Leader of the Year: Enrique Pena Nieto
Mexico’s
president Enrique Pena Nieto secures energy reform that could double FDI within
the next few years.
BY LATINVEX
EDITORS
While there were high hopes among foreign investors when Enrique Peña Nieto became president
of Mexico a year ago, it is now clear that those hopes were not only met but
exceeded.
Although the Mexican president has implemented new taxes and tax increases that
have been less than popular in the business community, his energy,
telecommunications and education reforms have been positive surprises.
"The numerous reforms that have been approved in the
past year in Mexico are unprecedented for the country,” Nicolás Mariscal, chairman of Grupo Marhnos in Mexico City, told the Inter-American
Dialogue’s daily Latin America Advisor.
ENERGY
REFORM
Let’s start with the energy reform, which will allow foreign and private oil
companies to sign production-sharing contracts and authority to book reserves.
The reform could boost foreign investment in Mexico by as much as $15 billion
annually, JP Morgan estimates. Bank of America’s chief Mexico economist, Carlos Capistran, is
even more bullish, predicting an additional $20 billion by 2015, according to Bloomberg.
To put that in perspective, Mexico attracted an average
FDI of $19.2 billion in the five year period 2008-12, according to a Latinvex
analysis. In other words, the two estimates would nearly double or double the
average FDI for Mexico.
There will be a dramatic uptick in oil investments already during the latter
half of next year, predicts Carlos Sole, a Houston-based partner with law firm Baker Botts who specializes in
energy.
“It’s a historic
transformational event,” he says. “75 years later, after they nationalized the
oil industry, it’s undoing that.”
The new energy bill effectively ends the monopoly state
oil giant Pemex has held since the oil sector was nationalized in 1938 by
then-president Lazaro Cardenas from the same Institutional Revolutionary Party
(PRI) of Peña Nieto.
In recent years both non-PRI presidents – Vicente Fox and
Felipe Calderon – unsuccessfully tried to open up the sector, facing fierce
opposition from wide sectors, including the PRI.
“It took a
president Nixon, a Republican, to restore US relations with China [and] it took
someone from the PRI to do this,” Sole says.
Both Sole and other experts say that the energy bill is
the most important reform in Mexico since the North American Free Trade
Agreement (NAFTA), which opened up
Mexico’s largely protective economy to US and Canadian investment and trade. It
was signed into law in 1993.
Some analysts say it may even be more important. “This is a very important reform, probably
the most important reform of the past 30 years in economic terms,” Jorge
Chabat, a political scientist at the Center for Economic Research and Teaching
in Mexico City, told Bloomberg. “We will
probably see many private investors coming to Mexico and many jobs generated.
This is a big decision, and a big victory for Peña
Nieto.”
Latinvex columnist Beatrice Rangel, CEO of AMLA Consulting
Group, notes that the reforms will impact not only Mexico, but also global
energy markets. “The Mexican Congress of the Energy Reform Acts sets the stage
for the brisk development of an energy multilateral mega power
integrated by Canada, Mexico and the United States,” she argues.
TELECOMMUNICATIONS
REFORM
In June, Peña Nieto signed
into law the new telecommunications reform that aims to boost competition in
the sector. A lack of competition in
Mexico's communications industry and comparatively high prices for broadband,
mobile and fixed-line phone service cost the country about $25 billion a year,
or 2 percent of gross domestic product, according to the Organization for
Economic Cooperation and Development (OECD). America Movil’s
controlling shareholder Carlos
Slim, however, has called the OECD figures a
"fantasy," according to Dow Jones.
The reform scraps foreign-ownership restrictions in
telephony, establishes a new regulator with real authority, IFETEL, and allows
for “asymmetric regulation.” IFETEL will be able to break up or and declare
players in telecommunications and TV with market shares of more than 50 percent
to be declared dominant and subject to being broken up.
On December 5, IFETEL identified America Movil and Grupo Televisa as dominant
companies in a preliminary finding, singling them out for closer scrutiny,
according to Bloomberg.
America Movil dominates both fixed and wireless
telecommunications, while Televisa dominates the broadcast sector.
Mexican bank Banorte-Ixe estimates the reforms will bring
nearly 150 percent more in investments over the next six years than were
invested between 2007 and 2012.
“This is a very positive reform,” Carlos Silva, an
independent telecom analyst in Mexico City, told Latinvex recently. “The current actors (will) have more
incentives, not in the short-term because there is uncertainty, but as things
clear up more, the law will give more incentives to invest.”
EDUCATION
REFORM
Mexico’s Congress passed the implementing legislation
for education reform in September. It includes deep changes to the teacher
tenure system, including the creation of a new national evaluation institute
that will prepare exams that all teachers must pass. In addition, the new law
will inject competition into the teacher hiring system by changing the current
rule that only graduates of the teacher’s university can be eligible for hire.
Finally, the notorious practice of teachers transferring or outright selling
their positions to family or friends will be outlawed, and full time union
workers will no longer be able to collect an additional teacher salary.
“President Peña Nieto …has …
realized that upgrading the Mexican economy will be a challenge without better
human capital, which is why he has placed education reform at the forefront of
his agenda,” Latinvex education columnist Gabriel Sanchez Zinny wrote recently.
The reforms have generated widespread protests among
teacher unions, which at one point managed to occupy the giant and symbolic
Zocalo square, which is surrounded by the presidential palace, the Mexico City
mayor’s office and the city’s cathedral.
The education reform came as previous efforts – most
recently during the Calderon administration – failed. One key obstacle was
removed when the powerful teacher’s union leader Elba Gordillo was arrested in February on suspicion of embezzling $200 million.
While Mexican schools have long suffered from decays,
teacher union leaders were flying around in private jets and had bulletproof
Hummers, pointed out Luanne Zurlo, founder of US-based
Worldfund, a non-profit organization whose mission is to raise the quality and
relevance of education in Latin America in order to transform lives and break
the cycle of poverty.
TAX AND BANK REFORMS
Peña Nieto’s tax reforms have been more unpopular. In November, the Mexican
congress passed a bill that increases personal income taxes from the current 30
percent to 35 percent on for those
earning more than 3 million pesos ($233,000) a year, while those making 750,000
pesos a year will have to pay 32 percent.
At the same, lawmakers increased taxes on so called junk
food from 5 to 8 percent. The new taxes have been harshly criticized by soft
drink and snack companies.
However, it is unlikely that the tax will dramatically
reduce soft drinks consumption overall in Mexico, where potable water is in
short supply, nor deter most impulse purchases of junk food, predicts Bethany Gomez, research analyst at
Euromonitor International. “Instead,
it may cause a shift in purchasing behavior between product categories, with
many consumers trading down to smaller pack sizes,” she wrote in an analysis for Latinvex.
Also in November, Mexican lawmakers passed Peña Nieto’s bank reform, which is expected to increase
bank lending since makes it easier for banks to collect on guarantees for bad
loans and beefs up regulatory power over financial firms. Its private sector
financing stands at just 26 percent of gross domestic product, with private
sector credit at 45 percent of bank assets - below Brazil, Argentina, Uruguay,
Peru and Chile, according to Reuters.
LEADER OF THE
YEAR
It is unclear what impact the reforms will have on the economy, but JP Morgan
estimates that the energy reform alone could boost economic growth by half a percentage
point. And similarly, if the OECD claim that Mexico’s lack of telecom
competition costs 2 percent of GDP, a similar gain should be made if the country
has competition, as is expected with the reform.
Mexico’s economy is expected to grow by 3 percent next year, compared with only
1.2 percent this year, the International Monetary Fund predicts. However, the forecast
excludes the impact of the energy reform.
Experts say Peña Nieto’s success in passing the reforms is due to a combination
of strong commitment and a pragmatic style.
“Since I first met Peña Nieto during his
transition to governor of Mexico state eight years ago, I have been struck by
how focused he has been on attracting investment and economic growth in order
to improve the lives of all citizens,” James
R. Jones, a former US ambassador to
Mexico and co-chair of Manatt Jones Global Strategies, told the Latin America Advisor. “He has attracted bright people to
achieve that goal. He has reached out to the opposition parties to create
alliances to move that agenda forward. And he seems to enjoy the political give
and take that some of his predecessors didn't.”
The pragmatic style was also on display
during the energy reforms discussion. After presenting his original bill in
August, Peña Nieto listened to the loud and
clear signal from the oil sector that it wanted more than profit-sharing and in
the end added production-sharing contracts to the final reform.
For his role in passing investor-friendly energy, telecom and education reforms
Enrique Peña Nieto has been selected by Latinvex as Leader of the
Year.
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