Bloomberg News

Mexico’s Pena Nieto Gets Nod From PRI to End Pemex Monopoly

March 04, 2013

Mexico’s President Enrique Pena Nieto won support from his party to advance with his growth plan that includes ending a 75-year-old state monopoly on the oil industry.

Pena Nieto’s Institutional Revolutionary Party, known as PRI, voted yesterday at its national assembly to end its opposition to constitutional changes that would ease state-owned Pemex’s grip on the oil industry. Pena Nieto hasn’t yet presented a bill proposing the changes and would have to win the votes in Congress, where his coalition controls 241 of 500 seats in the lower house.

Pena Nieto, 46, has pledged to open the oil industry to more competition and to reduce the tax burden on Pemex in a bid to boost economic expansion, which has trailed Latin America’s for the past decade. The move could increase gross domestic product by as much as 2 percentage points a year, according to the Energy Ministry. Oil output in Mexico, the world’s ninth- largest producer of crude, has fallen for eight years as Pemex finances a third of the government’s budget.

“The PRI is transforming itself through pragmatism and without dogma in order to transform Mexico,” Pena Nieto said at his party’s assembly. “Without falling into complacency, the PRI has opted to examine itself and redefine its position to adapt to the nation’s new circumstances.”

The ruling party also ended a ban that prohibited its members from voting for levies on food and medicine, giving Pena Nieto an option to make up for revenue shortfalls that may result from lower taxes on the oil industry. His administration hasn’t detailed the proposals it plans to send Congress.

Bonds

The yield on peso-denominated government bonds due in 2024 fell three basis points to a record low 5.05 percent at 12:15 p.m. in Mexico City. Yields on the benchmark paper have dropped 37 basis points this year as investors show confidence in Pena Nieto’s growth plan and anticipate the central bank will cut its 4.5 percent benchmark interest rate.

The change to the PRI bylaws is “credit positive” for Mexico’s Baa1 rating, Mauro Leos, a senior credit officer at Moody’s Investors Service, said Feb. 26.

Yesterday’s vote is “an unmistakable sign of the new administration’s commitment to push forward structural reforms,” Grupo Financiero Banorte SAB economists Gabriel Casillas, Delia Paredes and Alejandro Cervantes wrote in a research note e-mailed today. The changes “increase the possibility of an upward credit rating revision.”

Mexico’s economic expansion has outpaced Brazil’s, the region’s biggest economy, for the past two years. Mexico’s economy grew 3.9 percent in 2012, while Brazil’s expanded 0.9 percent.

Taxes on Food

Still, gross domestic product has risen an average 2.51 percent over the past decade, compared with 3.57 percent for all Latin American nations, according to data compiled by Bloomberg.

Some PRI lawmakers have been debating recently whether to tax food and medicine. The measure would be part of larger efforts to lift tax revenue that accounts for 18.1 percent of gross domestic product, the lowest ratio among 34 member countries of the Organization for Economic Cooperation and Development, according to data from the group.

Pena Nieto’s party scuttled energy and tax overhauls under former presidents Felipe Calderon and Vicente Fox, most recently thwarting a 2009 bid by Calderon to expand taxes to food and medicine. Calderon and Fox were presidents from the National Action Party, or PAN.

PRI’s historical resistance to changes in the oil industry and tax system fueled speculation that opposition within the party would prove to be the biggest obstacle to Pena Nieto’s energy overhaul, said Jose Antonio Crespo of the Center for Economic Research and Teaching, known as Cide.

Broad Majority

“There was more consensus than I’d expected,’ Crespo said in a phone interview from Mexico City. The national assembly showed “the broad majority of the party could back the reforms.”

Still, PRI members may seek to water down the measures once they are presented in Congress, said Jorge Chabat, a political science professor at Cide.

The PRI would need to negotiate among members because “they normally vote as a bloc,” Chabat said in a March 2 interview. If the party can’t reach agreements, “they don’t present the reform at all,” he said.

Pemex paid about 57 percent in taxes on its $111 billion of revenue in 2011. Taxes and royalties from Pemex fund about 34 percent of Mexico’s public budget.

Changing the nation’s charter requires approval by two- thirds of Congress and a majority of legislatures from 31 Mexican states and the capital.

Opposition

“The PRI is pushing authoritarian and regressive reforms for the country,” Carlos Augusto Morales, a lawmaker with the opposition Democratic Revolution Party, said in an e-mailed statement yesterday. “It’s the same PRI of 20 years ago.”

Ivonne Ortega, the PRI’s secretary general, said yesterday that the party decided to back Pena Nieto “without hesitation.”

The Feb. 26 arrest of Elba Esther Gordillo, the leader of the 1.2 million-member teachers’ union, on embezzlement charges, increases chances that Pena Nieto won’t let politically influential groups get in the way of his economic overhaul, Benito Berber, a Latin America strategist at Nomura Holdings Inc., said in an e-mailed report Feb. 27. Gordillo had criticized a constitutional overhaul in education signed into law the day before her arrest.

“There are no untouchable interests,” Pena Nieto said at the event yesterday. “The only interest to protect is the national interest.”

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net


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