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Reaction Mixed to Mexican Energy Reform

Aug 14, 2013

A landmark bill proposed this week to reform Mexico’s energy sector was met with cautious optimism by financial markets, amid questions over the extent of the plan.

Although there were few surprises in the ruling PRI party’s plans to overhaul the nation’s oil and electricity sectors, the markets reflected disappointment that plans lacked the aggressiveness of an earlier PAN proposal. There was also concern that the proposal did not go as far as allowing foreign oil companies to share in reserves, rather than just profits.

The stock market was down more than 1.0% on the Monday following the announcement before recovering slightly Tuesday. However, analysts see significant upside.

"We view this weakness as a buying opportunity and view the PRI proposal as a pragmatic approach that will still likely achieve objective of FDI inflows, competitiveness gains, higher growth potential and positive rating action," Jefferies said Wednesday in a note.

That constitutional reform is in the cards reaffirms itself represents a "positive event," the shop says, even if the markets would prefer production sharing versus profit sharing. It reiterates a preference for Mexican 30-year bonds, versus similarly-rated Colombian 30-year bonds.

"While [profit sharing contracts] do not go as far as granting full concessions to private operators, depending on how they are legislated, they should provide enough opportunity to attract significant private sector interest," said Will Landers, portfolio manager at BlackRock.

"We continue to argue that we see a 70% chance, or perhaps an even higher one, of this reform being approved by year-end 2013," Bulltick said in a research note. Approval should bring sovereign rating upgrades, increases in potential growth, higher levels of competitiveness of Pemex, lower electricity tariffs, and material appreciations in Mexican asset prices, it added.

Commerzbank sees the plan pushing Mexico’s long-term growth trend closer to 4.0% territory from the current 3.0%, it said, and could eventually lift the country into A rating territory.

"The government’s strategy is to reach a middle ground" between the PAN proposal and popular skepticism towards constitutional change, Commerzbank said. It calls the bill "market friendly," while noting it leaves "little room for positive surprises."LF


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