Mexico's Tax Reforms Boost Its Credit Rating
Citing Mexico's recent energy sector and tax reforms, Standard and Poor's Ratings Services has raised the country's investment-grade long-term credit rating to 'BBB+' from 'BBB' with a stable outlook, in line with the existing ratings from Moody's and Fitch.
In its statement, S&P pointed out that "the energy reform, supported by some changes in the tax framework, bolsters Mexico's growth prospects and fiscal flexibility in the medium term."
The rating agency commented, however, that the effect on the economy of opening the energy sector to private investment would take a number of years. With about one-third of the country's total budgetary revenues coming from the oil sector, Mexico will therefore still "remain vulnerable to volatile oil prices and potential declines in oil production over the medium term."
On the other hand, it noted that, while the non-oil tax base is currently low at between 9 percent and 10 percent of gross domestic product (GDP), the recent enacted tax reforms are aimed at raising non-oil revenues by nearly 2.5 percent of GDP by 2018.
Those reforms include the cancellation of a phased 2 percent cut in corporate income tax, an additional corporate income tax of 10 percent on capital gains and dividends, abolition of the 17.5 percent alternative minimum corporate tax; an increase in the mining royalty to 7.5 percent; and new taxes on drinks containing any type of added sugars.
However, S&P concluded that as, in the past, Mexican Governments "have had difficulty in realizing projected increases on the tax base following tax reforms," maintenance of the higher rating and any further rating improvement would depend on the "effective implementation" of those reforms.
In addition, it concluded that, as general government revenues of about 19 percent of GDP still compare unfavorably with revenue of more than 30 percent of GDP for other similarly-rated countries, "failure to effectively implement the recent reforms over the next few years could contribute to potentially weaker investor confidence and low GDP growth. … The resulting erosion of Mexico's economic and financial profile could lead to a downgrade."
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