Jury Out on Mexico’s Reforms

Two years into his presidency, Enrique Peña Nieto is struggling to convince voters that his reforms will boost the economy; LatAm INVESTOR looks at the likely impact for investors...

When Enrique Peña Nieto managed to pass a package of historic reforms it heralded a new era for Mexico’s economy. Economists always recognised that these were long-term, structural measures yet for a government that won a close election victory it was always vital that they showed short-term benefits. In the last two years Peña Nieto’s approval rating has been hit by corruption scandals and security issues, which means that he needs the reforms to show some positive effects more than ever. However, so far the results are mixed.

Slow growth

Economic growth has disappointed. It had been hoped that the reforms would unleash a wave of investment-led growth but that hasn’t really happened. Mexico’s GDP grew 2.1% in 2015 and is expected to grow by 2.8% this year, which, for many Mexicans, isn’t enough to justify the controversial reforms.

"It had been hoped that the reforms would unleash a wave of investment-led growth…"

One reason that growth has slowed is the falling oil price. It hit export revenues, which is forcing the government to retrench spending and means that state oil firm, Pemex, has less to invest. It also looks like cooling some of the interest in the landmark energy reform that policymakers had been hoping would attract large amounts of foreign direct investment.

Silver linings

Yet there are some considerable silver linings. The falling oil price has caused the Mexican peso to depreciate – especially against the strongly performing US dollar. Given that 80% of Mexico’s exports go to the US, this should give a big boost to manufacturers. Indeed robust growth of the manufacturing sector is one reason that unemployment continues to fall, although low wage growth means that many Mexicans don’t feel better off – hence their continued scepticism about the reforms. Especially given that last year’s tax reform has hit their disposable income.

Enrique Peña Nieto came to Britain to drum up international interest in Mexico's investment opportunities

One area where the reforms seem to have delivered is telecoms, where mobile phone bills, which are some of the most expensive in Latin America, have started to come down. The electricity generation reform, which doesn’t get as much international investor attention as the changes in the hydrocarbon sector, also seems to be having an early effect, with utility bills falling. With his approval rating at a record low of 25% Peña Nieto will be hoping that more sectors start to demonstrate the reform impact over the coming years.