Mexico Needs to Find New Revenue Sources, S&P Says

Mexican President Felipe Calderon must create new sources of revenue to offset declining oil income if the country is to avoid a downgrade of its debt rating, Standard & Poor’s analyst Lisa Schineller said.

Mexico’s contracting economy, a 50 percent drop in oil prices over the past year, and declining production by the state oil monopoly have exposed lawmakers’ failure to raise taxes and reduce dependence on petroleum for 40 percent of revenue. S&P wants Mexico to address this without resorting to temporary measures aimed at getting it through next year, Schineller said.
“There’s more of a structural medium-term weakness here and we’re looking to see how that might be addressed,” she 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.

Government spending rose 50 percent from 2004 to 2009 as oil revenue surged on higher prices. Next year’s budget will probably be based on an oil price of about $53 a barrel, down from $70 this year, said Alonso Cervera, chief Latin America economist with Credit Suisse Group AG. Mexico’s economy contracted 10.3 percent in the second quarter from a year earlier.

Bloomberg