Pena Nieto Has Ability to Open Mexico Oil Sector, Aide Says

Pena Nieto Has Strength to Open Mexico’s Oil Industry, Aide Says
Luis Videgaray speaks during an interview in Mexico City. Photographer: Susana Gonzalez/Bloomberg

Mexico’s President-elect Enrique Pena Nieto will be able to bring together members of his party and the opposition to pass laws opening up the oil industry to private investment, his top economic adviser said.

Pena Nieto has “the conviction for the reforms, the political experience and the leadership of his party,” to push through the changes, Luis Videgaray, co-head of the incoming president’s transition team, said in an Oct. 26 interview. “It implies building a political consensus. It’s what we’ll do with energy.”

The toughest resistance may come from within Pena Nieto’s Institutional Revolutionary Party, or PRI, a traditional ally of unions that have opposed past energy overhauls, said Lisa Schineller of Standard & Poor’s. Already, labor legislation presented by outgoing President Felipe Calderon and initially backed by Pena Nieto to ease the hiring and firing of workers is facing delays in Congress as PRI lawmakers refuse to approve some clauses to boost union transparency.

Pena Nieto is returning the PRI to power after a 12-year hiatus from more than seven decades of uninterrupted rule.

“Luis Videgaray represents this very reform-minded wing, but the PRI is diverse,” Schineller, a sovereign ratings director at S&P, said in a telephone interview from New York. “It’s different when the PRI was in power pre-2000. The power base at the local level is now greater. When it comes down to actual negotiations, it may be harder than expected.”

Tax, Oil

Pena Nieto wants to simplify and expand tax collection with a bill he plans on presenting in 2013 and which would take effect in 2014, Videgaray said. The legislation would seek to increase tax revenue sufficiently to create “universal” health care in Mexico, Videgaray said, denying speculation that the president elect would present the bill in December after taking power the first of the month.

Pena Nieto hasn’t yet decided whether to push for a constitutional amendment to lift investment in the state-run oil company Petroleos Mexicanos, or rely on smaller legal changes, said Videgaray, who served as the president-elect’s finance chief when he was governor of Mexico state between 2005 and 2011.

Pemex, as the company is known, is struggling to reverse seven years of production declines that have cut output 25 percent from a peak of 3.4 million barrels a day in 2004.

Bypassing a constitutional change would be a departure from the strategy outlined by Videgaray before the July 1 election. He said in an interview in May that his party would ask Congress to approve changes to the nation’s charter to allow joint ventures.

The PRI’s alliance with the Green Party fell short of winning a majority in Congress, garnering only 241 seats in the 500-member lower house.

While that puts it close to the majority needed to pass laws and regulations, it’s less than the party had expected to win and doesn’t ensure it sufficient support for constitutional changes, which must also be ratified by a majority of legislatures in the 31 Mexican states and the federal district.

Mexico State

A graduate from the Massachusetts Institute of Technology with a doctorate in economics, Videgaray says Mexico state’s debt record is proof of Pena Nieto’s commitment to keeping a balanced budget and to improving the nation’s sovereign rating.

Under Videgaray’s watch, Mexico’s most populous state saw its credit rating lifted to investment grade as its debt fell by 46 percent in real terms to 28.7 billion pesos, according to Aregional, a Mexico City-based public finance research organization.

As governor, Pena Nieto “never saw debt as a strategy to promote development in his state,” the 44-year-old Videgaray said. “This sets a precedent that there will be responsible management of public finances.”

The markets also seem to have confidence in the new president.

The cost of protecting dollar debt from Mexico against default for five years has dropped 36 basis points since Pena Nieto won the July 1 election as of 3:37 p.m. in Mexico City, while the benchmark stock index has gained 3.5 percent.

Development Banks

Pena Nieto also plans to strengthen state development banks such as Banco Nacional de Comercio Exterior SNC and Nacional Financiera SNC, and boost competition among lenders in order to increase access to credit that currently trails regional rivals, Videgaray said.

While bank lending in Mexico is growing at a 15 percent pace, helping drive growth that the government expects will reach 3.8 percent this year, access to credit remains restricted more than a decade after the collapse of the country’s banks during the 1994-1995 Tequila Crisis. Outstanding credit as a percentage of gross domestic product is 19 percent, less than half the level in Brazil, the region’s biggest economy, according to the International Monetary Fund.

“If credits don’t flow, that will always put the brakes on growth,” he said, without providing details on how he’d stimulate competition in the financial sector. “The issue with Mexico’s economy isn’t interest rates, it’s availability” of credit.

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