Financial Experts Like Mexico's Pemex Reform, After All

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Peña Nieto
Mexican President Enrique Peña Nieto took office Dec. 1.

President Enrique Peña Nieto’s proposal for reforming Mexico's oil sector without privatizing the state-owned monopoly has failed to please politicians and potential investors. But some quarters are calling it "groundbreaking” and “historic.” These enthusiastic terms are a wild change from the popular opinion that the reform, now headed for a vote in the Senate, is not the great step forward the government is claiming.

The president made his proposal on Monday. Mexican oil giant Petróleos Mexicanos (Pemex) would be opened for the first time in 75 years to private investment. The reform also proposed amendments to Articles 27 and 28 of the Mexican Constitution to make such private investment possible, a move fiercely criticized by the opposition.

The Wall Street Journal wrote on Wednesday that the initiative opens up a potential gold mine for private investment. “If the proposal is ratified by the Senate, it will be a historic move in the modernization of this country, unseen since the North American Free Trade Agreement in 1994,” read the editorial, which called the president’s proposal “extraordinary.”

Markets did not react well after the announcement; the Mexican stock market closed on Monday down 1.23 percent. Nevertheless, financial research centers, like Spanish bank Banco Bilbao Vizcaya Argentaria S.A. (MCE:BBVA), have explained that such behavior can be attributed to investors being unfamiliar with the specifics of the contracts the Mexican government will offer, as reported by Spanish newspaper El País.

According to the reform proposal, investors would sign contracts with Pemex to exploit certain oil sites, and the government would compensate them with the monetary value of the crude extracted. Investors voiced concerns that they would not have any rights to the oil they pumped.

“The fact that the proposal is looking to attract investors through such contracts instead of through concessions or partnership agreements does not mean, necessarily, a disadvantage. Contracts can be shaped so they do basically the same as concessions,” said BBVA Mexico in a statement.

The Mexican government has estimated that, should the reform be approved, the country’s GDP would grow 1 percent over the next four years, as reported by Mexican newspaper El Universal. It is expected that it could attract private investment of up to $70 billion.

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