WASHINGTON—The Mexican economy is in the midst of its worst crisis in more than a decade, but political obstacles including a rejuvenated opposition in Mexico's Congress could complicate attempts by President Felipe Calderon to enact much-needed fiscal reforms, analysts said Tuesday.
Since the onset of the global economic crisis, Mexico has been hit hard by a combination of declining exports, a downturn in remittances and lower oil prices, which have put significant pressure on public finances. Last week, Finance Minister Agustin Carstens said the country faces a revenue shortfall of 300 billion pesos ($US 23 billion) this year, and he proposed new tax reforms that would boost the country's non-oil revenues. But the issue of how best to deal with fiscal pressures is bound to ignite debate in Mexico's newly elected legislature, said Lisa Schineller, director of sovereign ratings at Standard and Poor's.
"The topics on the table, improving the fiscal flexibility, perhaps looking at the oil sector; those are fundamentally politically challenging topics in Mexico," Schineller said during a panel discussion at the Inter-American Dialogue.
Last month, the opposition Institutional Revolutionary Party, or PRI, which ruled the country for more than 70 years until losing the presidency to Calderon's National Action Party in 2000, staged a comeback in Mexico's midterm legislative elections, gaining 127 seats in the lower house. "The midterm elections create for President Calderon a more complex situation in the Congress during the second half of his administration," said Santiago Levy, vice president at the Inter-American Development Bank and a former official in Mexico's finance ministry.
Changes to the tax code would likely be met with opposition from the business sector, according Claudio Loser, a senior fellow at the Inter-American Dialogue and former head of the International Monetary Fund's Western Hemisphere department, who also spoke on the panel. "Nobody will support openly a tax reform that increases the tax burden on [their] own group, unfortunately," he said, adding that the Calderon administration is likely to seek broadening of the value-added tax and income tax.
Levy said certain aspects of Mexico's tax structure have wrongly favored informal employment over the formal sector, effectively making it 35 percent cheaper to hire workers under the table. This is one of the reasons why, despite charting steady economic growth in the years following the 1994-95 Tequila Crisis, Mexico hasn't seen significant advances in productivity, he said. Economic growth was lower than the Latin American average during the past seven years, and Mexico had a harder time keeping up with large Asian countries, Loser pointed out.
Increased fiscal pressure and deterioration of external indicators prompted Standard and Poor's to revise Mexico's credit outlook to "negative" earlier this year, despite generally positive macroeconomic management. Schineller said a ratings downgrade was still possible, but emphasized that "Mexico is firmly in the investment grade category."
Brazil and Mexico, the region's largest economies, account for roughly two thirds of Latin America's GDP. During a meeting earlier this week in Brasilia, Calderon and Brazilian President Luiz Inacio Lula da Silva promised greater cooperation between the two countries and hinted at a free trade agreement further down the line. Loser called the overtures "tremendously good news." It's "high time for Mexico and Brazil to get together," he said.
Search Our Publications
Changes to the tax code would likely be met with opposition from the business sector, according Claudio Loser, a senior fellow at the Inter-American Dialogue and former head of the International Monetary Fund's Western Hemisphere department, who also spoke on the panel. "Nobody will support openly a tax reform that increases the tax burden on [their] own group, unfortunately," he said, adding that the Calderon administration is likely to seek broadening of the value-added tax and income tax.