depend on what the parties negotiate. Some lawmakers in both President Felipe Calderon’s National Action Party and Pena Nieto’s Institutional Revolutionary Party have said in the past they would support adding duties to those goods.

Stronger Peso

Asked about Mexico’s foreign exchange outlook, Carstens said the peso has “solid grounds” to strengthen given the nation’s higher interest rate and faster economic growth than the U.S., its top trading partner.

The peso was little changed against the dollar at 13.0412 in trading yesterday after appreciating 10.2 percent against the dollar since the end of May, the best performance among 16 major currencies tracked by Bloomberg.

Overseas investors have poured a record $6.8 billion into Mexico’s debt securities this year in search of higher returns, according to EPFR Global, as the Federal Reserve, European Central Bank and Bank of Japan propel the rally by holding interest rates near zero through asset purchases such as quantitative easing in the U.S.

Mexico, Latin America’s second-biggest economy, could grow 4 percent this year, Carstens said during a speech in Minneapolis on Oct. 26. The U.S. economy is expected to expand 2.1 percent, according to a Bloomberg survey of economists.

“There are solid grounds to expect a subsequent appreciation of the peso,” Carstens said.

Carstens said more information about the central bank’s view on inflation will be made public this week, when Banxico delivers its third-quarter inflation report on Nov. 7 and releases minutes from its most recent meeting on Nov. 9.

The odds of a rate hike have increased, Carstens said, “but that depends on what happens in the near future, and will depend on additional information we have in subsequent policy-making meetings.”

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