Magazine article Business Credit

How Far Will Mexico's Reform Slide amid Oil Price Shock, Return of Violence?

Magazine article Business Credit

How Far Will Mexico's Reform Slide amid Oil Price Shock, Return of Violence?

Article excerpt

The presidency of Enrique Pena Nieto has been a roller coaster from the start. The expectations were sky high, as both Mexicans and the outside world were impressed by the youthful exuberance of the man who was going to lead the Partido Revolucionario Institucional (PRI, Institutional Revolution Party in English) out of the presidential wilderness by co-opting much of the message of those who had opposed it in the past.

Neito's was the fresh face, albeit of a very old party, and it seemed that the dinosaurs that had interfered with the progress of the country would finally be removed. The reform agenda was lengthy and ambitious and, amid early successes, it seemed that progress was going to be swift, sure and ongoing: The drug gangs would be brought to heel; the stranglehold of Mexico's state-owned petroleum company (Pemex) would be broken; and corruption would start to fade as Mexico exploited its position as a key U.S. trading partner.

Those expectations are starting to appear unrealistic and, today, the mantra of some growingly disenchanted Mexicans is that everything the president has tried was a failure. The drug cartels have rebounded and some say they are stronger than ever and there have been corruption scandals that have led right to the presidents inner circle and family. Pemex, however, has been remarkably adept at keeping its position intact.

Critical reactions have been overblown to a degree. Realistically, there was no way that Mexico was going to go through all this change that fast and without reaction. Still, reform efforts have been far from a failure in many respects.

Pemex: Profitable Idea Meets Unfortunate Timing

The major success thus far has been in energy, as the ossified nature of Pemex has been revealed and there have been moves to chip away at it. The inescapable fact is that Pemex is falling very far behind as a global oil player and desperately needs investment from outside Mexico. The oil field auctions that have been held thus far involve some of the smaller holdings, but they have taken place in a fair and open manner. The next step is moving to the more lucrative offshore fields as well as the oil shale plays. Based on the action thus far, these distributions should go as smoothly. The crisis now is not tied to Pemex's business approach, which has improved drastically, but that global oil prices are now so low and there is considerably less demand for Mexican oil development, like many other producers, than was the case just a year or so ago.

There has also been reform in the power generation sector and that could have an even bigger impact long term. Currently, the rates paid for power in Mexico City are almost double the global rate, which inhibits development. The country is fast becoming the manufacturing platform for the United States, in many ways replacing China thanks to its improving infrastructure, trained workforce, perceived quality and proximity to end-users. This would be a good trend to accelerate and the provision of reasonably-priced energy is key to this. Right now, the Mexican manufacturing sector is intimately connected to the U.S., as 40% of the products exported to the U.S. are actually made up of American goods that were assembled in Mexico. By comparison, Canada uses 20% U.S.-made goods for export to the U.S., and China uses 4%.

Violence Overwhelms Authority

The issue that looms over everything in Mexico is the role and spread of the drug cartels. …

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