President Enrique Peña Nieto has managed to enlist the backing of both the conservative PAN and the left-leaning PRD for the reform agenda of his PRI administration. The unprecedented tripartite alliance, dubbed the “Pact for Mexico,” has agreed to steer a total of 95 reform initiatives through the 500-member Chamber of Deputies, and has already delivered in the areas of education, labor-market rules, and telecommunications.

The survival of the partnership is far from assured. Following recent state-level and municipal elections that were marred by violence and allegations of fraud, the leaders of both the PAN and the PRD warned that their continued support for Peña Nieto’s agenda depended on action by the administration to guard against similar problems during future elections.

However, despite chronic tensions, the reform effort has not lost momentum. The Congress is planning to hold two special summer sessions to clear the agenda for key tax and energy-sector reforms that will be presented to lawmakers during the regular fall session. Approval of the reforms would go a long way toward establishing a solid foundation for long-term fiscal stability.

Incentives will encourage workers operating in the informal economy, estimated at 60 percent, to join the tax-paying economy.

The main focus of tax reform will be stemming the losses to the Treasury caused by loopholes and exemptions, and creating incentives that encourage workers operating in the informal sector—estimated at 60 percent of the active labor force—to join the formal (and tax-paying) economy. According to some experts, the government could achieve its target of boosting the tax take by 6 percent of GDP by focusing its efforts entirely on those two tasks.

Opening up the oil-and-gas sector to foreign participation will entail amending the constitution, and so will require the backing of a two-thirds majority in the Congress and the support of at least 16 of the country’s 31 states. Although the PRD is showing clear signs of cold feet on the issue of ending state-owned Pemex’s monopoly, the support of the PAN will be enough to get the job done.

The PAN pushed unsuccessfully for energy-sector reforms during its 12 years in power, and it is highly unlikely that the party will thwart Peña Nieto’s efforts on that front. Indeed, the bigger danger is the possibility that the PAN might insist on a greater degree of liberalization in the oil-and-gas sector than members of the PRI are prepared to accept.

Peña Nieto’s plan will not be unveiled until September, but the administration has signaled that it will include proposals to permit foreign firms to partner with Pemex on deepwater oil projects and the extraction of shale-gas reserves. Word that the reform will include a provision that allows foreign partners to book reserves is particularly significant.

Following approval of the telecommunications reforms, Fitch upgraded Mexico’s foreign currency rating by one notch to BBB+. Moody’s has indicated that passage of the fiscal and energy reforms would likely result in an upgrade of Mexico’s debt rating.

Real GDP growth slowed to just 0.8 percent (year-on-year) in the first quarter of 2013. Favorable data from the auto industry and forecasts of accelerating economic expansion in the U.S. point to stronger growth going forward, but the risk of a shift in U.S. monetary policy that triggers a reversal of capital inflows and a sharp increase in Mexico’s borrowing costs—with negative implications for growth potential—is not insignificant.

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The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.




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