Mexico faces possible downgrade after tax bill

By Jason Lange

MEXICO CITY (Reuters) - Mexico is running a high risk of getting a downgrade on its debt rating after lawmakers watered down President Felipe Calderon's proposal to raise taxes and reduce a reliance on falling oil output.

Many investors, banks and economists think Wall Street rating agencies will not be impressed by a plan approved by Mexico's Senate that would make public coffers depend more on high oil prices than Calderon had proposed.

Senators approved lifting the value-added tax, or VAT, to 16 percent, raising the income tax for high earners to 30 percent and putting a 3 percent tax on some telecoms services. But Congress threw out Calderon's initial idea of a sweeping 2 percent sales tax that would hit currently exempt food and medicines and be designated for anti-poverty programs.

"I don't think it's enough. They are going to get the downgrade," said Rogelio Gallegos, a fund manager at Actinver-Lloyd in Mexico City.

Battered by a recession that has slammed tax collection and a steady plunge in crude oil output, Mexico has been seen by investors all year as more likely to default on its debt than is Brazil despite Mexico's higher debt rating, according to data on credit default swaps.

Many analysts see this as evidence the market is already betting that Mexico will get a downgrade.

At the same time, other market players think the tax plan approved by the Senate on Friday, which would raise VAT by 1 percentage point from 15 percent currently, could be enough to let Mexico eke by with its current debt rating.

Even optimists see Mexico as running a pretty large risk of receiving a drop in its BBB+ rating, which has been threatened by both Standard & Poor's and Fitch.