Diluted Mexico tax reform gives retailers relief but no panacea

Wed Sep 11, 2013 4:46pm EDT
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By Gabriel Stargardter

MEXICO CITY (Reuters) - Mexico's retailers dodged a bullet when the government shied away from including a sales tax on food and medicine in a proposed fiscal overhaul, but the watered-down reform could end up hurting them.

President Enrique Pena Nieto on Sunday proposed raising taxes for higher earners, putting a levy on stock market gains and boosting social programs to help the poor, but he decided against a controversial sales tax on food and medicine that many thought was key to boosting Mexico's anemic tax revenues.

The surprise decision on the sales tax provided an instant pick-me-up for Mexico's retailers, which have been hit by falling sales as economic growth slows. But the tax plan may not be a long-term positive for them if it means, as many analysts expect, a slack economy and softer demand from consumers.

The stocks of both Wal-Mart de Mexico WALMEXV.MX, Mexico's biggest retailer also called Walmex, and Grupo Chedraui (CHDRAUIB.MX: Quote) have risen around 8 percent since the reform was announced. Comercial Mexicana COMEUBC.MX, known as Comerci, has gained about 6 percent.

Despite the retailers' short-term gains, rating agencies and analysts question whether the reform will go far enough to boost Mexico's tax take and help drive the economy toward Pena Nieto's aim of 6 percent growth by 2018.

And retailers are still concerned about the economy, which is expected to grow less than 2 percent this year.

"As regards VAT, more than a benefit, we think instead there will be no impact on consumer purchasing power," said Chedraui spokesman Jesus Velazquez. "In terms of demand, we still see it as vulnerable and are hoping it picks up in the fourth quarter."

Mexican retailers' same-store sales have fallen steadily this year, dropping 2.3 percent in July and bobbing just above flat for the year, according to the ANTAD trade group, which had expected growth of 5 percent for 2013.   Continued...

Mexico's President Enrique Pena Nieto smiles during the presentation of the fiscal reform at Los Pinos presidential residence in Mexico City, September 8, 2013. REUTERS/Edgard Garrido