Energy-sector reform is not a topic that gets most investors’ pulses racing, but it could spark “Mexico’s Moment”, as analysts at Morgan Stanley put it. The government has finally unveiled long-awaited plans to open its oil sector to private investment, by allowing state-owned monopoly Pemex to partner with both domestic and foreign firms on profit-sharing exploration and production deals.
Given that private involvement in oil production is highly controversial in the country, this affirms the momentum of recent reform efforts and could “unleash a rethinking of the magnitude of foreign direct investment that Mexico can attract”.
In addition to the symbolic importance, bringing private expertise improves the country’s chances of making the best of its large but poorly managed oil reserves, says Capital Economics. The government now hopes to lift production from around 2.5 million barrels per day to around 3.5 million by 2025, which seems achieveable.
It is “unlikely to deliver a quick acceleration in GDP growth”, but should provide a small boost to both growth and tax revenues, as well as ensuring the country remains a net oil exporter. As such, it’s “another reason to expect the economy to outperform” its Latin American peers.
The energy shake-up follows a number of other major announcements, including an infrastructure investment proposal that “surpasses any other investment project seen in the past”, says Dean Newman of Invesco Perpetual.
The government intends to spend four trillion pesos (25% of GDP) on road, rail, port and communications projects over the next five years. At the same time, policymakers have also managed to push through laws aimed at liberalising the labour market and improving competition, reflecting a new spirit of political compromise. “Mexico appears to have found the medicine [to cure] political gridlock.”
With reforms going from strength to strength, Mexico’s long-term fundamentals continue to look promising, despite an export and inflation-driven slowdown in growth in the first half of the year. The iShares MSCI Mexico IMI Capped ETF (LSE: SMEX) remains the easiest way to get access for UK investors.