Mexico: Energy sector liberalization faces tight deadline
November 11, 2014
The administration of President Enrique Peña Nieto has made a deliberate effort to speed up implementation of the key energy reform by-laws in order to meet the tight end-November deadline. According to the ten short-term measures the President proposed on 11 August, the government expects to have completed the legal framework for all of the energy reform by-laws and put in place all the institutions referred to in the new legislation by November of this year. However, since Congress approved the by-laws in August, regulatory agencies haven’t appeared well prepared to cope with the workload necessary to introduce complex changes.
Over the past two months, the government has taken important steps toward reform implementation. The Ministry of Energy announced which areas of production state-owned Pemex would keep for exploration and which would be open to bids from local and foreign investors. Independent advisers for both Pemex and the state electricity firm Electricity Federal Commission (CFE) have also been appointed. Moreover, regulatory agencies—such as the Hydrocarbons National Commission (CNH) and the recently-created agency responsible for industrial and environmental security—are dealing with a huge workload in order to determine what the correct rules are and to ensure that they are applied fairly and transparently. Nonetheless, many analysts have warned that the energy legislation is being implemented at a dangerously slow pace.
Despite the aforementioned improvement, the administration of President Peña Nieto is facing increasing pressure. On one hand, the government needs to send the right signs to financial markets and investors, both of which remain upbeat that the energy reform alone will add significant support to GDP growth in the medium-term. Moreover, falling oil prices and decreasing production are having a significant impact on the national budget, while rising public debt could be a source of concern in the medium term. On the political front, the government is still being confronted by left-wing opposition parties, particularly by Andrés Manuel López Obrador, leader of the recently-created National Regeneration Movement (Morena). López Obrador, along with many leaders of Mexico’s left, has virulently opposed the energy reform, claiming that the overhaul will lead to the privatization of Pemex and the loss of control over its oil reserves. With just over six months left until the 2015 mid-term elections, both Morena and many other left-wing parties are expected to take advantage, at least somewhat, of anti-energy reform sentiment to try to garner support.
The government’s remaining timetable for implementing the energy reform is narrowing and questions have been raised regarding whether regulatory bodies will be up to the task of processing the innumerable changes that are involved. Concerns have also appeared that, in its haste to rapidly attract large-scale investments into a more competitive energy sector, the government runs the risk of endorsing defective rules, which may produce disappointing results. Since the 1980’s, the Institutional Revolutionary Party (PRI) has had a good track record for getting reforms passed through Congress. However, it has often fallen short in ensuring their proper implementation. Moreover, improvisation, political trade-offs, excessive bureaucracy and corruption all have the potential to weaken the thrust of the energy reform. In contrast with the Finance Ministry, which expects GDP growth to average 4.8% between 2015 and 2018, LatinFocus Consensus Forecast panelists’ latest estimate for this period is 3.9%.
Author: Ricardo Aceves, Senior Economist