FROM THE ECONOMIST INTELLIGENCE UNIT
Enrique Peña Nieto, Mexico's president, has been pursuing a structural reform agenda looking to boost Mexico's longer-term growth. However, investor concerns about their expected effectiveness and rising popular discontent mean that consensus on passing these bills will not be guaranteed.
Rodrigo Aguilera, Mexico analyst, talks to Coralie Zacchino about the outlook for Mr Peña Nieto's reform drive.
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Approx running time: 7 mins
- How has the reform agenda shaped up so far?
- Do you feel the reforms have been comprehensive or that they've been watered down?
- Foreign companies are concerned that the energy reform will not allow concessions, only profit-sharing agreements. Will this compromise the success of the reform?
- Mr Peña Nieto's agenda seems quite ambitious. Will the fiscal reform raise enough resources to finance it?
- What do you make of the protests by teachers and Andrés Manuel López Obrador, the opposition leader?
Coralie Zacchino: Enrique Peña Nieto, Mexico's president, has been pursuing a set of structural reforms aimed at boosting long-term growth in the country. However, investor concerns over their effectiveness and rising popular discontent mean that consensus on passing these bills is not guaranteed.
I am Coralie Zacchino and joining me today is Rodrigo Aguilera, Mexico analyst.
Rodrigo, how has the reform agenda shaped up so far?
Rodrigo Aguilera: The reform agenda has shaped up quite well so far. I think the government has done a really good job in negotiating with the other two major parties, as we know this is part of the Pacto por México, the Pact for Mexico, an alliance between the big three, the PRI, the PAN and the PRD, to basically set up a reform agenda where there is a lot of degree of consensus. So, so far the government has been successful in this regard, I think the first batch of reforms, at least these have passed generally without major opposition. The second batch of reforms might be a bit trickier, but I would say, in general, so far so good, and it is a testament to the ability of the government to negotiate, but also to the pragmatism of the leaders of the leaders of the PAN and the PRD for achieving this.
Coralie Zacchino: Do you feel that the reforms have been comprehensive or have they been watered down?
Rodrigo Aguilera: I think the first half of the reforms, those that passed during the first legislative session, have been quite comprehensive. The education reform, the banking reform, the injunction reform, all of these have I think been passed in as close to an ideal state as can be, and I would really like to emphasise some of these more subtle reforms like the injunction law, which didn’t get the amount of foreign attention that some of the other bigger ones got, but these were really important reforms to help, especially help regulatory authorities be able to actually impose fines, improve competition in the domestic economy. So these have been quite good. The second half of the agenda is the ones that are taking place now, during the second legislative session. These are basically energy and fiscal and there are some concerns that these have been watered down for various reasons: mainly the weak economy and the social pressure that has been increasing over the past few months.
Coralie Zacchino: Foreign companies are concerned that the energy reform will not allow concessions, only profit-sharing agreements. Will this affect the success of the reform?
Rodrigo Aguilera: I think the market initially reacted with a bit of apprehension with the energy reform and I think that is probably the natural reaction. The key part of the reform was that concessions were not allowed, only profit-sharing agreements, and for foreign companies this might be a very important stumbling block because they need the assurance that they will be able to own the reserves. On the other hand, this is also, you can see it as a political ploy by the government in order to not make the reform appear as such an immediate liberalisation of the sector, which would have obviously increased a lot of protest. Mexicans are very sensitive about energy reform. It is a very touchy subject, brings out a lot of nationalist passions; it is not unlike gun-control in the US, in that sense. The key point here is to see how far the secondary legislation goes in making these profit-sharing agreements appear as concessions in everything but name.
Coralie Zacchino: Mr Peña Nieto's reform seems quite ambitious. Will the fiscal reform raise enough revenue to finance it?
Rodrigo Aguilera: Unfortunately, the fiscal reform raises more questions than it does answers. First of all, it had to be watered down because the issue of extending VAT to food and medicine was also another very touchy subject, especially one during a year in which the economy is not doing that well it would have had a disproportionate effect on lower and middle-class households. So it is understandable why the government chose not to apply this, and also that a lot of the social protest going ahead right now, which are focused on issues such as the education reform—there was a risk that these protests would eventually also take up the issue of the VAT. So, again, it is understandable why they didn’t include it. However, the question is whether the expected 3% of GDP by 2018 will be enough to cover the whole agenda. It is a very ambitious agenda, there are still things that are pending, such as social security reform and, according to most estimates, this is going to need approximately another 3% of GDP, maybe 4% of GDP. Additionally, if the government is to increase its infrastructure expenditure, as it has appeared willing to do, it is going to be another 1-2%, even more if Mexico really needs to invest say 8% or 9% of GDP in infrastructure, which is what a lot of estimates say that Mexico needs. So the government needs to be really clear on exactly where it is going to get all this extra revenue if it is going to be successful in pursuing its agenda to the full extent. If not we are talking about the possibility that deficits could reach up to 4% or 5% of GDP, maybe even more. So something has to give.
Coralie Zacchino: What do you make of the protest by teachers and Andrés Manuel López Obrador, the opposition leader?
Rodrigo Aguilera: Well, there is a risk that these protests could intensify during the following months. As to whether it is going to be sufficient to derail the agenda, I am not quite sure that is going to be the case. I think there is still a degree of consensus among the major parties that should be enough to see these reforms go through at least close to the state in which they are being proposed. I think that some things might be removed, certain items on the fiscal reform that could be removed, but otherwise, on a broader scale, I think that the reform agenda is going to be a success, at least this year. Next year it is going to be a different issue. As the days go by we are going to see the parties increasingly trying to set up their own agendas looking forward towards the 2015 election, eventually towards the 2018 election. So the degree of consensus that we are seeing this year is not going to last and so, in this sense, it is probably a good idea that the government decided to front-load the agenda, try and pass as much as they can this first year and leave the rest and see what happens.
Coralie Zacchino: Thank you Rodrigo.
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