By the Blouin News Business staff

Next steps in Mexico’s reform agenda

by in Americas.

Photo: Reuters.

Photo: Reuters

On Wednesday, Mexico’s president Enrique Peña Nieto presented with pride the reforms taking place in his country to a meeting of the World Economic Forum on Latin America being held in Lima, Peru. Once again, Mexico’s economy was held up before an international assembly for its accomplishments and growth, as the country seeks to become Latin America’s biggest economy.

Back home the feeling is less optimistic. There is even some exasperation being expressed towards Peña Nieto. On Tuesday, his government announced a delay in bringing before Congress a financial reform bill, part of a broad overhaul of several sectors of the economy that was the centerpiece of the president’s election campaign.

Some feared as a result for the future of the Pact for Mexico, an alliance between Mexico’s three main political parties — the ruling Institutional Revolutionary Party (PRI), the conservative National Action Party (PAN) and leftist Party of the Democratic Revolution (PRD) — to enact the reform agenda.

In an attempt to ease concerns about the state of the cross-party accord, the government said on Wednesday that the parties to the Pact are committed to working together and to continue to set aside their ideological differences. This may all, though, just be the end of the political honeymoon. The opposition PAN released video tapes that allegedly showed PRI officials using federal social programs as quid pro quo for votes in the state of Veracruz ahead of local elections last July. In order to move beyond the gridlock, the PAN and the PRD have expressed their determination to protect social programs.

Here is a run-down of the high-profile reforms covered by the Pact (document, in Spanish), which consists of 95 initiatives.

— Telecommunications reform

The bill aimes to open Mexico’s phone and television market, today in the hands of Carlos Slim’s America Movil, which controls some 80 % of the fixed line business and about 70% of the mobile market, and Televisa, with more than 60% of the TV market, respectively. It would permit higher foreign investment and give regulators the power to force incumbents to sell assets. The reform bill was approved by the Senate on April 19 and now waits to be taken up in Congress for final approval, something that is expected to occur before the legislative period ends on April 30. (UPDATE: Mexico’s Congress passed the bill on April 30)

— Financial reform

The bill at issue. Its main goal is to modify the legal framework to boost lending by making it easier for banks to collect on guarantees for bad loans and by giving powers to regulators to sanction firms that do not lend enough. Another aspect of the plan is to decrease the high level of credit focused on big enterprises and to “boost credit among small and medium enterprises that benefit less form credit and loans,” Peña Nieto said in Lima, since they suffer the credit burden the most: they generate nearly three quarters of Mexican jobs, but receive only 15 % of credit. Even though it threatens the Pact of Mexico, it’s likely that the bill will be introduced in the next few days; the government is intending for it to be law by the end of the year.

— Fiscal reform

Improving Mexico’s inefficient taxation system is a much needed overhaul in the eyes of investors, who see it key for Mexico’s economy to expand.  The bill is in a discussion stage though it’s expected to reach Congress later this year. Finance minister Luis Videgaray recently said that the reform “will be large.” It will likely include a review of  the income tax regime, a formalization of Mexico’s informal sector (the underground economy accounts for nearly one-third of the workforce), the end of subsidies, and be the channel through which to pay for the universal health and pension coverage in Peña Nieto’s plans. This is set to be in place by the end of 2018.

— Energy reform

Expected for the second half of the year, the aim of this reform is to bring new investment to an industry controlled by the state oil and gas monopoly, Petroleos Mexicanos (Pemex), through alliances with private firms. The goal is to bring in new technology to raise Pemex’s productivity and make it able to become a global company. It’s likely to be the most controversial reform of them all. Opposition parties say that they will oppose it, seeing it as a first step to privatization. The energy reform was heavily publicized in Peña Nieto’s recent Asian tour. It is scheduled to be implemented by the end of 2014.

The fiscal and the energy reforms, the most politically challenging, are closely tied since the government receives up to 40% of its revenue from the state-owned oil monopoly. It wants to wean itself off such dependence, possibly raising revenue through a levy value added tax (VAT) on food and medicine –a thorny issue because of the impact it would have on the poor (roughly half of the population). Both reforms will likely be pushed through Congress together, though that does not mean that they would be implemented at the same time. For now they are still under discussion.

So far, only an education reform bill has been signed into law. The rest of the structural reforms are part of Peña Nieto’s desire to propel Mexico towards being a global player and its economy to grow at faster than 5%. The Pact of Mexico had overcome years of deadlock in Congress but now is wobbly as the fighting between the parties intensifies. Naturally, some say.

Peña Nieto needs to show his desire to move forward with the Pact, first by supporting the investigation into the electoral crimes accusations — distancing his party from behavior that many Mexicans still readily associate with the PRI — and, second by resolving the emerging differences over social programs with the other two parties in the alliance. Mexico’s future position in the global economy depends on the implementation of the reforms. A test of whether its political parties can co-operate sufficiently to get it to where the country wants to be will come in what may be feisty local elections due in July, in 14 of Mexico’s 31 states.