Tax Reform Boosts Mexico Rating

Fitch has upgraded Mexico to BBB+ (stable) from BBB following the passage of fiscal reform last week in Congress, which the agency believes will be signed into law in the near future. Fitch is also encouraged by the strengthening policy framework, continued resilience in the current unfavorable external environment, as well as prudent public debt liability management that has strengthened local capital markets. “The tax reform that could increase the non-oil tax revenues by 2% of GDP during President Calderon’s term is a step in the right direction to address one of Mexico’s key credit weaknesses related to its narrow tax base,” says Shelly Shetty, senior director in the Fitch sovereign group. Fitch expects the reform to increase flexibility in the event of an oil price shock and other spending pressures, allowing the authorities to boost infrastructure spending, which could have a positive spillover on growth. The reform also gives greater tax relief to Pemex, which should boost its much-needed investment spending and allow it to finance through internal resources. “The reform is likely to promote infrastructure spending and private investment, possibly leading to higher growth, which would be beneficial for debt dynamics in the medium-term,” says Fitch.