Mexico: Energy Reform Seeks to Break Pemex Monopoly, Drive Growth in 2014 and Beyond

By Ricardo Aceves

This article was first published on www.focus-economics.com.

The Mexican Congress received the package of secondary legislation related to the energy reform on 30 April. The legislation aims to break the monopoly on the energy sector that Mexico’s state-owned Pemex has held for 76 years. The by-laws are necessary for the reform to take effect and to then start attracting private investment in the energy sector by as early as 2015. The package includes eight new laws plus changes to thirteen existing laws. The Senate (the upper house) and the Chamber of Deputies (the lower house) will discuss the by-laws in an extraordinary session on 14 May.

Photo by schlaeger

Photo by schlaeger

The main focus of the energy reform is to transform both Pemex and the state-owned electricity firm, CFE (Electricity Federal Commission), into what the government defines as “productive state companies”. Such companies have budgetary and management independence and, in addition, the Finance Ministry (Secretaria de Hacienda) and the respective unions are prevented from having influence over the companies’ management decisions. The two firms will still be subject to some government controls and they will also be required to adopt the same transparency standards as firms listed on the stock market adhere to.

With respect to the oil industry, the new legislation reinforces the participation of private firms in oil extraction and overall energy production. The liberalization of distribution and sale of fuels and other oil derivatives, however, will take place gradually. In addition, the reform provides Pemex the rights to 20.0% of new crude and gas fields to be developed. The reform also requires both Pemex and new private-sector players to source a minimum of 25.0% of goods and services from local suppliers until 2025. Pemex’s fiscal burden will be reduced from 79.0% to 65.0%. The transition to a new fiscal regime for Pemex will be carried out over the next 10 years. The new laws also pave the way for the creation of a sovereign wealth fund from excess oil revenues, which the government would not be able to take advantage of until the fund reaches 3.0% of GDP.

Gabriel Lozano, Chief Mexico Economist at J.P Morgan points out:

In a nutshell, the proposal is pretty much in line with expectations, and a fine-tuning is expected once the energy commission starts its analysis and discussion in both chambers. As we mentioned, the start of the discussion will depend on the previous approval of the political and the telecomm reform, which are expected to be discussed in May and June respectively. We expect an approval of the energy reform bylaws by the end of June, in a third extraordinary session.

The comprehensive reform agenda that was approved last year should address many of the country’s economic weaknesses, including lack of competition, inefficiencies and poor performance in the sectors that the reforms target. The successful passage of the by-laws, combined with a gradual recovery in the U.S. economy, should support stronger economic growth in Mexico in 2014 and beyond.

LatinFocus Consensus Forecast* panelists expect that the reforms, boosted by strong growth in investment, will propel economic activity in both the medium and long terms. Panelists expect that fixed investment will grow 4.4% this year, while forecasters expect investment growth to accelerate to 5.8% in 2015 and to maintain an average growth rate of 5.9% in the period from 2016 to 2018.

* Note: The LatinFocus Consensus Forecast is a monthly forecast based on 29 individual projections from investment banks, consultancies and think tanks. For more information, please contact us via www.focus-economics.com.

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