By Jaime Lopez Castaneda, Alexander Manda

    MEXICO CITY, July 2 (Xinhua) -- Mexico's urgent need to fix its fiscal problems is the clearest lesson from the world economic crisis hitting home here, Raul Feliz, an expert from the prestigious state-run Economic Research and Teaching center (CIDE), told Xinhua in an interview.

    "We have to put our house in order first," said Feliz. "We have been treating water, taking advantage of the cyclical high price of oil, and the crisis has exposed our weak fiscal position," he said.

    On Tuesday, Mexico's Finance Ministry reported a 24 percent decline in oil revenue in the year to May, compared with the same period a year earlier. Oil accounted for around 40 percent of state earnings.

    Tax earnings, at 489 billion pesos (37.6 billion dollars), were 15 percent lower compared with the same period a year earlier. Value added tax (VAT) fell 20 percent, income tax 17.4 percent and the flat rate business tax 4.1 percent.

    In addition, the government estimated it would lose some 465 billion pesos (35.7 billion dollars) in earnings, equivalent to 3.9 percent of gross domestic product (GDP), in 2009 because of one-off measures, like tax moratoriums for those who suffered the nation's flu crisis. In 2010 this figure will rise to some 503 billion pesos (38.6 billion dollars), nearly 4 percent of GDP.

    In May, Mexico had a budget deficit of 10 billion pesos (769.2 million dollars).

    SLUMPING TRADE

    Oil exports represent a significant source of volatility for international trade too, according to data published by the National Statistics and Geography Agency (Inegi). In May, oil exports fell 52.1 percent, while non-oil exports fell 28.2 percent. Overall May trade reached 17.47 billion dollars, down 32.8 percent from a year earlier.

    The steepest declines in manufactured goods exports were from steel, with 59.1 percent, and autos, with 42.7 percent. Agricultural goods and fishing exports were only 4.6 percent lower, at 708 million dollars.

    Even so, wheat exports posted a fall of 47.3 percent, grapes and raisins fell by 30.8 percent and tomatoes fell by 15.4 percent. Imports were worth 16.8 billion dollars, falling 35.5 percent in May from a year earlier.

    The Inegi also said that employment in Mexico's intermediate goods industry had fallen 8.4 percent from a year earlier, with production workers worst hit, largely due to a steep decline in trade with the United States, purchaser of around 80 percent of the nation's exports.

    WAITING FOR U.S. RECOVERY

    Being tied so closely to the United States means that Mexico has no other option but to wait for its neighbor to recover, so that it can exit the crisis, Feliz said.

    "I don't like it, but it is the truth," he said. "Mexico is a comparatively small economy closely linked to the world economy and especially to the U.S. economy," he said. "We don't have internal drivers that are strong enough to ensure our economy takes off independently of the United States."

    According to Eric Rosengren, the president of the Federal Reserve Bank in the northern U.S. city of Boston, the United States will start to recover during the second half of 2009, but unemployment will continue to rise there until early 2010.

    Since the U.S. recession began in December 2007, its economy has lost 6 million jobs and the current 9.4 percent unemployment rate is the highest since 1984.

    On Monday, the Federal Reserve Bank of Chicago reported its economic activity index at -2.3, more negative than April's -2.27. The production segment posted a level of -0.65 compared with -0.47 in April.

    BIG DILEMMA

    Faced with this difficult situation, analysts predict that the Mexican government will seek to make the tax system more efficient and, as opposition leader Andres Manuel Lopez Obrador warns, seek to impose VAT on food and medicine.

    The Organization for Economic Cooperation and Development, which is forecasting that Mexico's GDP will contract 8 percent this year, called on the government not to rush into "fiscal consolidation" for fear that it may extend the recession.

    Echoing this, Gerardo Aparicio, an economist with the privately-owned Panamericana University, warned that it could be discouraging for those that pay their taxes.

    Feliz warned that the money that is being spent represents around 1 percent of GDP and is not enough to turn around the current crisis.

    "If instead of 1 or 1.5 percent of GDP we were to have 20 percent, our ability to respond would be much higher," he said.

    "What we have seen is next to no ability to compensate for the U.S. cycle. In reality, Mexico did not have any ability to uncouple from what was happening in the United States," he said.

    Feliz urged Mexican businesses to develop new overseas markets in order to diversify their export base and develop stronger domestic financial markets. "Our financial market showed that it could not dissociate. It is neither big enough nor diverse enough."

    Mexico would continue to be a very open economy and stay closely connected to the United States, but there will be much to do to ensure the Latin American nation is not so affected by the crisis that erupted in its powerful neighbor, he said.

Special Report:  Global Financial Crisis