Mexico to approve energy reform by year-end

A major push towards implementing an ambitious reform agenda will enable the Mexican economy to bounce back after a year of disappointing economic performance, a senior government official told Emerging Markets.

Fernando Aportela Rodriguez, undersecretary of finance, said he expected a key energy reform to be approved by the end of the year. “Within the past six months, some key reforms were already passed by Congress, and there are good prospects for the other ones. This will be good for economic growth.”

Economic activity has been an anti-climax this year. Official growth forecasts have been slashed by half to 1.7% as part of a wider emerging market slowdown, a negative performance of the construction sector and volatility in the financial markets ahead of the withdrawal of monetary stimulus in the US.

“The potential GDP growth of the Mexican economy is between 2% and 4%, but that is not sufficient to get the development that we need in Mexico,” Aportela said. “This is why we are very eager to have this structural reform agenda approved. There is a good probability it will be passed by the end of the year.”

The catalogue includes education and telecommunications reform, which have already been approved, he said. The comprehensive financial reform, which includes 34 laws, was passed by the lower house and the fiscal reform by the lower house.

But the big one is energy reform, which requires constitutional amendments. It includes a partial opening to private sector investment and enhances budget autonomy of the state oil company Pemex.

Such pro-market reforms have prompted investors to praise President Enrique Peña Nieto’s policies. By the end of his mandate in 2018, officials expect potential output growth to be lifted by up to 1.9 percentage points. “If implemented in full, reforms could potentially increase trend growth to as high as 5.5%,” said Ramon Aracena, chief economist at the International Institute of Finance.

“I can tell you, Mexico is putting on the table, 10 months after the new government took office, some of the most far-reaching, most dramatic, most structural transformations,” said Angel Gurria, secretary general of the OECD and former Mexican finance minister.

“I would only say ‘way to go, stay the course’. Mexico is doing all the things that we in Mexico have wanted to do for 30 or 40 years.”

The proximity and the strong links with the US may again prove to be a double-edged sword. “Everybody is concerned about the US economy and the recent developments between the executive and the Congress, but we are confident they will be able to solve their difference and to come to a reasonable solution,” Aportela said.