ANALYSIS-New tax to hamper Mexico's telecom sector growth

By Tomas Sarmiento MEXICO CITY, Nov 5 (Reuters) - A new tax on telecommunications services could stall the expansion of one of Mexico's key economic drivers, making it more costly and riskier to grow in the country. Mexican lawmakers finalized last weekend a watered-down version of President Felipe Calderon's fiscal reform package to boost tax revenues, cut Mexico's dependence on oil and try to prevent a downgrade from international rating agencies. Deputies and the Senate approved a new 3 percent tax on telecommunications, excluding Internet services and rural and public telephony.

Congress also passed an increase in the value added tax rate, or VAT, to 16 percent from 15 percent and raised the top income tax rate to 30 percent from 28 percent. "It is a short-term, short-sighted effort" that counters Calderon's commitment to boost economic growth, said private consultant Ernesto Piedras, who specializes in telecoms. "They are hurting an economic sector driver that is the only one showing growth this year," he said. "During recession times, what you have to do is boost the economy ... and these (new) taxes carry an additional recessive impact." Wall Street analysts echoed that sentiment and said telecoms could be less attractive for investors in Mexico. The new tax is likely to hurt revenue for giant cell phone company America Movil and leading fixed-line telephone company Telmex, both majority owned by tycoon Carlos Slim. Spain's Telefonica is expected to suffer, too, along with newcomers Cablevision, controlled by broadcaster Televisa, and Megacable . They are two cable companies that have recently tapped the phone market using broadband networks. "Earnings and sector profitability will likely suffer under the new tax regime, making Mexico less attractive on the margin," Andre Baggio, an analyst at JPMorgan, said in a report. Mexico's plan raises "the risk of future tax increases to fund potential government shortfalls from a sector such as the Mexican mobile market, which is among the most profitable in Latin America," Baggio added. A PHONE FOR EVERYONE Mexico's telecom sector showed 12 percent growth in the first half of 2009 even during the country's worst recession since the 1930s, as thousands of Mexicans bought cell phones. In particular, video, Internet and phone bundles -- or triple-play -- are spearheading growth, according to data from regulator Cofetel. Despite the new tax, the market still has plenty of room to grow because only around 70 percent of Mexicans have mobile telephones, with the potential for an increase so that almost everyone has a cell phone, just like in Argentina and Chile. "It is a sector that despite everything will continue to grow," said Francisco Suarez, head of research with Actinver brokerage. "I would expect it to keep growing but at a lower pace," because of the tax, he added. The Mexican government is expected to soon publish new rules for fiber optic and wireless frequencies tenders, long-awaited moves that analysts and investors hope will increase competition. Televisa has voiced interest in participating in the tenders and has held talks with international players aiming at developing a wireless network in Mexico. Telefonica also seeks to expands its services, particularly in the Mexican capital. (Reporting by Tomas Sarmiento, editing by Gerald E. McCormick) Keywords: MEXICO TELECOMS/ ([e-mail], [phone], Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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