November 28, 2012 / 8:51 PM / 5 years ago

UPDATE 1-IMF urges Mexico to balance budget in 2013

* IMF says risks to economic growth to downside

* Needs to boost revenue, productivity, investment

* Says essential for cenbank to communicate well

MEXICO CITY, Nov 28 (Reuters) - Mexico must aim for a balanced budget in 2013 and boost tax revenue to avoid over-dependence on oil income, the International Monetary Fund said on Wednesday.

After its annual health check of Mexico’s economy, the IMF said growth in Latin America’s second-biggest economy was holding up due largely to strength in the United States, which buys almost 80 percent of Mexico’s exports.

But the IMF said risks were to the downside, including from a sudden exodus of foreign investment, and it highlighted the need for sound management of public finances.

IMF directors “encouraged the return to a balanced budget under Mexico’s fiscal rule in 2013,” the IMF said in a report, calling for increased efforts to raise revenue and reduce reliance on state oil company Pemex.

Mexico has the lowest tax take in the Organization for Economic Cooperation and Development, something that credit ratings agencies have cited as a hindrance to a long-desired credit upgrade from the current investment-grade BBB, or equivalent.

President-elect Enrique Pena Nieto, who is to take power on Saturday, has promised reforms to taxation and a boost to competition in pursuit of an economic growth rate of 6 percent.

Mexico has not yet released details of its budget for 2013; for 2012 it approved a deficit representing 0.4 percent of gross domestic product, excluding investment by Pemex.

The IMF said the Mexican central bank has helped support growth by keeping rates low at 4.5 percent and said it was essential to give signals about the right level for rates in the face of shocks to help keep inflation expectations low.

Inflation has overshot the central bank’s 4 percent ceiling for the last five months, but is now drifting down. Investors and analysts expect the central bank to keep rates on hold when it meets on Friday as growth slows in the face of global headwinds.

The IMF said Mexico, which has averaged just 2.6 percent annual growth over the last two decades, should focus on reforms to raise productivity and investment to boost the economy’s potential, as well as security and access to credit.

Mexico has averaged a ratio of private sector credit to GDP of 26 percent over the last five years, compared with 71 percent in Chile and 61 percent in Brazil, according to World Bank data, although it is expanding at double-digit rates.

The country has attracted record foreign investment in stocks and bonds this year, almost five times more than Brazil for the nine months to September, and the IMF warned Mexico should guard against the risk of a reverse. Foreign investors currently hold about one third of the outstanding stock of local currency government bonds.

IMF staff also found the real effective exchange rate consistent with fundamentals, the report said.

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