In his first full day in office last December, Enrique
Peña Nieto performed a feat that had long eluded
politicians in Mexico: the country's 46-year old new president
managed to forge a broad agreement across all three major
political parties for what the government hopes will be a
sweeping set of economic reforms.
That Peña Nieto had on day one proposed in his
so-called "Pact for Mexico" an ambitious list of measures was
But that he had won endorsements for his government's
95-point plan from across the political divide was entirely new
- and was orchestrated for one chief purpose: to signal that
Mexico's new leader has what it takes to overcome the political
paralysis that has prevented previous administrations from
tackling Mexico's fundamental economic problems.
In a masterful piece of political theater that day, the
former state governor - who had just returned his centrist
Institutional Revolutionary Party (PRI) to power after 12 years
in opposition - had also sought to hammer home the point that
he is prepared to shake things up to bring about the vital
reforms needed to turn Mexico into one of the world's
high-growth emerging markets.
Though these are early days yet, Peña Nieto's
fledgling administration at the start of its six-year term has
so far surprised even the most hardened cynics across the
political spectrum. And his election has lent vigor to an
already upbeat mood in Latin America's second largest
Mexico's economy rebounded in 2010 from recession the year
before, growing by 5.5%, its fastest expansion in a decade. In
the two years since, it has reported higher GDP growth than
Brazil. Its expected 4% expansion last year was spurred on in
part by US export demand that has helped insulate Mexico from
ill winds from Europe and a slowdown in Asia and other emerging
"The conditions are all there for growth: there is huge
potential," says Gerardo Rodríguez, a deputy finance
minister in the last administration. "Credit penetration has
doubled in the past decade and has the potential to double
again the next decade."
He adds: "Mexico finds itself placed very well between high
yielding countries that as an investor you don't really want to
hold and the low yielding countries that offer less return.
That makes it very appealing to investors."
On the up
Financial markets have taken heart. In early January,
Mexico's IPC stock index was breaking record highs; the
sovereign, meanwhile, was able to sell $1.5 billion in 30-year
global bonds at the lowest ever cost, with a yield of 4.19%.
And the country's Purchasing Manufacturers' Index (PMI), a
measure of business sentiment, itself reached a new record in
December of 57.1.
The improving mood predates the elections: Mexico had
already won praise in recent years for having achieved relative
economic stability and growth in the midst of a protracted
global slump. This followed a decade in which its average
growth had languished at 1.7%. A major part of the apparent
turnaround has been a boost in relative competitiveness with
China, given a rise in latter's labor costs and as Mexico's own
manufacturing sector has moved up the value chain.
But the speed of last year's uptick in sentiment also caught
many off guard. "Everyone was taken by surprise by the reversal
in perceptions," says Alonso García Tamés, head
of public sector at Grupo Financiero Banamex. "Fiscal and
financial conscientiousness is paying off, the value of having
an open economy and vibrant financial market is paying
He adds: "The stars are aligned for Mexico to become more
successful, all the elements are there to have a period of
Many now believe that Mexico has a good shot at boosting its
growth by some two percentage points a year so long as key
reforms, including of the tax system and energy sector,
In an exclusive interview with LatinFinance in December -
his first with any international or domestic print media since
taking office - Mexico's finance minister Luis Videgaray says
that the Pact represents "an opportunity" to finally push ahead
with critical reforms.
"It's an opportunity because it's a broad political
agreement to carry out some significant changes in public
policy, particularly in economic policy, to make some changes
that we all know need to be made: on the fiscal side, in energy
and in competition."
"The mandate is very clear," he adds. "It is to do all the
things that we need to do to have faster growth, stable growth
and for that growth to be something that is not only evident in
the macro variables but in the households and the domestic
The 44-year old Videgaray, who is widely considered the
president's right hand man and who headed the transition team
before being given the finance portfolio, served previously as
the State of Mexico's finance minister during Peña
Nieto's five-year tenure as governor, from 2005.
In that role, he was highly regarded for his management of
public finances: he was instrumental in helping the state win
an investment grade rating, having slashed public debt by 20%
and having boosted state revenues through a successful fiscal
reform - although, he stresses, revenues were doubled without
tax increases. "This was all about revenue efficiency,"
Videgaray says. "It's just as important as having a good fiscal
reform to have true efficiency in revenue collection."
Boosting tax revenues and increasing competition in the
energy sector are two key priorities of the new administration.
Mexico has the smallest non-oil tax take of any OECD country:
at 11% of GDP, it is on par with Pakistan and compares
unfavorably to Brazil, at 34%, or even the Latin American
average of 18.5%. Oil revenues, which account for a third of
the budget, are in decline.
Videgaray says the fiscal reform must fulfil three goals: it
must be simple and enable competitiveness; it must be fair; and
it must encompass all levels of the state as a whole, including
states and municipalities. "The agreement is for this to happen
in the second semester [of this year]," he says.
The reform aims at improving the efficiency and fairness of
the tax spending systems, to make public finances more
transparent, and to boost domestic savings and investment, and
- so it's hoped - Mexico's growth potential.
"Clearly this is not just a marginal twist in the fiscal
regime. We need to do a true overhaul of our fiscal structure
in order for this to be possible," he says. The government has
said it will review all taxes as part of a comprehensive
reform, though Videgaray has said no new taxes will be
introduced this year.
The Pact also includes a sweeping proposal for broadening
social security. "It's based on the belief that we need to
create a more equal society," he says.
Indeed, part of the rationale for the fiscal reform is to
raise funds to pay for the new programs under the Pact,
including universal healthcare. "We need to give budgetary
support for this to happen and that's where the fiscal reform
comes into play. We need to create a basic safety net to make
sure that all Mexicans have a minimum base of benefits."
The vision is bold. As Luis de la Calle, managing director
at consultancy De La Calle, Madrazo, Mancera, and a former
undersecretary for international trade, puts it: "They've
essentially said, 'let's build a welfare state with our
budget.'" But, he adds, "the question is: how will they pay for
it and how much will it cost?"
Videgaray says it's too soon to talk numbers. The government
is "not releasing any figures because it will all depend on
many components that are yet to be defined," he says.
Some anecdotal estimates put the cost of such reforms -
creating a social safety net - at between 3-5% of GDP. The
Center for Economic and Budgetary Research (CIEP), a think
tank, puts that figure at closer to 6% of GDP.
Vito Tanzi, a former head of the IMF's fiscal affairs
department, says there is no relevant historical precedent for
what Mexico is setting out to achieve; only the US and Sweden
have set up welfare systems from scratch, one in the midst of
the Great Depression, the other in the context of a highly
homogenous society. "Mexico is a very long way from where they
need to be if they want to have a welfare state, even one like
the US. They will have to have a major tax reform," Tanzi
Too much to handle?
Tax reform is the key to getting the broader set of
proposals in the Pact done. The finance ministry has estimated
that revenue losses from special tax preferences, exemptions
and deductions averaged more than 5% of GDP annually in the
2003 - 2010 period.
While there is consensus that a tax reform could prove a
significant boost to Mexico's economy, experts worry both about
the aim of using the proceeds to fund a broadening of social
security and the chances of success of the fiscal reform
Peña Nieto's administration has, in effect, wagered
its political future on getting its broader set of reforms
done. Videgaray himself points out that 44 of the goals in the
Pact are "explicitly subject to a fiscal reform happening." But
the fear is that given the new government's dense legislative
agenda, if one item falls short others could falter - and turn
a hopeful proposition quickly into a losing bet. The risks,
experts say, are not trivial, given a modern history littered
with fallen dreams.
Some question the logic of the government's approach. "I
would not have put the general principle of universal social
security as one of the first reforms to do," says Claudio
Loser, a former director of the Western Hemisphere department
at the IMF. "The problem is that the costs are significant. And
if it's not done with a tax reform that is major, then I would
say this is a very dangerous game
"As a broad plan it sounds great if they do the fiscal
reform on the revenue side, but it is an extremely dangerous
course of action. This could be a major disappointment if they
don't manage it well."
Others cast doubt on the presumed need to sell a high-stakes
fiscal reform that risks substantial amounts of political
capital up front and at a time when the macro picture appears
Indeed, in recent years, Mexico had already strengthened its
fiscal framework, boosting the credibility of public finance
management - a fact that, among other things, has also
contributed to bringing down public debt to 36% of GDP.
"Mexico doesn't have an urgent need to do a fiscal reform to
address a fiscal problem," says Rodríguez. "Mexico
doesn't have a fiscal problem."
But there is also the practical reality of trying to get a
deal through Congress and winning the buy-in of opposition
parties when push comes to shove. Any major tax reform would
also demand confronting vested interests head-on while
expending much political capital in doing so. Experts,
including Tanzi, say there are simpler ways to boost revenue,
such as increasing taxes on gasoline, political resistance
Moreover, with the oil price hovering between $90-$100 per
barrel, the urgency for pushing the tax reform may be naturally
Change in climate
Videgaray points out that the political climate has changed
markedly with PRI's return to power. "The political environment
I think is very constructive. It's a major innovation to have
the opposition parties approach the government and seal a pact
to work together on important and difficult matters."
The agreement on the Pact between the ruling PRI, the
conservative National Action Party (PAN), which governed for
the past 12 years, and the left-wing Party of the Democratic
Revolution (PRD), is widely seen as significant.
But Peña Nieto's achievement in winning the support
of the other two major political parties may prove to have been
the easy part: the bulk of the document's proposals were seen
as relatively uncontroversial in broad form.
"All the problems that the government wants to solve have
long been seen as serious problems for Mexico. In this sense,
agreement on these points is almost a no-brainer," says Loser.
The hard part, he says, will be "fighting on the details."
"The task ahead is enormous," he adds.
De la Calle agrees: "When you start tampering with special
interest groups, that's when you can run into problems."
Mexico has struggled in recent years to make any meaningful
progress in fiscal reform. Although ironically, it was
Peña Nieto's own party that was most obstructive over
its 12 years in opposition to the very reform agenda his
government is now pushing.
Says Luis Rubio, president of CIDAC, a consultancy in Mexico
City: "I have no doubt that the administration will come up
with ambitious reforms. The question is whether they will have
the power to push them through. It is the PRI and PRI-related
interests that have long been the issue.
"The PAN has been trying for 20 years to raise VAT but
failed. Will the PAN now play the same role today as the PRI
has played for the past decade, that is, to block reform?
What's in it for the opposition?"
He adds: "It was Peña Nieto that blocked many of the
reforms himself. He dominated the Lower House [of Congress].
Will it now be payback time?"
Nevertheless, a growing consensus is that Peña
Nieto's PRI might now be willing to back some of the measures
it obstructed when in opposition, including extending the VAT
to food and medicine.
Moreover, the government has already notched up some
legislative successes and may yet have the wind in its
In the run up to the inauguration, congress passed a key
labor reform bill, steered by Peña Nieto. The government
then had a major success in December with the passage of an
education reform bill. The sweeping overhaul of the country's
substandard educational system grants the government, rather
than the union, the power to hire and fire teachers. But the
development could also set the government on a collision course
with the unions.
Some have suggested the PRI's failure to secure a majority
in Congress will stymie the reform agenda. But Rubio says:
"Peña Nieto's greatest asset is the fact that he doesn't
have a majority, so he will have to convince people, he will
need the support of the opposition."
At the same time the government is pushing ahead with plans
to overhaul the energy sector and specifically state oil
company Pemex, which funds nearly a third of the federal
The energy company in recent years has experienced sharp
drops in output at its largest fields. Official estimates
suggest oil output will stagnate at 2.8 million barrels per day
(bpd) over then next decade without substantial new
But Pemex remains protected by a constitution that does not
allow private investment in the state monopoly.
Duncan Wood, director of the Mexico Institute at the Woodrow
Center, says that despite output having stabilized in recent
years, without fresh investment it could nevertheless decline
to 2.5 million bpd by the end of the decade, at a time when
domestic oil consumption is inching towards 2 million bpd.
"You're looking at a very dangerous situation as the largest
oil field enters decline in the next few years. If you don't
get mechanisms in place to replace those fields, you're looking
at losing potentially another half a million barrels per day,"
"It's not a question of Mexico lacking oil, it's a question
of Mexico not being able to exploit the oil it has," adds Wood.
"Pemex is ill equipped to deal with the challenges of the
modern energy sector." Such challenges include tapping
unconventional hydrocarbons, including oil in Mexican deep
waters and shale gas - a prospect Wood and others say would
prove a huge boost to the competitiveness of Mexican
"The consequences of not achieving this reform are quite
dramatic," says Wood.
Peña Nieto's predecessor Felipe Calderón was
unable to garner support to reform Pemex, but nevertheless
began the process of opening the state-run industry to private
Peña Nieto has said publicly that he is pursuing a
constitutional reform to allow for private investment in the
oil sector. Videgaray also acknowledges that foreign capital
and expertise are urgently needed to develop the sector,
though, like the president, he rules out privatization. "Pemex
needs to team with other players in the international energy
arena that can bring capital and expertise," he says. "That's
the key of the reform, to allow Pemex to partner with such
Wood is confident the government will push hard for a
meaningful constitutional reform. "I'm more optimistic than
I've been in 17 years in Mexico that something meaningful is
going to happen. I'm absolutely 100% sure they're going for an
ambitious reform. There's a better chance of them getting there
at the current political juncture than at any point over the
last 20 years."
But he concedes that ultimately legislative success on other
fronts will be key. "Peña Nieto and the government need
to keep having legislative success in order to keep going. If
there is a hiccup, that will damage the future
Yes we can
Videgaray, like his boss, is adamant that both fiscal and
energy reform will be tackled in the coming year and he insists
his government is best placed to succeed where others have
Asked whether he thinks his government can convince its own
party to drop historical opposition to reforming Pemex and
opening up the energy sector, Videgaray says: "absolutely,
otherwise we wouldn't be doing it."
Similarly, on fiscal reform, he says the case is
unambiguous. "All of us are alert to the importance of doing
this and to the cost of delaying a fiscal reform. The consensus
is much broader, that this is something that needs to be done,"
He adds that the political environment today is "very
constructive." "It's a major innovation to have the opposition
parties approach the government and seal a pact to work
together on important and difficult matters," Videgaray says.
"The political environment will help significantly."
"It's not only the opposition, it is society as a whole that
needs to understand why we need to enhance the financial
capacity of the government," he says. "It's not just 'we need
to tax more because we're taxing more.' It's that we need to do
things that are good for Mexico and the Mexican people. One of
the tools will be the tax reform. It's not an end in
What's at stake
If Videgaray and Peña Nieto are right and the
political cards are stacked in their favor, the fruits of a
successful economic reform could be significant.
Loser says it would mean the difference between Mexico
growing at 6% a year and reaching advanced income status in
thirty years or facing annual growth of roughly 2% and
wallowing in mediocrity for a generation to come.
Ultimately, though, the administration is likely to only
have one shot at the reforms. "Peña Nieto and the PRI
know it's their last chance. If they want to stay in power,
they will have to get the reforms done," says Rubio. "I'm
convinced that they will undertake many reforms but then they
will crash against the wall at some point. Then we'll see what
they're really made of." LF