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April 16, 2014

Historical energy change

Sunday, December 22, 2013

Mexican president Peña Nieto rushing through reforms

Los Pajaritos petrochemical complex belonging to Mexico’s state-owned oil company Petróleos Mexicanos (Pemex) in Coatzacoalcos in the state of Veracruz, México. President Enrique Peña Nieto’s proposal to revamp energy policy and modernize Pemex has ignited an enormous political fight, not just for the oil industry but for the entire country.

By Dave Graham and Simon Gardner
Reuters

MEXICO CITY — A year ago, President Enrique Peña Nieto took office vowing reform of Mexico’s economy even though he had no majority in Congress and faced accusations from the main opposition parties that he stole the election.

He has since passed a major education overhaul, shaken up oversight of the telecommunications market, pushed through reforms of the tax system and banking rules and put an end to Mexico’s 75-year-old oil and gas monopoly.

But it will count for little unless Peña Nieto can convert the legislation into hard and fast benefits for Mexicans, who want a strong economy and more well-paid jobs.

Though struggling to win over voters, Peña Nieto has been an astute political operator, capitalizing on the goodwill he generated with key figures inside his Institutional Revolutionary Party, or PRI, for bringing it back to power after more than a decade on the sidelines.

His achievements have contrasted with those of his two predecessors from the center-right National Action Party, or PAN, Felipe Calderón and Vicente Fox, who set out with grand ambitions but were often blocked by the PRI in Congress.

“One has to recognize that the PRI has entered the reform game with much more determination and skill (than the PAN) to pass reforms,” said Alberico Peyron, president of the Italian chamber of commerce in Mexico, which represents companies like car maker Fiat and tyre maker Pirelli.

The energy, telecoms and education reforms all needed a two-thirds majority to pass Congress, and even those that did not were generally approved with significant cross-party support.

While PAN presidents often got bogged down in disputes with the opposition, Peña Nieto has been much more nimble — first cutting a deal with the PRD on tax reform and then with the PAN on the energy bill.

Along the way, he has broken with proud traditions in his own party, which ruled Mexico non-stop from 1929 to 2000.

Peña Nieto has abolished the oil and gas monopoly of Pemex, a company the PRI created in 1938, and the party’s ban on direct re-election of lawmakers.

However, the devil will be in details of so-called secondary laws that accompany those constitutional changes.

Over the next few months, those secondary laws will set out how the reforms are implemented. Fine print on contractual schemes and payment structures will be crucial in determining how much interest oil majors show in investing in Mexico.

Peña Nieto has forecast foreign direct investment, or FDI, could hit a record of over US$35 billion in 2013 after a big jump since he took office. A major part of the FDI was due to beer giant Anheuser-Busch InBev’s 2012 takeover bid for Grupo Modelo, which went through in May.

Doubts still linger about how attractive it is to risk money in Mexico, where Peña Nieto has yet to significantly reduce the violence between drug gangs and security forces that has killed more than 80,000 people over the past seven years.

Murders have fallen slightly since 2012, but extortion and kidnapping have risen, according to official government data.

LONG-STANDING AGENDA

Likely facing months of protests against his energy reform from leftists styling themselves as defenders of Mexican sovereignty, Peña Nieto's nerve will be tested.

Still, since Congress approved the reform last Thursday, the majority of states Peña Nieto needed to ratify the constitutional change have already done so.

That bold reform likely represents Peña Nieto’s best chance of becoming a transformational figure in Mexican history.

Congress reconvenes in February, and the PAN and the center-left Party of the Democratic Revolution are due to hold internal leadership contests soon with an eye on 2015 mid-term elections.

A cooperation accord with both parties that Peña Nieto forged last December, known as the Pact for Mexico, is unraveling, putting the secondary legislation at risk of political hostage-taking that could crimp his room for maneuver.

“Peña Nieto’s reform agenda addressed problems that have been in the country’s general agenda for decades,” said Dwight Dyer, senior Mexico analyst at consultancy Control Risks.

“But he received a lot, and I mean a lot, of help from old party bosses, PRI congressional leaders,” he added.

It has done little for Peña Nieto’s popularity.

Never high after opponents accused him of buying votes to win the presidency in a bad-tempered election last year, his popularity has suffered further in a slowdown this year that has put the economy on track for its worst performance since 2009.

Starting well below his PAN predecessors’, Peña Nieto’s approval rating has dipped more than four points in his first year to 49.7 percent, according to polling firm Mitofsky.

That gave him the lowest rating since Ernesto Zedillo took office in 1994 and immediately faced a crippling recession.

“He’s a reformist president who hasn’t managed to get the population to see him as reformist,” said Jorge Buendía, head of polling firm Buendía & Laredo.

CLOCK TICKING

Peña Nieto has stressed time and again that he sought the presidency to change Mexico, and said in late October he was “not working to look good in polls, nor in the popularity stakes.”

But he is certainly not immune to public opinion.

One of his flagship reforms, a fiscal overhaul passed in October, was watered down before it was even presented.

Mexico has one of the weakest tax takes in the Americas, and the president had pledged to widen the base of taxpayers. For months, PRI lawmakers quietly said the bill was all but certain to introduce sales tax on food and medicine. But that was always going to be risky in Mexico, where about half the 116 million population lives in poverty.

In the end, after a shock economic contraction in the second quarter, the government retreated from the sales tax. Instead, Peña Nieto put forward a mixed bag of measures that was pilloried by the business community and did little to redress the paltry tax take.

The president is hoping his more ambitious energy bill may ultimately lift tax receipts in the world’s number 10 oil producer.

If oil majors like Royal Dutch Shell and Chevron decide to enter Mexico, the reform could also raise Mexico’s long-term growth potential, economists say.

But with increasing competition on the global stage amid the US energy boom, and the prospect of sanctions being lifted on Iran, analysts say Mexico may have a hard time attracting foreign firms that have other options.

If Peña Nieto can tie up the reform’s secondary laws successfully, create jobs and lift the economy, he may persuade ordinary Mexicans that his changes were worth the effort.

“I think he’s handled it well. I think it's been one of the president's great achievements,” said Hector Moreira, one of four independent members of Pemex’s board and a PAN supporter.

“Now the problem is going to be showing results quickly enough to convince the people,” he added.

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