MEXICO: Opportunity knocks

Mexico City’s Parque Delta has had more than a few makeovers in its time. Originally home to the country’s Red Devils baseball team, it once put on a batting exhibition featuring the legendary Babe Ruth. In the 1980s, Queen rocked out to a packed audience. Several years later, it became a makeshift morgue for the thousands of people who were killed in the 1985 earthquake.

Today, though, the remodelled Parque Delta, with its shops, cinema and vast food hall, is home to one of the latest pastimes sweeping Mexico: shopping. So much so that if you dropped by on any recent Sunday, you might have thought it was the last weekend before Christmas.

There’s a feel-good factor in Latin America’s second-largest economy at the moment: in December, the consumer confidence index reached its highest level since March 2008, well before the recession that hit in the aftermath of the US financial crisis and the global downturn that followed.

Sergio Martín, chief economist at HSBC in Mexico City, believes that that will continue for the rest of this year and well into next. “There are encouraging signs for consumption going forward,” he says. “With the growing availability of credit as well as a steady improvement in the labour market, we believe that consumption will outpace the whole economy this year.”

That is saying something. Last month, Mexico’s central bank forecast an expansion in the country’s gross domestic product of between 3% and 4% – considerably higher than most industrialized countries, and much more than the average of roughly 2% that characterized Mexico’s annual growth for the first decade of the 2000s. Moreover, the bank recently gave its first forecast for 2014: between 3.2% and 4.2%.

The mix of higher growth, nearly bullet-proofed macroeconomic fundamentals, expansion of credit – overall, bank loans are now growing at about 13% a year – and stronger consumer spending has coincided with the relative dulling of Brazil’s gloss as once-impressive growth rates have slowed. That has made international investors look all the more closely at Mexico as Latin America’s brightest prospect in the coming years.

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Between January and September of 2012, international investors ploughed $57 billion into Mexican stocks and bonds – a level more than five times the amount they invested in Brazil during the same period. Last year, the country surpassed Brazil as the largest venue for equity offerings, with almost $12 billion in deals. Meanwhile, investment banks, which have been slashing staff globally, have gone on a recruiting expedition in Mexico: brokerage firms expanded their staff by almost 9% between January and September last year, according to the banking regulator.

Perhaps it should come as no surprise that Larry Fink, who heads BlackRock, the world’s largest asset-management company, recently described Mexico as “an incredible growth story”. But how long can it last?

Most economists would argue that the answer to that question depends largely on how successful Enrique Peña Nieto, Mexico’s new president, is at pushing through a long list of reforms considered necessary to raise the country’s long-term growth potential.

The reforms are well-known – mainly because successive governments have tried – and failed – to pass them. The tax reform, that Vicente Fox, Mexico’s first-ever president from the National Action Party (PAN), failed to get approved three times, is a case in point. In spite of its size and relatively advanced economy compared with the rest of Latin America, Mexico has one of the worst tax takes in the region.

Economists such as Ernesto Cervera of GEA, a Mexico City-based consultancy, argue that the current system, which has many loopholes and also allows state and municipal governments to forgo the politically onerous task of increasing contributions from local constituents, leaves the federal government woefully short of funding the sort of infrastructure and social investment programmes that would boost growth. “You can’t aspire to be a fully developed country if the government doesn’t have enough money to invest,” says Cervera.

OIL REFORM

Energy reform is another priority. More than 70 years after Mexico nationalized the oil industry, Pemex, the state oil monopoly, is still the only company constitutionally allowed to explore for – and extract – oil from the country’s potentially huge reserves. At the same time, the lack of funding, as well as technology and project know-how, has led to an alarming slump in production. According to Pemex’s own figures, average daily production has fallen from about 3.4 million barrels in 2004 to less than 2.6 million today, as output has declined for the last eight years.

As a recent report by Mexico’s Itam University and the Wilson Centre’s Mexico Institute, pointed out, “The current system has shown itself to be unable to respond to changing circumstances, and has left us on the brink of a disastrous decline in oil production and reserves”.

Then there is making the private sector more competitive, namely by making it easier for would-be new competitors to enter the playing field and have a reasonable chance of succeeding.

Since taking office on December 1 last year, Peña Nieto of the centrist Institutional Revolutionary Party (PRI), the party that ruled Mexico for 71 consecutive years until 2000, has got off to a start that has even long-term PRI sceptics thinking again. In the months between the election result and taking office, his team and his party were instrumental in passing a labour reform – the first in 40 years – that introduces much more flexibility than before. Companies are now able to hire workers by the hour, which was impossible previously. The reform also established clear rules for outsourcing, once a grey area. And it caps the amount of money companies have to pay workers following a decision to fire them.

As Manuel Molano, deputy director of the Mexican Institute for Competitiveness (Imco), a Mexico City-based think tank, says, “Mexico was waiting for this for a long time”.

Then, within days of taking office, Peña Nieto passed an education reform act that returns to the state much of the power in the running of Mexican schools that the mighty teachers’ union had won from the federal government over the course of many decades. The message – that Peña Nieto was prepared to take on some of the country’s most symbolic vested interests – was loud and clear: “This constitutional reform underlines the authority of the state over national education policy,” Peña Nieto said at the time.

Late last month, Peña Nieto’s administration went a step further: in one of the most daring moves yet against powerful, old-guard figures, it arrested Elba Esther Gordillo, leader of the Teachers’ Union, on charges of embezzlement. “In this government, nobody will be above or beyond the law,” said Jesùs Murillo Karam, Mexico’s attorney general, at the time of the arrest. Gordillo denied the charges.

And at the beginning of this week the government announced a sweeping proposal to open up the telecoms and television markets to more competition. It would create a new regulator, the Federal Telecommunications Institute, which would have the authority to classify any company with over 50% of the market as “dominant” and these companies could be subject to sanctions.

PACT FOR MEXICO

But probably the biggest sign of the more cooperative mood among Mexico’s political tribes was the Pact for Mexico, a document containing 95 reform proposals that Peña Nieto signed with the heads of all the leading political parties on December 2 – barely 24 hours after taking office. The document covers a lot of ground, ranging from social policy such as the suggestion to create universal healthcare and pensions, to creating more competition in telecoms and television, and making the oil and gas sectors more efficient.

It is also vague in places. On energy, the document just says that the idea is “to increase the capacity of the oil exploration and production industry through an energy reform to maximize oil earnings for the Mexican state”. There is also scant detail on tax reform proposals.

But political analysts agree that the document’s strength is to create an agreed framework and a timetable – each of the 95 proposals comes with its own sequencing – that will raise the stakes for any members of congress who might later decide to oppose Peña Nieto’s agenda.

They also point out that the political landscape is relatively favourable at the moment. For one thing, the conservative PAN is deeply divided, and at least one faction is cooperating openly with the new administration. For another, Andrés Manuel López Obrador, the firebrand left-wing leader and Peña Nieto’s closest rival in last July’s election, has now formally exited the Democratic Revolution Party (PRD), which in effect should allow the party to move gradually towards the centre while freeing its members to cooperate on at least some of the reform initiatives.

Of course, this is Mexico, and favourable political outlooks can turn very quickly. One of the lessons of the last 16 years, during which no single party has held a simple majority in congress, is that democracy does not always provide a straight path when it comes to reform.

But Luis de la Calle, an economist in Mexico City, argues that while that path may be winding – one recent example is the administration’s decision to postpone an energy reform proposal until the second half of this year (unofficially to buy more time to do the politics needed to get politicians on board) – it is at the very least a clear one. “This government has the best chance in years to make progress,” he says. “Now they are going to have to start governing.”

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