Mexican Stocks Rally, Peso Gains on Tax Reform Proposal

    By Amy Guthrie

    MEXICO CITY--Mexican stocks were climbing higher early Monday after the government presented a sweeping tax overhaul proposal that would raise additional fiscal resources and allow for creation of a broader social safety net.

    The IPC index of Mexico's most-traded shares was gaining 0.7% to 40216 points on volume of 23 million shares worth 664 million pesos ($51 million), while the Mexican peso was trading at MXN13.1280 to the U.S. dollar versus its Friday close of MXN13.1685.

    The proposal, if approved by Congress this year, would raise the individual tax rate on top earners, introduce a 10% capital gains tax for shares and dividends and close some corporate loopholes. It would also apply a special tax to sugary beverages in an effort to curb the country's obesity epidemic. The changes are seen increasing federal revenue by 1.4 percentage points of gross domestic product next year.

    Policy makers considered imposing a moderate sales tax on some food and medicines, but decided against it following weak second-quarter economic data and recent protests against other controversial government initiatives.

    "We expect the market to react positively to the tax reform/hike proposal presented by the authorities despite it not being as ambitious and deep cutting as originally expected," said Goldman Sachs economist Alberto Ramos.

    Shares in processed food giants and grocery chains were rallying in relief over the government's decision to not apply sales tax to more food items. Bread maker Bimbo was up 4% to MXN40.12 while Herdez, which sells canned vegetables and other industrialized foods, was advancing 3.1% to MXN44.98.

    The country's largest retailer, Wal-Mart de Mexico, was advancing 2.8% to MXN33.20.

    Heading lower were shares in soft drink bottlers, taking into account the government's proposal to charge an excise tax on sugary beverages. By suggesting a soft drink tax, Mexico joins countries like Denmark and France in targeting sugary beverages with a special tax in the name of health.

    Coca-Cola Femsa shares were down 2.4% to MXN165.30 while Pepsi bottler Cultiba was off 1.6% to MXN31.10.

    Concerns that soda would be hit with an additional tax has weighed on Mexican soft drink bottlers' shares for weeks.

    -Write to Amy Guthrie at