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.
“Tapping into Mexico’s vast oil potential should energize investment and growth throughout the economy,” she said, echoing renewed enthusiasm on Wall Street for all things Mexico.
COVERAGE: Energy & Environment
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.
Mexico’s prospects grew even brighter in December 2012 after the election of Mr. Pena Nieto, whose administration, aided by a rare consensus of the country’s major parties, has pushed through a series of sweeping reforms of the country’s calcified labor, education, telecommunications and energy sectors. The labor reforms, for example, aim to reduce the size of Mexico’s “informal economy,” or underground markets, by enabling businesses to more easily hire and fire workers in the formal sector.
“Pena Nieto’s administration has focused on major political and energy reforms,” taking on and defeating “sacred cows” such as labor unions and the 1938 ban on foreign oil companies, said Ms. O’Neil. Its accomplishments “have the potential to chip away at Mexico’s many barriers to broader, more inclusive growth.”
Key components of the energy reform, which required amending the national constitution, will permit private contracts for global giants such as Exxon Mobil and BP to explore and drill for oil and gas. The government also will be able to auction oil and gas licenses, mostly for deep-water projects, and collect taxes and royalties for the amount extracted.
“With a stronger domestic economic base and a richer society, Mexico can take advantage of its greatest potential,” said Ms. O’Neil.
Still, she said, Mexico faces “daunting hurdles” such as a high crime rate, corruption, inequality and weak infrastructure.
In an interview with the Council on Foreign Relations for the January/February issue of Foreign Affairs, Mr. Pena Nieto said he was able to secure sweeping reforms that eluded his predecessors by first securing agreement to a “Pact for Mexico” that committed all three of Mexico’s major political parties to the reforms.
“This government has come not to manage, but to transform,” he said, “and that is exactly what has been happening throughout this year.”
With enactment of the energy reforms in particular, he said, Mexico’s economy will revive this year and grow by 4 percent to 5 percent on average in the future.
“The most important changes are about to come” with implementation of the reform laws, he said. “Internal success will allow Mexico to project a different face to, and have a better position in, the world.”