Energy reforms will help keep Mexico’s growth story on track

The opening up of Mexico's oil sector should boost the country's already expanding economy.

Energy-sector reform is not a topic that gets most investors' pulses racing, but it could spark "Mexico's Moment", as analysts at Morgan Stanley put it. The government has finally unveiled long-awaited plans to open its oil sector to private investment, by allowing state-owned monopoly Pemex to partner with both domestic and foreign firms on profit-sharing exploration and production deals.

Given that private involvement in oil production is highly controversial in the country, this affirms the momentum of recent reform efforts and could "unleash a rethinking of the magnitude of foreign direct investment that Mexico can attract".

In addition to the symbolic importance, bringing private expertise improves the country's chances of making the best of its large but poorly managed oil reserves, says Capital Economics. The government now hopes to lift production from around 2.5 million barrels per day to around 3.5 million by 2025, which seems achieveable.

It is "unlikely to deliver a quick acceleration in GDP growth", but should provide a small boost to both growth and tax revenues, as well as ensuring the country remains a net oil exporter. As such, it's "another reason to expect the economy to outperform" its Latin American peers.

The energy shake-up follows a number of other major announcements, including an infrastructure investment proposal that "surpasses any other investment project seen in the past", says Dean Newman of Invesco Perpetual.

The government intends to spend four trillion pesos (25% of GDP) on road, rail, port and communications projects over the next five years.At the same time, policymakers have also managed to push through laws aimed at liberalising the labour market and improving competition, reflecting a new spirit of political compromise. "Mexico appears to have found the medicine [to cure] political gridlock."

With reforms going from strength to strength, Mexico's long-term fundamentals continue to look promising, despite an export and inflation-driven slowdown in growth in the first half of the year. The iShares MSCI Mexico IMI Capped ETF (LSE: SMEX) remains the easiest way to get access for UK investors.

Recommended

Uranium price is melting up
Commodities

Uranium price is melting up

The price of uranium has hit an eight-year high after being in the doldrums for much of the past decade
17 Sep 2021
Why are energy prices going up so much?
Energy

Why are energy prices going up so much?

UK energy prices are going through the roof, with electricity the most expensive in Europe and gas at its highest for 13 years. Saloni Sardana explain…
16 Sep 2021
Uranium prices are spiking – and conditions look ripe for a longer-term bull market
Energy

Uranium prices are spiking – and conditions look ripe for a longer-term bull market

The price of uranium has hit $40 a pound for the first time in six years. And it's unlikely to be just a short-term spike. John Stepek looks at what's…
10 Sep 2021
China’s new small-cap stockmarket
China stockmarkets

China’s new small-cap stockmarket

China has announced plans to establish a new stock exchange in Beijing that will be aimed at small and medium-sized firms.
10 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
How to stop recurring subscriptions becoming a drain on your money
Personal finance

How to stop recurring subscriptions becoming a drain on your money

Tracking and pruning subscriptions isn’t as easy as it sounds. Here's how to take charge.
14 Sep 2021