Mexico: Looking Ahead to 2015

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Mexico: Looking Ahead to 2015

As we count down to 2015, I want to wish you all the very best for the upcoming holiday season. It also seems like a good time to take a moment to reflect on some of the events in Mexico over the past twelve months.

In this newsletter, I’ve outlined three takeaways from what has been a dramatic year.

1. Mexico’s reform agenda kept rolling through 2014, but turbulence could lie ahead.

2014 opened with much anticipation in the wake of President Peña Nieto’s ambitious 2013 reform agenda. By August, Mexico had passed eleven new structural reforms, with sweeping changes across the education, political, financial, fiscal, and telecommunication sectors. Some of these changes were widely viewed as necessary—such as opening up television and Internet networks to competition or allowing reelection for members of Congress—while others including mandatory teacher evaluations or higher taxes for border manufacturing sparked fierce debate.

But the most anticipated and contentious of all was the energy reform, which we have focused on quite a bit here at White & Case (you can read some of our analysis here). The reform opened the country’s oil and gas sector to private investment for the first time in seventy years and the secondary legislation—passed in August 2014—outlined the details on everything from new energy regulators to domestic content requirements.

And yesterday, the National Hydrocarbons Commission approved and made public the details of the first-round bids in shallow water blocks to take place next year. For more, see JP Morgan’s December 10th report, “Mexico In Brief: Preliminary bidding rules for oil investment now approved.”

For energy reform, as well as for all the other reforms, the big challenge in 2015 will be implementation. While less exciting than the political negotiations, getting it right will be critical. For the oil and gas sector, proper implementation will mean first hammering out the nuts and bolts of the contracts and then making sure everything is in line for the first auction early next year.

As we look toward 2015, another challenge could come from plummeting oil prices, which reached the mid $60s for a barrel of crude last month (compared to over $105 in June and July). While many of you may breathe a sigh of relief when it comes time to fill up your tank, for energy companies and oil exporting countries, this isn’t such good news. The low prices will dampen investment enthusiasm—also hurting workers and communities that rely on the industry—and mean less revenue for many governments across the region that rely on these revenues to fund their budgets.

2. While President Peña Nieto’s ambitious reform agenda was comprehensive in many ways, it has yet to address some of Mexico’s most pressing challenges.

This year’s reform agenda certainly covered a lot of ground, but it is now clear that it didn’t address some of Mexico’s most glaring weak spots. Most prominently, it did not include any serious push to address the country’s perennial challenge: rule of law. This oversight could threaten many of the reform’s gains—as investors lack confidence that their contracts or investments will be respected—but even more importantly, it threatens Mexicans’ security.

On September 26, the horrific disappearance of 43 students in Iguala, Guerrero shocked the nation to its core, pushing tens of thousands to the streets across the country to demand a safer and more just future. The outrage only grew in November as news outlets began reporting that the first lady owned a $7 million house, registered to a company whose owner had just won a high-speed train concession from Mexico City to Querétaro. The train contract was canceled and the first lady quickly announced that she would sell the house, but just the hint of corruption was enough for Mexico’s public—beating down Peña Nieto’s approval ratings to slightly under 40 percent.

To address the violence, the government announced its new ten-point security plan, including a focus on strengthening the police and judicial systems and investing more in impoverished areas of the country. While a much-needed step, the reaction from many Mexicans was that it all amounted to too little too late.

Giving these rule of law initiatives the same attention as the earlier economic reforms will be critical to ensuring their full implementation and success. If this doesn’t happen, the consequences will be steep—undermining the foundation for a safer and more prosperous Mexico and complicating the PRI’s path forward in next year’s midterm elections.

In yesterday’s New York Times, Enrique Krauze offers up timely and thought-provoking perspective on what President Peña Nieto must do to address these concerns head on.

3. Despite sluggish GDP growth across the hemisphere, economic integration continues to evolve in dynamic ways.

Throughout 2014, Mexico—like many countries around the hemisphere—struggled to spur its economy into high gear. Part of this was due to weak economic activity globally, but it also reflects the fact that many of the country’s reforms will take a few years to be fully realized. The result has been disappointing growth, projected to reach just above 2 percent for the year.

But measuring what’s going on in Mexico and its neighbors’ economies by this one indicator misses some of the most interesting developments across the region. North American supply chains are now deepening their roots from Toronto through Querétaro, entrepreneurial ecosystems are increasingly spilling over borders, and innovation continues to change the ways we think about and conduct business throughout the region.

Trade agreements are also evolving across the hemisphere. To the south, the Pacific Alliance—a free trade agreement between Mexico, Colombia, Peru, and Chile—has now eliminated tariffs on 90 percent of members’ trade, begun sharing embassies, removed visa requirements for residents, and combined stock markets to total over $1 trillion in capitalization when Mexico officially joins. Things may expand even further in 2015, as the Pacific Alliance announced its plans to work more closely with Mercosur and expand its market power across the region.

Similarly to the north, the United States is working to negotiate new innovative trade agreements—pushing forward on the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP). While these agreements would transform the global trade landscape, they hinge on Congress’ willingness to grant the president trade promotion authority. While this looks increasingly unlikely, it is one of the many things to watch in the coming year.

Even with so much underway, we should be thinking creatively about new ways to harness our region’s potential—something that I wrote about here and that is outlined in the CFR Task Force on North America. Our countries have much to gain from working together, not only for crafting more efficient and effective policy at home but also for strengthening our competitiveness abroad.

As this year comes to a close, I want to wish you all a very happy holiday season. I’ve enjoyed connecting with so many of you on Twitter, Facebook, and LinkedIn, and look forward to staying in touch through 2015.

Sincerely,

Antonio Garza


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