A reversal of fortune

Author: | Published: 24 Apr 2015
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An ambitious set of reforms could transform Mexico’s investment environment. Former ambassador to the EU and Nafta negotiator Jaime Zabludovsky explains what is needed to capitalise on the changes

Things are looking up in Mexico. Inbound investment is surging, and its reformist government is busy implementing the 95 reforms that comprise its economy-wide overhaul known as the Pact for Mexico. Liberalisation of the state-owned energy sector has created the most excitement, but the package – as well as older reforms – has created a melting pot of opportunities for foreign investors.

Twenty years after he negotiated the North American Free Trade Agreement (Nafta), Jaime Zabludovsky speaks with IFLR about the legacy of Mexico's first FTAs, teething problems under the Pact for Mexico, and how foreign investors can help the country continue its growth story.

What is behind the surge in foreign investment into Mexico over the last two years, and are these levels sustainable?

I do think the levels are sustainable, and I think the level of recent activity is a combination of a few things. First, we are now reaping the benefits of the consistency and permanence achieved as a result of the very responsible macroeconomic policies that have been pursued for the past 20 years. Second, the country's free trade agreements (FTA) and integration into the North American market has made Mexico a very important foreign investment destination. And last but not least, the recent reforms have significantly raised expectations about new opportunities in Mexico. So I think the investment we are seeing is the result of things we have been doing for the last two decades, as well as more recent changes.

The breadth of reforms created by the Pact for Mexico is ambitious, to say the least. Does introducing so many reforms at once create the possibility of difficulties or confusion?

I'm not concerned about confusion, but I think it will be a very big challenge for the government to implement and administer so many reforms. The proof is in the pudding, and while the reforms have been approved at the legislative level, we still have to see the regulatory framework and put them to work. I hope this will be a smooth process, but it will be difficult.

Won't there be complications in how the reforms interact?

I don't think that interaction is a problem. The main challenge is that many things have to be done at the same time, and in some cases new authorities and regulatory boards will need to be established. There will be a learning curve for everyone – the government, regulators and the private sector, which will be facing a completely new business environment. So it will take some time for the reforms to be implemented and for everyone to learn to live with them.

In the scheme of Mexican reforms over the past 50 years, how significant is the liberalisation of the energy sector?

"The liberalisation of the energy sector might be one of the most important reforms over the last 50 years"

Very significant. This might be one of the most important reforms over the last 50 years. It will change the environment for doing business in Mexico, opening up a sector that had been completely reserved for the government creates a whole new frontier of business opportunities. Perhaps most importantly, it could allow the country's economy to become energy integrated into North America. Energy prices in the US and Canada have been falling very dramatically, which has raised the sector's competitiveness. If Mexico moves towards those prices, it will be possible for the country to return to energy intensive activities. So I do think this could be a game changer – for Mexico's economy but also for the regional economy as a whole. Energy restrictions were one of the things to prevent the full integration of Mexico, Canada and the US under Nafta. But if we eliminate barriers to importing and exporting energy between the countries and have the same set of prices across North America, Mexico could be fully integrated into the region.

What will be the major challenges for the first foreign investors wanting to take advantage of these energy reforms?

For some, simply identifying the opportunities and understanding the new regulatory environment will be a learning experience. So many sectors will be opened at the same time – offshore, onshore, shale gas, electricity, gas stations – the full spectrum of upstream and downstream. So being able to discriminate between the possibilities, and learning the new rules of the game, could be their main challenge.

What other aspects of the Pact for Mexico do you see as important?

Competition reforms regarding the telecommunications sector are significant, and it's prompted some rapid changes. Carlos Slim has already announced his intention to divest some of his assets in the sector, which will allow for new participants to enter very quickly.

Today, what is the biggest risk for foreign companies looking to invest in Mexico?

There is the challenge of so many reforms being implemented at once. But I wouldn't call that a risk. Obviously we still have some security issues in parts of the country, and some of the new energy investment possibilities are concentrated in areas that have some safety problems, so that will be challenging

Is there any way to mitigate against that, or must investors simply accept those security risks?

I don't think this is the responsibility of the investor. The Mexican government and society must make the necessary changes and target organised crime. That is something we have been doing over the last couple of years, but it will take us some time to win that fight. And it might pose a challenge or risk for some investments into the country

And the most common pitfalls?

"This could be a game changer – for Mexico’s economy but also the regional economy as a whole"

Large companies that have been in the country for many years will already be comfortable with doing business and understand the Mexican climate. But small and medium-sized enterprises, especially those entering the market for the first time, really need to learn their way. Dealing with the government – particularly state and municipal authorities – and understanding the Mexican consumer can be difficult. Having a local partner that is willing to participate in the new opportunity with you will help the foreign investor navigate the domestic matters which are only understandable once you've been active in the country for many years.

More than 20 years has passed since Nafta took effect. How do you think it has helped improve investment and trade with Mexico?

I think it has been instrumental in making Mexico an open economy and a relevant global player. It locked in the country's liberalised trade and investment regime, giving stability and permanence to the opening of Mexico's economy in the late 1980s. It allowed Mexico to become an export platform, and made the country relevant to all trading partners – not just the US and Canada. Giving favourable treatment to Canada and the US made Mexico relevant to other countries. This led to its FTA with the EU and Japan, and the overall strategic positioning of Mexico's economy.

Do you believe Mexico-EU investment potential is being fully capitalised on?

It's difficult to know if the full potential has been realised, but I do believe the EU-Mexico FTA was instrumental in putting European companies on the same footing as US and Canadian companies under Nafta. That agreement has allowed for duty free imports from European countries, which is why we are seeing investment from the likes of BMW, Volkswagen and even Audi. They are taking advantage of the import and export opportunities created by the interaction of Nafta and the EU-Mexico FTA. But I do believe the new reforms, particularly those in energy and telecoms, will likely lead to an increase in investment from European as well as North American companies. So in that sense, the full potential may not yet have been realised.

What do you think will be the biggest challenge for Mexico's private sector over the next five years?

Taking advantage of these reforms such that they live up to expectations. Really participating in the activities that these changes now make possible will require experience that many of them will not possess. So one of their challenges might be finding partners or strategic allies that allow them to participate in the energy sector, for example, as well as competing with the foreign investors which will no doubt be targeting it as well.

This article first appeared in IFLR's Foreign direct investment special focus, published in October 2014

About the contributor

Jaime Zabludovsky
Negotiator of Nafta and Mexico-EU FTA

W: http://conmexico.com.mx/

From 1998 to 2001 Jaime Zabludovsky served as ambassador of Mexico to the EU and chief negotiator of the FTA between Mexico and the EU. A founding partner of Solutions Strategic, since 2001 he has advised governments, international and Mexican companies, and transnational leaders on business related to international trade and competitiveness in Latin America. He is also vice president of IQOM Inteligencia Comercial, the Mexican Council on Foreign Relations (COMEXI), Digital Information VERTICE and Cala de Ulloa. Since February 2007 he has been president of the Mexican Council Industry Consumer Products (CONMEXICO), an association of the leading companies producing food, beverage and other consumer goods.