Mexico has embarked on a bold package of structural reform to break free from the three decades of slow growth, low productivity, pervasive labour market informality and high-income inequality. 2015 will see the results of the ‘Pacto Por Mexico’ agreement, where major structural measures have been legislated to improve economic competition, education, energy, the financial sector, labour, infrastructure, telecommunications and the tax system. If fully implemented, these reforms are forecasted to increase annual trend per capita GDP growth by as much as one percentage point over the next ten years.
Going for Growth in 2015 – Reforms Made by the ‘Pacto Por Mexico’ Agreement
- Reducing barriers to foreign direct investment: The wireless, fixed-line, satellite, media, insurance and leasing sectors have been opened more substantially to FDI in 2014. Secondary legislation to implement the 2013 reform of the energy sector has also been approved, allowing for risk sharing with the private and foreign sectors.
- Reducing barriers to entry and competition: New sectoral regulators became operational for the telecoms and energy sectors in 2014 alongside a new competition law that strengthens the powers of the Competition Commission.
- Raising education achievements: National standards for primary and secondary teacher performance have been implemented in 2014, including an evaluation system and the professionalization of the training and selection of school principals.
Despite a Difficult Financial Environment, Mexico’s Growth Prospects Remain Strong
Growth prospects for Mexico remain positive at a time when the economy being hurt by both a weak peso, which has fallen by 13.1 percent in 2014, and a historically low price for oil, an export that constitutes 32% of government revenue. Lower oil prices will have a negative impact on fiscal revenues and, if prolonged, the slump could reduce the attractiveness of some of Mexico’s most lucrative opportunities for energy investment, such as deep waters and oil shale production, both of which have high break-even costs. Despite the difficult environment, Barclays and Citi have forecasted that the economy will grow by 3.9 percent in 2015 – a growth rate above the forecasted global average this year. The reason – the aforementioned political orientation towards fixing the economy and improving competitiveness, which is non-existent in other emerging market economies whose governments focus on more populist policies.
Mexican Fixed and Foreign Direct Investment Will Shift Into Gear in 2015
President Enrique Peña Nieto’s administration, as outlined in his latest 2015 economic plan, remains committed to implementing expansionary fiscal policies in order to ensure the Mexican economic recovery remains on track. A significant amount of government spending will be through fixed investment, as outlined by the National Infrastructure Plan, with $594 billion in planned investment between 2014 and 2018. Mexico unveiled the first phase of the opening of its oil sector to foreign investors in December 2014, allowing foreign companies to drill for oil for the first time since 1938. This liberalisation of the energy sector will attract foreign investment in the coming year, although inflows will undoubtedly be hampered as investment decisions are scaled back due to the new petroleum price reality.
Geopolitical Tensions are a Risk Factor for Growth in 2015
With failed commitments to bolster the security environment in the country’s drug war, and the outrage over the murder of 43 college students that were handed over to drug lords by a local mayor, Preside Enrique Pena Nieto is struggling to regain popularity in the months preceding the Mid-Term Elections in Summer 2015. Despite the unpopular fiscal and energy reforms, public protests have been temporary and broadly contained. However, the outcome of next year’s mid-term elections could alter the political balance and result in a more polarised policy-making process.
Geopolitical tensions aside, the positive impact on productivity and competitiveness in the Mexican economy achieved by the ‘Pacto Por Mexico’ agreements will attract substantial investment and bolster growth throughout 2015.