Mexico faces race against clock on fiscal reform
By Rodrigo Martinez
MEXICO CITY, Sept 27 (Reuters) - With economic activity sliding and oil prices falling fast, Mexico's government is in a race against the clock to secure Congressional votes for a reform designed to buoy the nation's sluggish tax collection rate.
Mexico's economy has been pummeled by the marked slowdown in the United States, which buys 85 percent of Mexico's exports, and an expected drop in U.S. consumer confidence after the deadly Sept. 11 attacks is likely to wreak even further havoc.
In the past two days, Latin America's No. 2 economy has taken a beating on another key front as prices for oil have dipped to levels not seen since late 1999.
The rash of negative news gives new urgency for President Vicente Fox to push through much-anticipated tax reform. The pressure to pass reforms quickly could ultimately force Fox to backpedal on a core piece of his proposal -- the application of value-added taxes (VAT) to food and medicine.
``(The government) must look for an agreement and try to have a fiscal reform by the end of October,'' said Pablo Alvarez-Icaza, director of economic research at Bursametrica Management.
Earlier this year Fox's government sent Congress a reform package designed to bring in an additional $14.7 billion in taxes during its first year.
Congress has passed some financial reforms that were part of the package -- one of Fox's major initiatives -- but the tax changes have languished since April over fierce opposition to broadening the VAT to food and medicine.
A number of lawmakers, including some from Fox's own party, object to the proposal on the grounds that it would hurt the 40 percent of the population already living in poverty.
BETTER THAN NOTHING
Faced with the retreating economy and a Congress in which no party has an outright majority, it now seems Fox may be forced to present a more modest reform plan.
The plan ``will certainly not bring in the amount that was originally forecast,'' said Felipe Calderon, leader of Fox's National Action Party (PAN) in the lower house, on Tuesday.
Mexico's tax income rose 4.2 percent in the January-July period compared with the same 2000 period, but the government forecasts a drop in the second half because of the poor economy, which posted flat growth in the second quarter and was forecast by analysts to contract in the third quarter.
``Since it has to do with the fiscal side, the reform would help the economy remain fertile and it would be in a position to rebound as soon as possible,'' Finance Undersecretary Agustin Carstens said on Wednesday.
Beyond the gloomy tax scenario, Mexico stands to be hard hit by the sharp drop in oil prices since it relies on the commodity for about a third of its government revenues.
In tandem with the drop, the price of Mexico's basket of crude hit $17.52 a barrel on Wednesday, below the $18-a-barrel average price that was used to calculate the 2001 budget.
``This is much more important now,'' said Ignacio Trigueros, director of the Economic Analysis and Economic Investigation Center, of the passage of tax reform. ``This is one of the few hopes we have to exit the situation we're in.''
SEARCHING FOR INVESTMENT GRADE
Also bound to the fiscal reform package is Mexico's quest for an investment grade rating from Standard & Poor's.
Economists said even toned-down tax reforms would likely prompt the agency to boost Mexico's rating in the medium term.
Probably S&P would wait for some time after reforms were approved, to evaluate the impact on tax revenues, before assigning an investment grade rating, said Alvarez-Icaza.
But S&P said on Wednesday that an upgrade of Mexico has become ``much less likely.''
``The prospect for reactivation of growth in the Mexican economy in the second half of the year has collapsed since Sept. 11, because of Mexico's link to the U.S. economy,'' Graciana del Castillo, S&P's lead Mexico analyst, told Reuters in a telephone interview from New York.
Moody's Investors Service raised Mexico to investment grade in March 2000.
(With additional reporting from Hugh Bronstein in New York) |
