Mexico's Lopez Obrador Pledges to Freeze Fuel Prices for 3 Years

(Bloomberg) -- Andres Manuel Lopez Obrador, who’s leading in Mexican presidential polls, pledged to freeze fuel prices for the first three years of his term if he wins the July 1 election.

Prices of gasoline, gas and electricity would rise only as much as inflation, and costs would begin to drop once two new refineries are built in Mexico, Lopez Obrador said Wednesday at an event in Compostela, Nayarit state on the country’s Pacific coast. He said that the new refineries would cost $8 billion and take three years to build.

"There won’t be gasolinazos," said Lopez Obrador, referring surges in fuel prices. "Once we have the two refineries, we’ll lower fuel prices."

Mexico's Lopez Obrador Pledges to Freeze Fuel Prices for 3 Years

Lopez Obrador is appealing to voters who were outraged over last year’s gasoline price increases that stoked nationwide protests. But the cost to the government of subsidies required by a price freeze could open up a fiscal gap of 2 percent of gross domestic product and would put Mexico’s credit rating at risk, according to Barclays Plc.

"It is negative in many aspects," Marco Oviedo, chief Latin America economist for Barclays Plc, said in an e-mailed response to questions. "Returning to a policy of subsidizing gasoline prices increases the vulnerability of public finances since the level of subsidies will depend on external shocks, such as oil prices. That’s a factor that would put the rating stability at risk."

Lopez Obrador has also pledged that cities and towns on Mexico’s northern border will see their value-added taxes halved to 8 percent from 16 percent, along with a cut to their income taxes, a hike in minimum wages and equal fuel costs to U.S. cities across the border. That could also weigh on Mexico’s finances by about 0.3 percent of GDP, Oviedo said.

Nevertheless, Moody’s Investors Service said Wednesday when it raised its outlook on Mexico’s A3 rating to stable from negative that it sees a low probability that the next president would weaken the nation’s economic and fiscal trends. Lopez Obrador is 13.5 percentage points ahead of his nearest rival, Ricardo Anaya, of a coalition of right and left parties, according to Bloomberg’s poll tracker.

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