Mexican President Enrique Pena Nieto proposed taxes on capital gains, sugary drinks and the nation’s highest earners in a bid to wean the government of Latin America’s second-largest economy off its dependence on oil revenue.
The bill sent to congress yesterday along with the president’s 2014 budget proposal would place a new 10 percent tax on individuals’ profits from stock sales and dividends, raise the maximum personal income tax rate to 32 percent from 30 percent and avoid taxing food and medicine. The measures would help offset a proposed lower tax burden for state-owned oil producer Petroleos Mexicanos, or Pemex, and help pay for universal social security and unemployment insurance.
Pena Nieto also asked Congress to approve a budget for next year with a deficit of 1.5 percent of gross domestic product that would climb to about 3.5 percent, the highest level in more than a decade, when a proposed $27 billion in Pemex investment is included. Ratings companies will probably be disappointed by the decision not to tax food and medicine, while some government bond investors may be hurt as additional debt issuance boosts supply of the securities, said Alonso Cervera, the chief Mexico economist at Credit Suisse Group AG.
“The government is reacting to the current economic conditions in Mexico, and this is why probably they refused to go with a VAT on foods and medicines,” Cervera said in a telephone interview. In the bond market, “the middle part, the long end of the curve will have to digest the news that there will be a lot of net issuance in Mexico next year,” he said.
The tax bill would increase government revenue as a percentage of GDP by 1.4 percentage points next year and by 2.9 percentage points by 2018, according to the bill. The budget calls for a maximum 550 billion pesos ($41.7 billion) in net internal debt and $10 billion in external issuances.
The peso rose 0.1 percent to 13.1522 per U.S. dollar at 11:32 a.m. in Mexico City. Yields on fixed-rate government peso bonds due in December 2024 fell six basis points, or 0.06 percentage point, to 6.31 percent.
Pena Nieto has pledged to boost tax collection as part of a series of economic overhauls to speed up growth that’s 40 percent slower than the regional average over the past five years. Income from Pemex crude sales funds about a third of the federal budget, and tax revenue in Mexico is the lowest as a percentage of GDP among 34 members of the Organization for Economic Cooperation and Development.
Pena Nieto also wants to revise this year’s balanced budget to a 0.4 percent deficit to allow higher government spending after lower-than-expected economic growth.
“With this tax reform, we will all do more for the country, and Mexico will do more for all Mexicans,” Pena Nieto said yesterday in a speech at the presidential residence of Los Pinos. “Mexico will grow more, be more fair and open greater opportunities for each person to write their own success story.”
The higher 32 percent income tax rate will apply to people making more than 500,000 pesos a year, according to the proposal. Mexico currently doesn’t tax profits from stock sales.
Growth slowed more than analysts forecast this year after the government reduced spending in the first half, Finance Minister Luis Videgaray said in a June 17 interview. The government on Aug. 20 cut its 2013 growth estimate to 1.8 percent from 3.1 percent. Taxing food and medicines, which had been considered, would hurt Mexican families amid the current economic weakness, Pena Nieto said.
The lack of a tax on food and medicines was the biggest surprise in the proposal and could buoy food and retail stocks, Grupo Financiero Banorte SAB said in a research report today.
Retailer Grupo Comercial Chedraui SAB led gains on the benchmark IPC stock index, climbing 5.7 percent to 40.42 pesos at 11:43 a.m. in Mexico City. Grupo Bimbo (BIMBOA) SAB, the world’s largest break maker, climbed 5.6 percent to 40.76 pesos. Wal-Mart de Mexico SAB, Latin America’s biggest retailer, gained 3.6 percent to 33.48 pesos. The IPC index overall gained 2 percent.
The government is also seeking a tax of one peso per liter on sugary drinks. That could affect companies such as Coca-Cola Femsa (KOF:US) SAB, the largest bottler of the soft drink in Latin America, and Arca, the second-largest Coca-Cola bottler in the region.
Coca-Cola Femsa gained 0.2 percent to 169.71 pesos after earlier losing as much as 3.6 percent, Arca Continental SAB (AC*) rose 0.9 percent to 85.6 pesos after falling 2.2 percent. Organizacion Cultiba SAB (CULTIBAB), the exclusive bottler of PepsiCo. Inc. soft drinks in Mexico, rose 1 percent to 31.9 pesos after earlier losing 2.4 percent.
The government plans to spend 4.48 trillion pesos next year including investment in Pemex and lowered its 2014 growth forecast to 3.9 percent from an April estimate of 4 percent, according to the budget proposal. Calculations for the budget were made with the assumption Pemex will export 1.17 million barrels per day next year with an expected average price of $81 per barrel.
The reform would also end a tax benefit, known as fiscal consolidation, that allows holding companies to postpone paying taxes when their subsidiaries post losses. Companies with the largest deferred tax assets, and thus may be the most affected, are America Movil (AMXL) SAB, Cemex SAB, Arca Continental, Empresas ICA SAB (ICA*) and Bimbo, JPMorgan Chase & Co. said in a Sept. 6 research note.
America Movil gained 1.3 percent today to 12.9 pesos, Cemex rose 1.2 to 15.21 pesos, and ICA gained 3.3 percent to 27.55 pesos.
“We anticipate turmoil in the Mexican stock exchange,” Deutsche Bank AG said in a research note following Pena Nieto’s announcement yesterday. “President Pena Nieto’s fiscal reform initiative should ultimately translate into more robust public finances. However, the short-term impact on several industries and companies could prove to be adverse.”
Shares of Bolsa Mexicana de Valores SAB, the operator of Mexico’s stock exchange, gained 1 percent to 31.9 pesos.
The proposals won support from Jesus Zambrano, head of the opposition Democratic Revolution Party. “Essentially we are in total agreement and there are elements to support” in the bill, Zambrano said in an interview.
The tax proposal also calls for lowering gasoline subsidies over the next two years, although at a slower pace than this year. The plan will also lower Pemex’s tax burden gradually until it is similar to that of other companies, although changes won’t take effect until 2015, Deputy Finance Minister for Revenue Miguel Messmacher said in an interview on the sidelines of yesterday’s tax bill announcement.
The proposed higher deficit would only be sustainable if new taxes are implemented, as they’ll “lend support to our indebtedness going forward,” Messmacher told reporters yesterday.
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