Mexico’s government hopes this year to launch the tax overhaul that is its only permanent ticket out of the economic doldrums, in the face of an emboldened opposition, Finance Minister Ernesto Cordero has said.
“There is some agreement,” Cordero told Emerging Markets this weekend in Cancun. “Now we have to get down to details, and see how far these agreements will take us – and whether they’ll allow us to present a solid, responsible fiscal reform proposal to Congress.”
Mexico was the Latin American country worst hit by the global recession. In 2009, growth dived 6.5%, as demand fell among US consumers who buy most of its exports. Now, as US manufacturers bounce back, Mexico is hitching a ride, and local demand is picking up too. An initial 2010 growth estimate of 3.9% is likely to be increased.
But without radical reform, Mexico, with its abysmally low tax take, will never achieve sustained growth, instead having to piggy-back on US growth spurts.
“It’s great that now we can expect Mexico to grow between 4% or 5%,” Cordero said. “But if we made headway on our structural reform agenda ... we could expect it to grow at 6% or 7 %.”
Fiscal reform is President Felipe Calderón’s economic holy grail, but Congress has only tweaked an inefficient tax structure. Negotiations flounder over value added tax.
Increasing the VAT rate is seen as the easiest way to raise the tax take. A slight increase last year raised total revenues to 15% of GDP, but exemption of foods and medicines costs dearly. The majority opposition Institutional Revolutionary Party (PRI) has a working-class base, and removing those exemptions is considered politically unwise.
As the PRI, which ruled Mexico for 70 years before Calderon’s party ousted it in 2000, barrels toward a likely 2012 presidential victory, it will not likely back down, especially with key gubernatorial elections this year.
But Cordero is hopeful. “Right now we’re talking to everyone ... comparing notes and discovering where we coincide,” he said. “We’re open to absolutely all suggestions.”
Mexico’s fiscal problems partially stem from constitutional blocks on foreign participation in the oil sector, which keep deep water reserves largely out of reach. Cordero was less upbeat on oil reform, saying Mexico would first have to wait to see how a previous round of partial reforms played out.
Mexico’s peso weakened after a long rally this week, relieving exporters, after Cordero said the government would buy up more dollars and currency traders bet on devaluation.
But he said the dollar hoarding was simply aimed at bolstering Mexico’s foreign currency defences in case of future shocks.
“We have no intention of trying to influence the exchange rate,” he said. “In Mexico we believe in a free floating currency.”