Mexico Currency Weakens Over Ratings And Tax Concerns

by Mike Godfrey, Tax-News.com, Washington

03 September 2009

Despite extra central bank auctions of US dollars, the Mexican Peso has taken a battering in the foreign exchange markets amid concerns about Mexico's fiscal outlook raised by Standard & Poors (S&P).

The currency has lost nearly 6% of its value since August 21, and budget measures for 2010 to be introduced to Congress by September 8 are expected to be insufficient to address long term fiscal objectives of widening the tax base.

S&P has reportedly warned that the current BBB+ rating could decline to BBB-, the lowest of investment grades, by the end of the year if the government does not show that it can reduce its reliance on oil tax revenues.

President Calderon's party lost seats in Congress in early July and the People's Revolutionary (PRI) Party became the largest party in the lower house. With presidential elections due in 2012, the PRI want to press on their advantage and are expected to prevent constructive budget proposals from getting off the drawing board. Despite spending cuts since May already totaling MXN85bn (USD6.4bn), the PRI advocate making further spending cuts and oppose tax increases, claiming that they would make the recession worse.

Calderon recently delivered a speech to mark the inauguration of the new Congress, in which he referred to a 10 point plan for fundamental budget reform, and said that he would aim to free up more spending on social welfare and cut out bureaucratic waste.

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