Mexico continues along the path to reform with President Enrique Pena Nieto recently presenting the government’s fiscal proposals. Labour, education, telecom, financial and energy bills are already at various stages of the legislative process. According to the Mexican finance ministry, the combination of these reforms will put the economy on a path towards potential annual GDP (gross domestic product) growth of above 5%.
The fiscal reforms are not the sweeping overhaul of the tax code that many had hoped for and that are needed to reduce the government’s reliance on oil revenues. However, more bold changes such as the imposition of a value-added tax (VAT) in order to improve collection from the informal side of the economy would prove both unpopular and could run the risk of creating a fiscal headwind at a time when the economy is in a fragile position. Additional reforms will be required in the long term, but in order to ensure that the impressive momentum behind the cross-party «Pacto por Mexico» accord is maintained and that the energy bill is approved, the government is erring on the side of caution with this latest bill.
The impact on Mexican corporations of these changes is onerous in the short term but presents big opportunities in the long term. Productivity improvements will improve the cost structure of labour-intensive industries, more formal employment will drive domestic consumption, and there will be energy savings and investment opportunities from the proposed opening up of the energy sector and other infrastructure plans. The reforms are no free lunch though as they will also spur competition in some sectors, meaning that only the most nimble companies will be able to capitalise.
Opinion column by Nicholas Cowley, Investment Manager, Global Emerging Markets at Henderson Global Investors