Mexico has scope for further fiscal reform -S&P

Reuters

(Corrects paragragph six to show tax reform proposal was a"disappointment" to the market, not to the analyst)

By Alexandra Alper

MEXICO CITY, Nov 7 (Reuters) - Mexico has room for furtherfiscal reform to improve its tax base because a bill passed byCongress last week still leaves it well behind countries withstronger revenues, credit ratings agency Standard & Poor's saidon Thursday.

Mexico's Congress approved a package of measures last week,including higher taxes for the rich and levies on junk food andstock market gains in a bid to increase the country's paltry taxtake, one of the weakest in the Americas.

Before the tax reform was presented in September, seniorofficials in President Enrique Pena Nieto's InstitutionalRevolutionary Party (PRI) said the aim was to boost revenues byfour percent of gross domestic product.

But the bill that was eventually floated was less ambitious.And the reform approved is only expected to up the take byaround 2.5 percent of GDP by 2018, the finance ministry said.

The government avoided a political hot potato by notimposing a sales tax on food and medicine, a measure seen bymany economists as fundamental to strengthening the tax base.

S&P sovereign credit analyst Lisa Schineller, an expert onLatin America, told Reuters the fact that this was not includedin the reform was a "disappointment" to the market.

While such sources of revenue remained untapped, there was"certainly scope" for further reform, she said.

With the new reform, excluding tax revenue from state oilmonopoly Pemex - which generates about one third of federal taxincome - Mexico's tax take would be only about 13 percent ofGDP, Schineller said.

"That is still a low tax base internationally," she said.

FURTHER REFORM NOT EXPECTED

Schineller said she did not expect Mexico to propose furtherreform soon and the Finance Ministry has already played down thepossibility of seeking to widen sales tax during Pena Nieto'sadministration, which still has five years to run.

S&P, which rates Mexico one notch lower than other majorratings agencies at BBB, downgraded Mexico in 2009 after theprevious president failed to widen the country's tax base.

The ratings agency revised up its outlook for Mexico'ssovereign debt in March to positive from stable.

Schineller repeated that any S&P upgrade would depend on theimplementation of the fiscal reform, and a pending bill aimed atboosting oil production.

That bill, proposed by Pena Nieto in August, aims to open upthe state-controlled oil sector by allowing private companies toenter into profit-sharing contracts with Pemex.

Lawmakers in the ruling PRI say the reform could still gofurther than that, opening up the possibility ofproduction-sharing contracts to oil majors.

"To the degree that you leave as many options open in theform of contracts, that is probably more positive," Schinellersaid.

Fitch, which rates Mexico BBB-plus, is also of the view thatthe new reform cannot by itself dramatically improve Mexico'stax take.

"The gap between Mexico's revenue base and that of the BBBcategory is still quite substantial," Fitch senior ratingsanalyst Shelly Shetty told Reuters earlier this week.

"And no one single attempt at tax reform is going tomaterially improve or bridge this gap because the gap is stillquite substantial," Shetty added. (Editing by Dave Graham and David Brunnstrom)

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