Moody’s Sees Elements of Mexico Tax Overhaul as Credit Positive

Mexican President Enrique Pena Nieto’s proposals to increase spending to counter slower economic growth and reduce the government’s dependence on oil revenue are credit positive, according to Moody’s Investors Service.

Mexico’s proposed budget deficit for next year, which at 3.5 percent of gross domestic product would be the biggest since 2009, is “very manageable” and the nation’s debt level is still lower than similar-rated countries, said Alberto Jones, Moody’s Mexico chief. Moody’s rates Mexico Baa1, the third-lowest investment grade, with a stable outlook.

Pena Nieto’s tax bill, presented Sept. 8, would increase revenue by 2.9 percentage points of GDP by 2018, helping the government diversify away from oil sales that fund about one-third of the budget. Combined with the president’s plan to open the state-controlled oil industry to more private investment, it would help raise potential growth, Jones said.

“These are elements that are positive for the credit,” Jones said today in a phone interview from Mexico City. “We need to see if these changes that are credit positive will result in a change in outlook.”

The fiscal bill proposes taxes on capital gains, sugary drinks and the nation’s highest earners. Pena Nieto, who took office in December, has pledged to boost tax collection as part of a series of economic changes to speed up growth that has lagged behind the region. Tax revenue in Mexico is the lowest as a percentage of GDP among 34 members of the Organization for Economic Cooperation and Development.

Peso Strengthens

The peso strengthened after Jones’s comments, erasing its loss and rising 0.1 percent to 13.0885 per U.S. dollar.

Moody’s will probably analyze Mexico’s credit rating before the end of the year to evaluate the impact if Pena Nieto’s plans are passed, Jones said.

The government decided against a value-added tax on food and medicine out of concern such a measure would hurt workers while the economy is weak, Mexican Finance Minister Luis Videgaray told reporters yesterday.

Jones said Moody’s hadn’t expected that the items would be taxed. Pena Nieto’s Institutional Revolutionary Party earlier this year voted to end its opposition to tax on food and medicine, fueling speculation the government would promote such a measure to boost revenue.

Rafael Camarena, an economist at Grupo Financiero Santander Mexico SAB, predicted the exclusion would disappoint ratings agencies in a research note today before Jones’s comments.

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