Changing Winds in Mexico?

The last week brought several positive developments for the Calderón administration.  First, the Mexican Senate approved the revenue portion of President Calderón’s 2010 budget bill.  Despite strong resistance from opposition parties and much of the business sector, the bill was passed with few changes from the lower house-approved version.  Among the changes are an income tax increase for Mexico’s highest earners from 28% to 30% and an increase in the value-added tax (VAT) from 15% to 16%.  Calderon’s party, however, was unable to gain a 2% tax on all goods, including foods and medicines. 
    Following Senate-approval of part of his budget bill, President Calderón also announced on Thursday (November 5) that Mexico had passed the worst of its recession, with economic growth of 2.7% in the third quarter.  This represents a dramatic change from the first two quarters of 2009, when GDP declined 8.2% and 10.2%, respectively.  Overall, Mexican GDP is still expected to decline by about 7%.  President Calderón painted a brighter prospect of Mexico’s growth potential in the next several years, stating that positive growth will return in 2010 with growth likely reaching 5% in 2012.  Also mentioned in the president’s speech were improving employment figures, with October marking the fifth consecutive month to see gains in employment.
    Both developments represent welcome news for the current president.  With a projected budget shortfall of 300 billion pesos ($23.08 billion) in 2010, Calderón and his PAN party have been pushing for tax increases and budget cuts to help make up for declining oil revenues, which currently account for about one-third of government revenue.  Increased tax revenues, from the tax changes and rebounding economy, will likely aid the president in his goal of shoring up Mexico’s financial situation.  Also on the minds of Mexican officials is the country’s investment-grade credit rating.  With speculation that the inability of the Calderón to pass major tax reform, such as the previously mentioned 2% consumption tax, would lead to a possible ratings downgrade, Mexican officials and leaders of the business community remain optimistic.  Pointing to the tax changes enacted and a rebounding economy, they believe enough has been done to avoid a potential ratings downgrade.  However, other analysts remain less optimistic.  Pointing to falling oil revenues, declines in remittances, and uncertainty over future demand for Mexican exports in the United States, Fitch Ratings and Standard & Poor’s have both given Mexico negative outlooks.  Whether Mexico can avoid the ratings downgrade remains to be seen.

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