Energy reform: Mexico waits on the details

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Vital energy reforms could provide a welcome fiscal boost.

The disappointment of Mexican president Enrique Peña Nieto’s fiscal reforms in the third quarter of 2013 has now been put into context and explained.

Those tax reforms were widely seen as creating as many issues as they solved and having little overall impact and a lack of coherent fiscal strategy. The government backed away from the more politically sensitive reforms to value-added tax despite signalling an intention to withdraw certain costly exemptions.

Worse, the reforms did little to improve the government’s overall tax haul, which at just 14% of GDP is below the average for Latin America. Now, however, we know why. Peña Nieto had been doing deals behinds the scenes with the political parties he would need support from to pass his ambitious energy reform bill.

The energy reforms surprised all but the most optimistic observers in their potential scope – in particular, allowing foreign oil companies to book reserves against projects. State oil company Pemex will likely be radically different in five years’ time, and the political decision to remove the workers’ union from Pemex’s board is bold. Again, with the caveat of the need to see the content of the secondary laws, FDI should boom.

Liberalization of the electricity and oil and gas sectors should have a big impact on those sectors and the economy generally; economists have already added an extra 1.5% to future GDP growth rates as a direct consequence of the scope of these reforms and many say the risks are on the upside.

Suppliers, contractors and a whole host of other industries will benefit. Cheaper electricity will lower manufacturing costs across the board, and the country could become a competitor in energy-intensive industries such as aluminium and steel production. And, circling back to fiscal matters, that growth should improve Mexico’s overall tax take too.