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Reforms from President Enrique Peña Nieto will add  two percentage points to Mexican GDP growth the next several years, the author points out. (Photo: Juan Carlos Morale/Mexico Presidency) 
Monday, November 24, 2014

Mexico: Ready To Launch

If implemented well, reforms will attract record investment to energy, telco and transportation. 


Mexican voters are growing impatient of their country’s economic underperformance. For the last decade, Mexico has stood in the shadow of Brazil and other high growth resource markets like Colombia, Chile and Peru. Desperate for economic growth, voters brought the much derided PRI back into power when they elected Enrique Peña Nieto. In 2000, the PAN (Partido Accion Nacional) had broken the PRI’s 70 year winning streak when President Fox was elected, but neither he, nor his PAN successor, Felipe Calderon, were able to legislate the reforms needed to modernize Mexico.


Peña Nieto promised both bold reforms and the political machinery to get contentious reforms through congress. Over the last 20 months, five important reforms have been passed in Mexico. If implemented well, these and pending reforms will raise Mexico’s capacity to grow by attracting record investment to some of its most important infrastructure industries: energy, telco, and transportation. 

Mexico is forecast to grow at 4-5 percent per year for the next several years, a laudable pace for a middle-income country and ahead of the Latin American average. Future Mexican growth with reforms is as much as two percentage points ahead of the rate it would have been without reforms.

Pushing five significant reforms through the Mexican congress took its toll on Mexico and the Peña Nieto administration. In a typical sexen~o (6-year) Presidential administration, it is normal to expect a six to nine month slowdown in investment as industrial groups await the announcement of the new government’s plans. However, this time round, it took 18 months to complete the most high profile reform of all, that of energy. Not only did investors sit on the sideline for almost two years, but government spending was also slow to get started. The executive branch held back funding on dozens of initiatives that benefited fence sitting congressman and women, in an attempt to lure their votes in favor of reforms, some of which have proven to be controversial. With so little investment and government spending coming online over the last two years, job creation and wage growth were both negative, damaging consumer sentiment. In 2013, Mexico grew only 1.1 percent and not much better in the first half of 2014.

But as skeptical as Mexican consumers are, there is no question of the economic logic behind many of the reforms. In the lengthy transition period between the elections in August, 2012 and his assumption of Presidential duties in December, 2012, Peña Nieto apparently struck a back-room deal with outgoing President Felipe Calderon. The former President was best known for taking on a violent war against organized crime, often referred to as narco groups. During the hundreds of military and police raids orchestrated by the government, innocent by-standers were killed in the cross-fire. Upon leaving office, Calderon faced civil suits from victim’s families. Incoming President Pena Nieto purportedly promised Calderon six years of legal impunity in exchange for Calderon pushing through an important but controversial reform of Mexico’s outdated labor laws.

Soon after being sworn in, Peña Nieto took on Mexico’s corrupt teachers union, throwing its boss, Elba Esther Gordillo in jail for embezzlement. Next came reforms to public education, including how teachers are evaluated and opening up the possibility of firing them for underperformance. After education, came financial reform that is designed to widen the availability of credit to the middle class and small businesses. The effectiveness of financial reforms is questionable without full cooperation from the banks but there were a few carrots in there for bankers as well, including making the seizure of assets belonging to delinquent borrowers a bit easier.

The next three reforms were the big ones: fiscal, telecom and energy. Fiscal reforms were originally designed to raise taxes to replace what will become a reduction of taxes levied from Pemex once it is opened up to more private participation. Higher VAT for northern border-states and higher corporate taxes implemented in early 2014 had the immediate impact of slowing consumption and investment levels and were widely criticized.

Since then, however, the market has been positively shocked by the depth and breadth of Mexico’s most promising reforms: telco and energy. Most surprising is the imposition of a 50 percent market share cap on operators in telecoms and television. Carlos Slim, the wealthiest man in the world, is forced to sell off about 20 percent market share from his cellular phone assets (America Movil). Two new television networks will be allowed to operate and a 700 MHz shared mobile network will be created, designed to accommodate ultra-fast WiFi, the ilk of which is found in South Korea today.

Energy reform consists of both electrical power and oil and gas exploration and distribution. Opening up power generation to private suppliers combined with the right to pipe US LNG into Mexico will create vast new investments in gas fired generation in northern Mexico. Mexican industrial electricity costs 80 percent higher than the US. Bringing down pricing is key to Mexican manufacturing competitiveness. Mexico’s difficult-to-reach deep water oil deposits now will begin to be exploited, both by Pemex and a half dozen Mexican industrial groups who are likely to team up with global oil companies and technology suppliers.

Mexico has traditionally attracted $20-30 billion per year in foreign direct investment. FDI flows starting in 2015 should exceed $50 billion and could remain that high for 4-5 years into the future as Mexico modernizes much of its infrastructure. Those investments are key to raising Mexican productivity. Birth rates continue to fall in Mexico and today stand barely ahead of population replacement levels. Future growth in Mexico must come from productivity gains.

In 2015, investment will drive economic growth in Mexico. Consumer spending will grow more moderately next year but will pick up dramatically in 2016, along with additional expansion of credit.

The combination of broad based consumer growth and easier access to credit will expand the pool of potential car owners in Mexico as well as help an ambitious middle class trade up for a higher value vehicle. In 2014, vehicle sales in Mexico will exceed one million units and total annual production in Mexico should exceed 3 million vehicles by the end of 2015. With auto sales falling rapidly in Brazil, the auto sector is relieved to see Mexico returning to high growth mode.

John Price is the managing director of Americas Market Intelligence and a 22-year veteran of Latin American competitive intelligence and strategy consulting. jprice@americasmi.com



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