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Investor report: Mexico

Sep 25, 2013

Over the past year, Mexico found itself once again the shining investor favorite in Latin America, as its economy rebounded and as a new government took office on an unprecedented wave of optimism. Yet now the administration must live up to the high expectations placed on it by the public, as well as by investors at home and abroad. Growth has abruptly slowed while competitiveness remains strained. Meanwhile, a growing number of Mexicans are voicing their opposition to change.

Enrique Peña Nieto, approaching a year in office, is stepping up his drive to overhaul many parts of the economy. As we examine, the government’s reforms — to education, labor, telecommunications, finance, competition, and energy — have the potential to lift Mexico’s growth potential. But that will depend on whether Peña Nieto can maintain the political support he mustered last December when he first presented the his agenda for reform. A rethinking of the fiscal system — including levying capital gains tax, introducing a social welfare system, and cutting corporate deductions — is a central pillar of the reform effort. But when the government unveiled its fiscal reform program in early September, markets were taken aback by the fact that it would entail a large deficit in the coming years. A $300 billion infrastructure investment plan underpins another leg of the administration’s proposed economic overhaul. Investors are hopeful that the ambitious program will offer opportunities, but caution that its success depends on legislative details still to be hammered out.

Meanwhile, in another example of an investor favorite falling from grace, three Mexican homebuilders have defaulted and are negotiating with bondholders. We examine what went wrong. LF

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