This past week has been a fiesta in the Mexican economy with a surprise move by Banco De Mexico cutting its interest rates 0.25% down to 3.75%. This rate is the lowest it has been since before the crisis in 2008.
The shocking move came after news that the nation’s economy contracted for the first time in 4 years in the second quarter of 2013. This caused a re-evaluation in economic prediction and caused a decrease in the estimate for this year’s growth from 3.1% down to 1.8%.
The Mexican economy is the second-largest in Latin America and the 13th largest in the world and viewed as a large investment opportunity by financiers worldwide.
However, the interest rate cuts could have a negative impact on foreign investors interested in previously lucrative bond yields.
The cut had shown significant impact on the first day with stocks increasing by one point and bond yields declining.
Tax Increases
The President of Mexico, Enrique Pena Nieto, announced this past Sunday that there are deliberations of a re-evaluation of the current tax system.
The skeleton of the plan is aimed at collecting tax to fund an improvement of the general infrastructure of the nation.
In addition, the collected tax will be put towards creating social programs that do not currently exist in Mexico such as a universal pension plan which will be available to all citizens over 65. Also, creating unemployment insurance schemes are being discussed.
The current over-all tax rate in the country is a mere 10.6% and is not allowing for growth, claimed the President.
With tax rate being so low the government has funded it’s spending by using resources collected form the government owned oil company, Pemex. These funds pay for up to 40% of overall government expenditure.
The new reforms that have been suggested are revised Capital Gains Tax, an introduction to carbon emission tax and an increase of income tax for individuals making over $39,000 annually.
The President is eager to fill up the divide between the rich and the poor in Mexico and believes that this tax overhaul is the right path towards a solution.
However many critics believe that a more important focus should be on government spending before a decision is made to increase tax.
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