Fitch: Mexico tax reform plan, 2014 budget are 'credit neutral'

MEXICO CITY Tue Sep 10, 2013 6:49pm EDT

A flag is reflected on the window of the Fitch Ratings headquarters in New York February 6, 2013. REUTERS/Brendan McDermid

A flag is reflected on the window of the Fitch Ratings headquarters in New York February 6, 2013.

Credit: Reuters/Brendan McDermid

MEXICO CITY (Reuters) - A Mexican government tax reform proposal and 2014 budget package are "credit neutral," credit rater Fitch told Reuters on Tuesday, and said it expects no change in the country's rating or outlook for at least a year.

President Enrique Pena Nieto on Sunday proposed a plan to close tax loopholes and impose higher income taxes on the wealthier, pushing aside calls to apply a sales tax to food and medicine that economists have long said was the quickest way to boost Mexico's low tax take.

The reform was presented along with a budget proposal for 2014 that includes a plan to widen the budget deficit next year.

"I think broadly speaking the (reform and budget) package for us is credit neutral," Fitch senior ratings analyst Shelly Shetty said in a telephone interview.

"While the fiscal package clearly enhances the revenue base, we also have to offset this by the higher than expected fiscal deficit trajectory in the coming years as the government provides stimulus to the economy," she explained.

Mexico's economy contracted for the first time in four years in the second quarter, prompting the government to slash its growth outlook.

Shetty welcomed the fiscal reform proposal's bid to eliminate "special regimes" that allow certain sectors to avoid taxes and measures aimed at limiting informality in Mexico's sprawling black market.

But a decision not to apply sales tax to food and medicine made the reform "less aggressive than it could have been," she said. Extending the sales tax would have "yielded a rich dividend in terms of additional revenues," Shetty said.

Fitch Ratings upgraded Mexico's sovereign foreign currency credit rating by one notch to BBB-plus in May with a stable outlook, marking Mexico's first ratings upgrade since 2007.

Shetty said she was waiting to see if the reform push translates into a wider tax base and stronger economic growth.

"When we keep ratings on stable ... it is saying that we are not expecting any positive development probably within a year's time," she said.

Ratings agency Moody's said on Monday it viewed the tax reform proposal as "credit positive," while Standard & Poor's viewed it with caution but said there was room for a debt upgrade if the fiscal plan boosts revenue and a significant energy reform is approved.

(With reporting by Tomas Sarmiento and Michael O'Boyle; Editing by Simon Gardner and Eric Walsh)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article