Mexico peso dips on fears new taxes may hurt growth

MEXICO CITY, Sept 9 - Mexico's peso weakened sharply on Wednesday as investors worried that proposed new taxes could slow a recovery from the country's deepest recession since the 1930s.

The peso shed 0.74 percent to 13.46 per U.S. dollar. The currency briefly pared losses after rating agency Standard & Poor's said the government's tax reform bill is a positive step toward shoring up Mexico's fiscal accounts.

The proposal's potential impact on growth also hurt equities, with the IPC stock index closing down 0.31 percent to 29,100.05 points.

Mexican President Felipe Calderon proposed a sales tax and a higher maximum income tax rate, as well as special taxes on telecommunications, liquor and cigarettes.

"It will help the fiscal balance, but it isn't really helpful for the economy as it will reduce consumption. There is an economic cost to this package and the market is focusing on that," said Gerardo Margolis, vice president of emerging markets at TD Securities in Toronto.

Mexico's economy is expected to shrink as much as 7.5 percent this year due to the collapse in demand for products it exports to the United States.

Traders and analysts said the market was divided on whether the measures would be enough to stave off a downgrade of Mexico's debt by Wall Street ratings agencies, which want to see the government reduce its dependence on revenue from sales of oil as output declines.

"We still have to see if Congress approves this package and if it is enough to prevent a downgrade," Margolis said.

Fitch Ratings said on Wednesday that the tax bill shows the government is serious about shoring up public finances.

Standard & Poor's lead analyst on Mexico said the bill is a positive step, but avoiding a ratings downgrade will depend on the details of any law approved by Congress.

Mexico's Congress is dominated by the opposition, which may be unwilling to raise taxes amid the economic downturn.

Bond traders said new taxes could push up inflation and force the central bank to raise interest rates while the economy is still weak.

The government's benchmark 10-year peso bond rose 4 basis points to bid 8.04 percent.

In stock trading, shares in America Movil fell 0.49 percent to 30.77 pesos, hurt by worries a proposed 4 percent tax on telecommunications could push down revenues as Mexicans cut back on calls.

Brewer Grupo Modelo, which could be hit with higher beer taxes, lost 1.31 percent to 50.54 pesos.