Mexico has scope for further fiscal reform -S&P

MEXICO CITY Thu Nov 7, 2013 8:54pm EST

MEXICO CITY Nov 7 (Reuters) - Mexico has room for further fiscal reform to improve its tax base because a bill passed by Congress last week still leaves it well behind countries with stronger revenues, credit ratings agency Standard & Poor's said on Thursday.

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

Before the tax reform was presented in September, senior officials in President Enrique Pena Nieto's Institutional Revolutionary Party (PRI) said the aim was to boost revenues by four 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 by around 2.5 percent of GDP by 2018, the finance ministry said.

The government avoided a political hot potato by not imposing a sales tax on food and medicine, a measure seen by many economists as fundamental to strengthening the tax base.

S&P sovereign credit analyst Lisa Schineller, an expert on Latin America, told Reuters the fact that this was not included in the reform was a "disappointment."

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 oil monopoly Pemex - which generates about one third of federal tax income - Mexico's tax take would be only about 13 percent of GDP, 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 further reform soon and the Finance Ministry has already played down the possibility of seeking to widen sales tax during Pena Nieto's administration, which still has five years to run.

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

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

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

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

Lawmakers in the ruling PRI say the reform could still go further than that, opening up the possibility of production-sharing contracts to oil majors.

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

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

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

"And no one single attempt at tax reform is going to materially improve or bridge this gap because the gap is still quite substantial," Shetty added.

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