Mexico’s Peso Advances as Government Seeks to Cut Spending

By Jens Erik Gould and Andrea Jaramillo

Sept. 9 (Bloomberg) -- Mexico’s peso rose after President Felipe Calderon yesterday proposed spending cuts and increases in income, corporate and sales taxes in a bid to rein in a swelling budget deficit.

The peso strengthened 0.3 percent to 13.3235 per U.S. dollar at 8:24 a.m. New York time, from 13.3569 yesterday.

The government, which submitted its 2010 budget proposal to Congress last night, plans to cut spending by 218 billion pesos ($16.4 billion) as part of “unprecedented” steps to offset diminishing oil revenue and prevent a credit-rating reduction.

“They preferred to go with a less ambitious reform that has a higher probability of being approved,” said Gabriel Casillas, the chief economist for Mexico at UBS AG in Mexico City. “Even if it is approved as is, we see a low likelihood that it will avoid a downgrade because it’s not creating significant new sources of fiscal revenues.”

Mexico is seeking to bolster its fiscal position as the deepest economic slump since the 1930s reduces tax collection and output at the state oil monopoly declines. The proposed changes to tax laws would generate 176 billion pesos, the Finance Ministry said. Calderon’s economic package would also merge some government ministries, modify tax laws and change rules in a bid to boost competition in the energy, banking and telecommunications industries.

Oil Income

Credit rating agencies say Mexico needs to reduce its dependence on oil income, which finances 38 percent of the budget. Standard & Poor’s may cut Mexico’s BBB+ credit rating before the end of the year, depending on how Calderon and legislators address ways to boost tax collection, analyst Lisa Schineller has said.

On May 11, S&P lowered the outlook for the federal government’s foreign and domestic debt, which stood at $217.3 billion as of December, to negative from stable.

“The economic package considers the seriousness of the circumstances that we’re facing,” Calderon told reporters yesterday at the presidential residence in Mexico City. “The proposal I’m sending to Congress is a drastic and unprecedented adjustment in the exercise of public spending.”

Yields on Mexico’s 10 percent bond due December 2024 rose two basis points, or 0.02 percentage point, to 8.29 percent, according to Banco Santander SA.

To contact the reporters on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net; Jens Erik Gould in Mexico City at jgould9@bloomberg.net