Mexico in 2014 panel

(L-R) Gustavo Flores-Macias, Gerardo Rodriguez, Lisa Schineller, Jose Enrique Arrioja. (Image: Roey Yohai)

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Summary - Mexico in 2014: Political and Economic Outlook

By Andres Sada

Experts debated prospects for growth and how the reform process will play out.

Speakers:

  • Gustavo Flores-Macias, Professor of Government, Cornell University
  • Gerardo Rodriguez, Managing Director, Blackrock
  • Lisa Schineller, Managing Director, Latin American Sovereign Ratings, Standard & Poor’s
  • Jose Enrique Arrioja, Editor-At-Large, Latin America, Bloomberg News (Moderator)

Summary

AS/COA hosted a panel examining the political and economic outlook for Mexico in 2014. Last year brought a major set of reforms covering energy, education, telecom, banking, and fiscal changes, among others. However, panelists discussed that the benefits of the reforms will not be felt this year but rather in the medium and long term. They noted that with the recent rout in emerging markets, the global economic environment will be an important factor to consider in the Mexican economic and political outlook of 2014.

Economic Growth and Reforms

For Cornell University's Gustavo Flores-Macias Mexico’s reforms are unprecedented during a democratic period. “Mexico is having a watershed moment,” said Standard & Poor’s Lisa Schineller. This agency issued a second credit rating upgrade in 2013 for Mexico, giving the country a BBB+ rating. 

“Mexico learned its lessons the hard way, after recurring periods of financial crisis, which opened up space for consensus,” explained Blackrock's Gerardo Rodriguez. “This vehicle to construct reform has been more positive than people were expecting.” Bloomberg's Jose Enrique Arrioja mentioned that last year, the country’s growth reached its lowest level since 2009. Schineller responded that some of the factors that reduced growth in 2013—slower infrastructure spending and reduced public expenditures—no longer exist this year. 

In spite of the progress made on reforms, the “level of complexity of the tasks that need to be done soon is much higher than in the past,” said Rodriguez. Secondary laws must be approved and implemented in areas such as telecom and energy reforms. Flores-Macias said that when it comes to reforms, “the devil is in the details.” Rodriguez noted: “No country in the world has become rich without addressing the quality of institutions and the ability to do business,” citing transparency, corruption, and rule of law as areas to tackle.

Emerging Markets and the Global Economic Environment

Rodriguez explained that for several years, “risky assets have performed very well as emerging economies have moved up the income curve after a spectacular decade.” Even though markets aren’t doing as well now, the peso—which moves with risky assets—has behaved very well.

Still, the peso could impact the reform process. “Peso pressure may have the negative consequence of not giving the government enough time for these reforms to play out,” said Flores-Macias. Reforms could be watered down as inflationary pressures lead interest groups being squeezed in the short-term, he explained, though Mexico could benefit from a strengthening U.S. economy.

How Security Impacts Reforms

Panelists discussed Mexico’s security challenges amid reform efforts. “Now that the reforms have been approved, it will be a lot harder to ignore security both in terms of the public discourse and in terms of tweaking the strategy,” said Flores-Macias. Economic performance and violence are related, he noted. Violence doesn’t necessarily prevent growth—as countries like Colombia demonstrate—but it does have a negative impact. Flores-Macias added that public safety remains the top concern for Mexicans, according to numerous surveys. There needs to be strong institution building rather than more militarization, he suggested.

Energy Reform Challenges

Flores-Macias stressed the importance of getting secondary legislation right, especially for energy reform. “There is a huge risk of the government not being able to reign in companies, resulting in very serious arbitration,” he said. Plus, with 30 percent of Mexico’s revenues coming from state-run oil company Pemex, uncertainty remains about what will happen to those funds.

Rodriguez concluded that Pemex faces a number of hurdles, such as pensions, which are the most expensive in the country. Out of any energy entity in the world, Pemex has the most complex mandate, he said. Schineller noted that another challenge is that the energy reform is not popular domestically, so efforts should be made to change that perspective.

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