Energy reform in Mexico is taking shape. The swiftness in which a presidential promise survived a Congressional vote and was signed into law shows that Mexico, a major manufacturer and provider of goods to the United States, is ready for investment and to turn around a nearly century old stalemate in the country’s energy sector.
State owned PEMEX has been the sole oil producer in the country since 1938, but with reforms on the horizon, Mexico’s economy is sure to be impacted in what consensus views as only a positive for the country. There will be more international and regional interest in the energy sector, more foreign direct investment and even more competition as various avenues for growth begin to open up.
It’s also a positive sign that Mexico’s government can work together to encourage that growth, says Win Thin, Global Head of Emerging Markets with Brown Brothers Hariman.
“It shows that Mexico’s President Pena Nieto and the Congress can work together to pass structural reforms,” says Thin. “Other reforms are needed in other areas, and the fact that the contentious energy sector reforms can be pushed through with compromises is a very good sign. It’s also very positive for growth, and thus for Mexican equity markets.”
Mexico’s energy reform will also lead to significant changes in the country’s infrastructure, as refiners begin to modernize and take shape, and the structural changes required come to fruition. Even before he announced energy reform in 2013, Pena Nieto outlined a $300 billion plan to upgrade Mexico’s infrastructure, which includes energy.
Mexico’s fundamentals are improving. According to a September research note published by Bank of America Merrill Lynch (BAML), Mexico “stands to be one of the most resilient emerging economies in the increasingly likely scenario of higher growth and rates in the U.S.” As a result, the firm raised Mexico to “market weight” on September 30 from underweight, citing market fundamentals and “fair spreads.” Growth has also picked up in the country on the back of stronger exports, with more growth potential ahead from structural reforms, according to BAML.
Rumblings of rate hikes in the United States have led to wider Mexican spreads but remain on par with similar emerging markets with similar credit ratings. The country’s macro picture is improving however, according to BAML.
That goes according to plan for President Pena Nieto, who has said energy and other reforms could bring 5 percent annual growth to Mexico by 2018.
Putting Mexico On The Map
As a developing nation, energy reform could put Mexico in a group of global energy leaders, especially within the emerging markets. Increased output from the energy reforms would keep Mexico as part of the growing North American bloc of energy producers, explains Thin.
“Growing oil production from stable North American sources should also help limit the effects of supply disruptions from the more politically volatile Middle East,” he says.
The North American Free Trade Agreement may also benefit Mexico immensely once reforms begin to roll out.
“The faster development of the energy sector in Mexico could be synchronized with the developments in the U.S.,” says Marco Oviedo, Chief Economist for Mexico with Barclay’s. “We could start talking about the NAFTA energy bloc. Also, the manufacturing sector will become more competitive improving the outlook for foreign investment and market expansion for Mexican manufacturers.”