Pemex Official Sees Monopoly End as JPMorgan Sees Reform

Mexico is on the cusp of opening its energy industry to outside investment as a wide consensus has developed that the constitution must be changed to end the government’s monopoly on production, according to a board member of state-controlled oil producer Petroleos Mexicanos.

The country needs “very deep” reforms to lure investment to its natural gas and crude fields after eight years of declining oil output, and proposed changes could be ready by the end of summer, Hector Moreira, who also is a former official in the country’s Energy Ministry, said today at the Bloomberg Mexico Conference in New York. A congressional bill to open the oil monopoly would prompt as much as $50 billion in annual investments if approved, he said.

Much-needed changes will open the way for faster growth and a stronger currency in the region’s second-largest economy, Gray Newman, Morgan Stanley’s chief Latin American economist, said at the event. Officials from JPMorgan Chase & Co. and Grupo Financiero Banorte said they’re optimistic President Enrique Pena Nieto will lead a successful effort at reforms this year.

“This administration doesn’t only have the willingness, but the political power and political capital” to enact the changes, Gabriel Casillas, Banorte’s chief Mexico economist, said. Casillas said he was “very bullish” on the peso, the best-performing major currency against the dollar this year, and that investors hadn’t yet priced in the reforms.

Economic Slowdown

A slowdown in economic expansion is putting pressure on Pena Nieto to gain approval to open the energy industry and change laws to boost tax collection, reforms he says may lift growth to 6 percent.

“We need far more investment, we need capacity in production and we need technology,” Moreira said. “We need to transform the energy sector in a very deep way. I think now is the time.”

The ruling Institutional Revolutionary Party has the ability to pass the key bills, which will attract investment and bolster Mexican markets, according to Eduardo Cepeda, the senior country officer for JPMorgan in Mexico.

Mexico’s stock market may slump 10 percent if none of the promised reforms are carrier out this year, Cepeda said. Still, that could present a buying opportunity because the structural changes will eventually get done, he said.

The IPC stock index has dropped 8.4 percent this year, compared with declines of 25 percent for Brazil’s benchmark, 12 percent declines in Chile and a 15 percent fall in Colombia.

Pena Nieto

Yields on Mexican government bonds due in 2024 have climbed

1.35 percentage points in the past two months through yesterday to 5.83 percent as banks from JPMorgan to Barclays Plc cut Mexican growth forecasts and prospects for reduced U.S. stimulus sparked outflows from emerging markets. Average yields on local-currency developing-nation debt rose 0.5 percentage point in that span, according to Bank of America Corp.

Mexico’s peso has “a lot of upside,” Douglas Smith, director of emerging-marked fixed income research at TIAA-CREF Investment Management, said today at the conference. The peso is at a good entry level for medium- and long-term investors, said Gerardo Rodriguez, managing director at BlackRock Financial Management Inc.

The peso weakened 0.4 percent to 12.9478 per dollar at 2:12 p.m. in New York, extending its drop this year to 0.6 percent.

Barclays predicts the economy will expand 2.5 percent this year, the weakest pace since it shrank 6.2 percent in 2009 and below the 2.9 percent forecast by analysts in a Bloomberg survey. JPMorgan predicts GDP will climb 2.8 percent this year. Mexico’s 1.7 percent annual growth in the past five years is about half the rate in Brazil.

Reform Momentum

Pena Nieto said in an interview in London last month the passage of education and telecommunications bills earlier this year and the formation of an alliance between the country’s leading political parties signals there’s momentum to adopt more reforms.

He said his administration will send bills to overhaul energy and tax policies to lawmakers when regular congressional sessions resume in September. The 46-year-old former State of Mexico governor said he’s confident the so-called Pact for Mexico alliance between his ruling Institutional Revolutionary Party, or PRI, the opposition National Action Party, known as the PAN, and Democratic Revolution Party, or PRD, will ensure the energy bill is approved by Congress before year-end.

Mexico is seeking to attract capital for deep-water and shale deposits found in the past decade as reserves dwindle in Cantarell, the 1976 oil discovery that ranked among the world’s largest. Mexican law prohibits Pemex, as Petroleos Mexicanos is known, from profit-sharing agreements with other companies for exploration, extraction and refining.

More Competition

“Pemex would benefit from competition,” Moreira said at today’s conference. “There is nothing more efficient to make a company more competitive than to have competition.”

Pemex, the source of funds for about a third of Mexico’s federal budget, was founded after Mexico expropriated assets from U.K. and U.S. companies and changed its constitution to assert control over its energy resources in 1938.

While Pena Nieto hasn’t said whether his energy law proposal would require amending the constitution, Juan Molinar Horcasitas, a spokesman for the opposition PAN party, said July 8 the party is set to push for changes to the country’s charter. Mexico City’s former mayor, Marcelo Ebrard, has said his opposition PRD party should “strongly” oppose Pena Nieto’s oil plan, which would have state-owned Pemex develop certain fields, with others being tapped by foreign and private companies.

‘Eve’ of Reform

Optimism over legal changes is helping push up growth expectations for next year to 4 percent, according to the median estimate of economists surveyed by Bloomberg, with Mexico forecast to expand more than Brazil for a fourth year. A pick-up in the U.S. economy and passage of new laws will boost investment in Mexico while falling commodity prices won’t hurt the nation as much as Brazil, according to Citigroup Inc.

“We are on the eve of a narrative-changing constitutional reform in energy,” Morgan Stanley’s Newman said today.

Mexico’s energy reform “has already started” and international companies are preparing capital for potential investment, Guido Cerini, managing director at Credit Suisse, said today at the conference.

“When you go to Mexico, for the first time ever, you have the feeling that something will happen,” Cerini said.

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