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. 

© Copyright Latinvex