Mexican economy on the brink of a new era

Thanks to reforms, the Mexican economy could be at the start of a new era of high growth.

During bouts of risk aversion, emerging-market bonds aren't usually at the top of investors' buy lists. Yet Mexico's 100-year bond the longest maturity on sovereign debt in the world jumped by almost 6% in the first half of October.

Its virtual safe-haven status shows that the Mexican economy has made rapid progress in recent years. Mexico, says BlackRock's Gerardo Rodriguez, is "at the top of a very small list of countries that have shown willingness to reform".

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Few governments can claim to be radical, agrees The Economist, but President Enrique Pea Nieto's "is on its way to joining this rare breed". Closing tax loopholes has boosted the tax take.

The government has freed up the telecoms and broadcasting industries and exposed Mexico's large, foreign-owned banks to competition. Most importantly, however, it has broken open the "hidebound energy sector".

State-owned Pemex has had a monopoly on oil exploration and production for 76 years. Now foreign firms will be allowed to bring in technology and money to bolster oil production, which accounts for 6% of GDP.

Electricity generation will also be liberalised, with private companies allowed to sell energy directly to business customers. This should cut industrial electricity costs currently 80% higher than America's and boost output.

The energy reform, says BCP's Walter Molano, "will lead to a tidal wave of new firms, capital inflows and technology that will revolutionise the energy sector and reverberate throughout the rest" of Mexico.

These reforms mean the country is "at the start of a new era of high economic growth". GDP is expected to grow by 2.5% this year. In a few years' time, the government hopes, the pace will have doubled.

Mexico is already a manufacturing powerhouse. Around 80% of Mexican exports go to America, and it makes almost 25% of US car imports. The sector should continue to strengthen by next year, Mexico's wages will be 6% below China's.

Mexico has also benefited from good housekeeping in recent years. Public debt is just under 50%, below the regional average, and inflation is under control at around 4%.

Investors can gain access via the iShares MSCI Mexico Capped UCITS ETF (LSE: CMXC). James McKeigue of MoneyWeek's The New World and LatAm Investor highlights chemical group MexiChem (NYSE: MXCHY) as being a beneficiary of energy reforms.




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