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Opening development of oil sector catapults Mexico as leader of emerging markets
Question of the Day
Mexico is gaining stature as an invigorated leader among the world’s major emerging markets thanks to the speedy enactment last month of far-reaching energy reforms that are expected to boost economic growth by opening development of its vast oil and gas resources.
While other emerging-market titans such as China and Brazil are faltering and casting about for new sources of growth, Mexico has gained a rising reputation and prospects. Last year under President Enrique Pena Nieto, the slumbering Latin American giant tapped its potential by enacting an overhaul of its state-owned energy sector and a series of reforms in taxes, labor, education and telecommunications. The rush of reforms has, among other things, swept aside 75-year-old restrictions against foreign investment in the state-controlled energy sector that have stifled development.
Mexico’s revival as a leader among developing nations promises to produce major dividends for the U.S. by increasing its wealth and appetite for American imports and by strengthening job prospects for Mexicans at home. As a result, the flow of illegal labor across the U.S. border will continue to slow.
“This is a watershed moment for Mexico,” said Lisa M. Schineller, an analyst at the rating agency Standard & Poor’s Corp.
The agency announced an upgrade of Mexico’s credit rating and economic prospects last month shortly after its Congress and state legislatures approved a constitutional amendment to open the energy sector to private investment.
Although much remains to be done, economists estimate that the reforms will increase Mexico’s annual growth rate in the next few years to as much as 6 percent on average, led by surging exports of oil and gas.
A good bet
“If Mexico is able to make its legislative changes stick and harness its geostrategic potential, the country will excel over the next five years, benefiting its people and making it a good bet for investors,” said Shannon K. O'Neil, senior fellow at the Council on Foreign Relations.
Even before enactment of the reforms, she said, Mexico was making an economic comeback. Its textile and apparel industries were decimated a decade ago by competition from China when the Asian giant joined the World Trade Organization.
“The low-skilled, low-paid jobs are likely gone from Mexico for good,” she said. “But rising wages in China, combined with higher Mexican productivity; increasing energy costs, which make shipping more expensive; the proximity of Mexican factories to the United States, reducing delivery times; and worries about intellectual property rights have led a number of manufacturers to choose Mexico over China.”
Moreover, major advanced manufacturers such as Bombardier, Honda, Nissan and Volkswagen have plans to locate plants in Mexico, contributing to the rise of a middle class of 40 million to 60 million people, she said.
The increased economic opportunity in Mexico slowed net migration across the U.S. border to essentially zero last year, and trade with Mexico — the second-largest export market for the U.S. — skyrocketed to more than $500 billion in 2012. More than $1 billion worth of goods cross the U.S.-Mexico border each day.
Investment analyst Erik Gholtoghian said the net return of migrants back to Mexico in the past few years is evidence of the U.S. economic slump and the renaissance of Mexico’s economy and manufacturing sector. Mexico has particularly benefited as the value of China’s currency and wages surge, sending many manufacturers in China scurrying back to Mexico, he said.
“International capital flows are already starting to cause major changes in Mexico,” he said, while “the Mexican government has begun recognizing its potential as a world export leader and has started making serious progress” by reforming critical markets and by derailing several drug cartels in export-sensitive seaport areas.
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