Event

For the second time this year, quarterly data on the Mexican economy have disappointed observers. The April to June period saw year-on-year economic growth of just 1.5%,  only modestly up from the 0.6% y-o-y expansion realized during the first quarter. The weak performance, attributable to both domestic factors (an ailing construction sector, sluggish household consumption, fiscal tightening) and external ones (weak foreign demand), prompted the Ministry of Finance to cut its 2013 growth forecast from 3.1% to a meagre 1.8%. For his part, President Enrique Peña Nieto of the Institutional Revolutionary Party (PRI) continues to push for reform. With structural changes in the fields of labour, education, telecoms and banking agreed upon earlier this year, next up is energy. Mexico is an oil giant, but production of the state-owned petroleum company Pemex (the 7th largest producer worldwide) has declined by nearly a quarter since 2004 and it is estimated that Mexico will become a net oil importer within a decade if nothing changes. Experts agree that to reverse the trend, Pemex needs access to the finance and technological know-how of foreign oil majors (much of Mexican oil is in deep-water reserves and shale rock formations). Then again, the 1938 hydrocarbon nationalisation is still a point of national pride in Mexico and any constitutional change to allow for international involvement will be highly controversial. So the President is trying to strike middle ground between nationalist rhetoric and appeal to international investors. He wants to open up Pemex to joint ventures on a ‘profit-sharing’ basis. Oil majors would have preferred issuance of equity or concessions for the private development of  oil fields,  so they will wait-and-see until further details are disclosed.  More budgetary and operational autonomy for Pemex is also on the reform agenda. Right now, the company faces a tax burden of about 55% of its revenue and this is crowding out its investment. The obvious challenge will be to make public finances less dependent on oil revenues, which currently make up 34% of the government budget.

Impact on country risk

Broad political consensus has facilitated the recent push for reform in Mexico. Both the centre-right National Action Party (PAN) and the centre-left Party of the Democratic Revolution (PRD) – the two main opposition parties – have voted alongside the ruling PRI to pass new legislation. Yet, this so-called ‘Pact for Mexico’ will not apply to energy reform, as the PRD has signalled not to support constitutional change. Meanwhile, Manuel Lopez Obrador, runner-up to Peña Nieto in the 2012 presidential election (then for the PRD, now independent), has vowed to stage mass protests against the reform on 8 September. So even though the PRI and the PAN have a sufficiently large legislative majority, the issue of energy is likely to test political stability in the weeks to come. Looking further ahead, it is estimated that the reform could add between 0.5 and 1.5 percentage point to potential GDP growth. That is, assuming it succeeds in attracting international investment and the fiscal picture does not significantly deteriorate.

Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com