| | |  News Around the Republic of Mexico | October 2009 
Calderon Budget Set to Pass, Putnam Says
 Jens Erik Gould & Catarina Saraiva - Bloomberg
go to original
October 12, 2009
| | “This would be bullish for Mexican financial assets.” | |
Mexican legislators will back President Felipe Calderon’s plan to raise taxes and cut spending, helping the nation avert a credit-rating downgrade and extend gains in stocks, bonds and the peso, Goldman Sachs Group Inc. and Putnam Investments say.
“They’re going to approve something quite close to the proposal,” said Paulo Leme, the chief Latin America economist at Goldman in Miami. “This would be bullish for Mexican financial assets.”
Calderon, a 47-year-old lawyer who’s spent two decades in politics, is seeking to increase consumption and income taxes and reduce spending by 218 billion pesos ($16.5 billion). Standard & Poor’s and Fitch Ratings say they’ll cut Mexico’s BBB+ rating, which is three levels above junk, should Calderon fail to rein in a budget gap that’s widening as the country’s oil output falls.
Mexico’s dollar bonds have rallied this month, sending yields to their lowest in more than a year, and stocks and the currency gained on prospects Calderon will win congressional approval.
“The guy’s an extremely effective president,” said Michael Atkin, who helps oversee $12 billion in fixed-income assets as head of sovereign research at Putnam in Boston. “He’s been able to do a very good job of getting important stuff through the Congress.”
Talks Start
The lower house finance committee is slated to begin debating the 2010 budget bill this week. Deputies are scheduled to vote on the income portion of the budget by Oct. 20 and the spending segment next month.
“Mexico will do what it needs to do to preserve its credit rating,” said Atkin. “The problem is well enough understood and the incentives are well enough aligned for the political players that they will be able to take an important step.”
Calderon may have difficulty persuading opposition lawmakers to support his proposals because his political power and momentum is waning in the second half of his term and because his party lost midterm elections, Standard & Poor’s analyst Lisa Schineller said in an interview last month.
Calderon will need the support of the Institutional Revolutionary Party, or PRI, the country’s biggest opposition party, to pass the proposals. Lawmakers from the PRI are split over some aspects of the proposal, especially a plan for a 2 percent consumption tax on all products.
Consumption Tax
Some PRI legislators favor rejecting the consumption tax, while others say the tax will be approved with modifications, legislator Jesus Alberto Cano Velez, who is a member of the finance and budget committees in the lower house, said in an Oct. 6 interview. It will also be difficult to pass a proposed 4 percent tax on telecommunications services, he said.
The PRI will seek “more aggressive” spending cuts than those proposed by Calderon, Luis Videgaray, a PRI lawmaker and head of the budget committee in the lower house, said Oct. 7.
Excise taxes such as levies on beer, gambling, the lottery and tobacco, will probably be approved, he said. Lawmakers also agree on a proposal to temporarily increase income taxes to 30 percent from 28 percent, Cano Velez said.
Finance Minister Agustin Carstens said Oct. 6 that the outlook for legislative approval will be clearer after the finance committee begins discussions.
The peso would appreciate and bond yields would decline should lawmakers approve Calderon’s plan, Leme said.
Peso
The extra yield investors demand to own Mexico’s dollar bonds instead of U.S. Treasuries has narrowed 42 basis points, or 0.42 percentage point, since Oct. 1 to 1.75 percentage points on Oct. 9, according to JPMorgan Chase & Co. That’s within eight basis points of the smallest yield gap since August 2008. The yield on the government’s 10 percent peso bonds due in 2024 declined 16 basis points this month to 8.05 percent as of 9:35 a.m. New York time, according to Banco Santander SA.
The peso, which dropped to a record low in March, has gained 2.4 percent this month, the second-best performer among Latin America’s major currencies after the Colombian peso. Leme forecasts the peso will rise to 12.9 per dollar by December from 13.3070 on Oct. 9. Mexico’s benchmark Bolsa stock index has climbed 3.6 percent this month.
Mexico’s $1.09 trillion economy, the region’s second biggest, contracted 10.3 percent in the second quarter and job losses accelerated as the recession in the U.S., which buys about 80 percent of the country’s exports, sapped demand for its products. The economy will shrink 7 percent this year, according to the median estimate of 18 analysts surveyed by Bloomberg.
Recession
Government revenue tumbled as the recession reduced remittances and tax collection, while output of oil, which funds about 38 percent of the budget, slumped. Production at Mexico’s state-controlled oil company known as Pemex, Latin America’s largest oil producer, declined 7.9 percent in August from a year earlier to 2.54 million barrels a day.
Total non-oil revenue, including sales and income tax, fell 13 percent in the first eight months of the year compared with the same period last year, according to the Finance Ministry.
The government will start this week to liquidate Mexico’s second-largest power supplier Luz y Fuerza del Centro after Calderon said its finances were “unsustainable” amid mounting losses.
The passage of legislation may not be enough to stave off Mexico’s first credit-rating downgrade since 1995, said Sergio Trigo Paz, chief investment officer at Fortis Investments.
“They’re doing the best to avoid it but it’s certainly in the cards and they don’t have much room for maneuvering,” said Trigo Paz, who helps manage $2.7 billion in emerging-markets fixed-income in London.
Markets Last Week
The Bolsa index gained 4.8 percent last week, the biggest advance since July. Desarrolladora Homex SA climbed the most in the measure, surging 17 percent. Fomento Economico Mexicano SAB had the steepest loss, slumping 5.7 percent.
The peso climbed 2.5 percent last week to 13.3070 per dollar from 13.64 on Oct. 2. Yields on Mexico’s 10 percent bond due 2024 fell 10 basis points to 8.06 percent, according to Santander.
|
|
| |
Vallarta Weddings
Tell a Friend
Site Map
Print this Page
Email Us