Mexico election seen weighing on economy prospects

By Jason Lange

MEXICO CITY, June 24 (Reuters) - Mexico's upcoming congressional elections could be decisive for President Felipe Calderon's plans to overhaul the economy to boost growth analysts say as Mexico seeks to emerge from its deepest recession since 1995.

All 500 seats in Mexico's lower house are up for grabs on July 5, and polls show a centrist opposition party is poised to replace Calderon's conservatives as the biggest force in Congress.

A key issue will be the willingness of the Institutional Revolutionary Party, or PRI, to work with Calderon to boost tax collection and wean the federal budget off oil revenues as the country's black gold runs out.

PRI leaders say they oppose tax hikes, but have signaled they are in favor of retooling income tax laws.

Mexico pulls in just 10 percent of GDP in taxes, one of the lowest levels of revenue collection in Latin America. For Mexicans, that often means underfunded schools as well as shoddy highways and ports.

To fix this, "you need money and you need to collect more taxes. Someone has to pay for it," said Alberto Ramos, an economist for Goldman Sachs in New York.

"It remains to be seen whether the political balance after the elections will be friendly to reforms or not," he said.

Mexico is also under pressure to boost investment in its energy sector and promote competition in an economy where relatively few companies dominate their respective markets.

Failure on these fronts is seen as likely to lead credit rating agencies to downgrade Mexico's debt, possibly before the end of the year. That would raise borrowing costs for the government as well as companies, complicating the prospects of any recovery from the current recession.

Mexico's economy is expected to shrink about 6 percent this year, slammed by a plunge in demand for its exports in the recession-hit United States. That would be the worst contraction of Mexico's economy since 1995 when the economy shrank 6.2 percent.

Growth in Mexico has been subpar by Latin American standards for years. Mexican growth averaged about 3 percent in the 10 years through 2008, compared to 3.3 percent in Brazil and 3.8 percent in Chile.

APPETITE FOR REFORM

Economists blame Mexico's leaders for putting off the tough choices needed to make the economy more dynamic.

Now the country's oil production, which funds more than a third of the federal budget, is falling steadily. Output fell in May to its lowest under normal conditions since 1993.

Since taking office in December 2006, Calderon has worked with the opposition to push some tax and energy reforms through Congress. However, the PRI watered down those efforts -- killing a plan to allow private investment in refining and taking some of the bite out of a plan to tax the country's vast informal economy.