MEXICO CITY – For the last few years, the challenging security situation has been the headline issue in Mexico. Turf wars between increasingly-fragmented cartels—enfeebled by the capture or killing of high-profile kingpins—not to mention the recent proliferation of vigilante groups, have overshadowed the remarkable progress that President Enrique Peña Nieto’s government has made on other fronts. Last year, Peña Nieto forged a broad political consensus around a set of revolutionary constitutional reforms touching everything from the country’s economy to its educational system to its fiscal management. Reforms to the energy sector have generated particular excitement, opening the door to foreign participation in the country’s energy industry and raising hopes of a new round of growth that will benefit Mexico and foreign investors alike.
These are indeed exciting times for Mexico, but as we explain in a new report, any exuberance about the country’s prospects should be tempered by the hard work that lies ahead. The coming months and years will see the country turn its state-run oil, gas and electricity monopolies into market-driven enterprises and establish new independent regulatory bodies to oversee these industries. Any challenges to the new order will play out before the country’s notoriously fickle judiciary. And there will certainly be challenges: from the staunchly opposed labor unions, political opponents, and any companies who feel they’ve lost out.
The first hurdle is in the political arena. The Pact for Mexico—the political alliance that led to the reforms–has disintegrated. As it wrestles with the painstaking and often contentious details of how to actually implement the energy reforms, Mexico’s Congress is far more divided than it was a year ago. Opposition parties seem intent on delaying the process, and powerful interest groups are bent on influencing the outcome.
Another challenge will be the productivity of Mexico’s conventional oil fields, which have been declining for the last decade. At the same time, an uptick in domestic consumption threatens to cut into export revenues. Even with the promise of Mexican shale gas and tight oil sometime in the future, convention oil remains Mexico’s life blood for the foreseeable future. The hope is that an influx of private investment can reverse the declining output trend.
That said, unconventional energy sources could greatly bolster Mexico’s energy output. The country boasts the world’s eighth-largest shale oil reserves and sixth-largest gas deposits. Taking full advantage of these sources will require new infrastructure—not just in extraction and refining capacity, but also in transport. Mexico has made ambitious investments to bolster its shipping capacity, but corruption remains a significant concern with infrastructure projects in general and at ports specifically.
Of course, the specter of organized crime looms large over all of this—particularly in the minds of investors. By now it has become clear that bulked up security forces cannot substitute for reform to the country’s criminal justice system. That is one reform that does not appear imminent, and in the foreseeable future, security will remain a challenge for the government and private enterprises alike.
Despite this risk, and the uncertainty around how the energy reforms will actually play out, the potential for real growth in Mexico is considerable. The developments of the last year surprised almost everyone—perhaps even has Peña Nieto himself. But radical change will require further progress; Mexico is half way home.
Dwight Dyer is senior analyst, Michael Moran is vice president, and Gavin Strong is an analyst for global risk analysis at Control Risks, an international political, integrity and security risk consultancy. For more analysis, sign up for a free trial of our Country Risk Forecast.