Wednesday, August 12, 2015

Keep an eye on the Mexican economy

(My new American Thinker post)

For a couple of years, Mexico and President Pena-Nieto have received praise for reforms and economic growth.    To be fair, I praised those reforms too.

"No mas" as that famous boxer once said.   

According to a new story in The Washington Post, Mexico's economy has halted sharply: 
Mexico has been held up as one of the economic bright spots among emerging market economies, as Peña Nieto’s government has pushed through constitutional overhauls aimed at making major industries such as oil and telecommunications more competitive. But in recent months, Mexican newspapers have kept running banner headlines of economic gloom: The value of the peso has plummeted to record lows against the dollar, growth rates have shrunk to dwarfish size, and the only things that seem to be getting bigger are the poverty rate and the gap between rich and poor.“With all this financial volatility we have seen with the peso, the failure of the round-one [oil] contracts and low growth, the economy continues to suffer from the chronic anemia of the past,” said Alfredo Coutiño, director for Latin America at Moody’s Analytics.He added: “I do not see Mexico growing as the government expected at the beginning of this administration.”
The peso is now valued at 16.33 to one US dollar.   It was 14.74 at the beginning of 2015.   We are not talking here about the 1976, 1982 or 1994 peso devaluations but the erosion raises concerns.

President Pena-Nieto was correct for pushing for energy reforms.   He correctly said that those reforms would bring in foreign investment and expand the economy.

Unfortunately, President Pena-Nieto forgot that foreign investors are not going to invest in the energy sector under the management of an enterprise named PEMEX.   

In other words, PEMEX is simply too unattractive for any foreign investor.    The Economist explained it in 2013: 
"Its first problem is structural: it has never been treated as a profit-making company. Astonishingly for a monopoly that drills every barrel of oil in Mexico at an average cost of less than $7, and sells it for around $100, it lost an accumulated 360 billion pesos, or $29 billion, in the five years to 2012 (despite a small profit last year). This is partly because although its oil-and-gas-production side makes a fat profit, its refining business loses a fortune, and its petrochemicals division is also loss-making. Worse, the government sucks out cash to compensate for the lack of tax revenues it collects in the rest of the economy. Last year 55% of Pemex’s revenues went in royalties and taxes. This perpetual drain on its cashflow means its debt has soared to $60 billion. The hole in its pension reserve is a whopping $100 billion.Besides siphoning off its profits, the government refuses to let it make its own decisions. Its boss is appointed by the president, the energy minister chairs its board of directors, and the finance ministry vets its budget, line by line."
Why would any foreign investor invest in an energy company that isn't really in the energy business?

To be fair, Mexico's slowdown goes beyond energy.   Nevertheless, the energy sector is the key to a more prosperous Mexico but how do you reform a sacred cow?

P. S. You can listen to my show (Canto Talk) and follow me on Twitter.

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