Mexico: fuel for an energy boom

With strong political support for both infrastructure and private investment, Mexico has been simmering nicely. But this April’s announcement of a $590 billion national infrastructure plan by the Peña Nieto administration, comprising 743 projects for the period 2014 to 2018, promises to bring things to the boil.

For investors, Mexico represents a promising environment: strong political support, fast economic growth, a highly skilled workforce and a reliable legal system all provide considerable confidence. But Mexico’s determination to liberalise its economy – especially in the energy sector – is a potential game-changer in terms of the scale of the opportunity.

Monopoly

Up until now, the state-backed Petroleos Mexicanos (Pemex) has enjoyed a monopoly in the energy sector. However, after a prolonged period in which Mexico’s oil production has declined, the sector is being opened up to private capital (as well as private expertise and technology).

At the moment, reforms are still going through an approval process. However, hopes are high among market participants.

“We are watching with interest the passage of the current secondary laws in respect of the energy reforms as they pass through Congress. We remain very hopeful that we will this month see these approved in final form providing certainty regarding the forward regulatory framework and the role for private sector participants across the energy sub sectors,” Jonathan Walbridge, chief executive officer of the Macquarie Mexican Infrastructure Fund told Infrastructure Investor recently.

He added: “We have also welcomed the flexibility shown by the government with regards to these new laws, like the grandfathering of existing energy projects under the current regulatory regime, particularly for renewables.”

Assuming that the new laws do go through in the way anticipated, multiple financing sources are waiting to take advantage.

“We think it [Mexico] will now start attracting more private equity that has not been in the market in the past,” Deutsche Bank’s Bryan Gartenberg said in an article for our Emerging Markets Handbook 2014 last month. “Plus, we could see additional commercial and investment banks that have not operated in Mexico before.”

Furthermore, Mexican pension funds will almost certainly want to grab a slice of the pie. Now enabled to make investments outside of traditional fixed income products, these funds are rapidly becoming sophisticated and knowledgeable operators. They will also take particular comfort from the government’s effort to create a comfortable investing environment.

While the size of the energy sector means it is the natural focus for many of those eyeing the Mexican market, other areas are also coming under scrutiny. Transportation infrastructure projects are growing in size and number in both urban and rural areas, with toll roads slicing large chunks off journey times. In addition, more social infrastructure projects, such as those involving schools and prisons, are being undertaken.

Asked for any negatives in relation to Mexico, investors are hard pressed to think of any. While the emerging market sell-off that resulted from the US Federal Reserve’s tapering of its bond-buying programme briefly overshadowed Mexico’s strong domestic story, even that had its positive aspect – namely, the Mexican and US economies’ strong links mean that any recovery in the US is also good news for Mexico.

All in all, Mexican infrastructure is looking as hot as a jalapeno pepper.