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
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
Won't there be complications in how the reforms
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
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
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
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
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
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
Negotiator of Nafta and Mexico-EU FTA
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.