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July 10, 2013

Bernanke’s Bond Buy Cut Back Slices Into Mexico Market

As one of the hottest emerging market economies of the past few years, Mexico has been doing well—but the second largest economy in Latin America could be in for some hard times in months to come, thanks to its neighbor to the north. Fears over that possibility have sent foreign investors scurrying for the exits, despite the fact that Mexico has a number of initiatives under way that promise good potential in a number of sectors.

Ben Bernanke’s announcement that the Fed could cut back on bond buying this year, and possibly end the policy altogether in 2014 if the U.S. economy stays on track to recovery, not only caused a global selloff but also did particular damage to Mexico, where the peso plunged on the news and foreign investors began dumping Mexican bonds. But the Mexican government has been working on economic and other reforms that offer a number of opportunities to investors, even if those investors need to exercise caution as changes play out.

One major action already in train is legislation to break up monopolies in Mexico’s telecommunications sector. The return of the Institutional Revolutionary Party (PRI) to power in the last election cycle came after the party promised not to resume the authoritarian hold it formerly held over the Mexican government. PRI had ruled for 70 years, uncontested and under an aura of corruption, until ousted in 2000. But in 2012 it returned, and set to work to prove that it had changed. One way it intended to do that was to tackle the problem of Carlos Slim and his telephone monopoly.

Slim had taken control of the former state phone entity Telmex in the early 1990s—ironically, under the regime of former PRI president Carlos Salina, which privatized it. Slim built the telephone sector into a booming business, and built an empire along the way; his company America Movil now runs 80% of the fixed-line phone market in Mexico and about 70% of its mobile phone business.

For some time the Mexican government has wanted to break up America Movil while still keeping the telecom sector healthy; the country’s current president, Enrique Pena Nieto, has made it his mission to do so. In March his government announced an antitrust bill that would target Mexico’s dominant telecom and television empires, forcing them to sell off segments of their holdings.

The news led to a selloff of shares of America Movil in May that dropped Slim from the top wealthiest spot in the world to second (after Bill Gates), and has also opened the door for a complete restructuring of the telecommunications sector. Broadcaster Televisa, the province of Emilio Azcarraga, is also in the government’s sights. A new regulatory body, Ifetel, is scheduled to take shape within the next three months and decide which companies must be broken up—thus opening the door to potential competition.

The president is also determined to open the country’s oil industry to more private investment, and an overhaul of the state oil monopoly Pemex is in the works. Some of that is tied to a closer relationship between Mexico and China; Pemex announced, during a visit to Mexico by Chinese President Xi Jinping, that Export-Import Bank of China will be providing it with a $1 billion line of credit for the purchase of ships and offshore equipment. It also announced the signing of a memo of understanding with Xinxing Cathay International Group, a state-owned entity, to research collaborative efforts on pipelines.

Other actions designed to make Mexico into a more investment-friendly environment include some congressional actions originally scheduled for the first session in April that were not completed. To keep pushing ahead, the government has announced that it will hold two special sessions in July and August to deal with these measures. They include regulating state debt, boosting the powers of the government’s transparency institute, and forming a new anti-corruption organization, as well as working on improvements to the country’s education system and pushing competition in the telecom sector.

Another area designed for reconstruction under Pena Nieto is the country’s tourism sector, which, while it lags behind manufacturing, oil, remittances and foreign direct investment, according to Citigroup Inc.’s Banamex unit, provides a fifth of the country’s revenue. By the end of 2018, Mexico intends for it to provide a third.

How will the country do that? Investments in better tourist infrastructure, included for the first time in the country’s overall infrastructure plan—as well as more attention devoted to stopping violent crime. New airports are included in the plan, as are cargo and commercial ports, as well as plans for railways and highways to link popular transportation hubs with tourism destinations that are off the beaten path. While the U.S. and Canada currently contribute the largest numbers of international tourists to Mexico’s tourism industry, plans are to expand the country’s attraction to other emerging markets—including China, Russia, Argentina and Brazil.

 

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