Mexico's energy reform to reap rich dividends - Fitch

Monday, September 22, 2014

Mexico's energy sector reform will likely yield rich dividends and is unlikely to have a near-term impact on the country's sovereign ratings, according to a report by Fitch Ratings.

"Of the several reforms approved since 2012 to address Mexico's structural constraints on growth, energy reform should yield the richest dividends in terms of investment and economic activity," said Shelly Shetty, head of Fitch's Latin America sovereign group.

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The reform paves the way for increased private sector participation, which is expected to facilitate an increase in oil output and lead to a decline in electricity tariffs, improving the competitiveness of the country's manufacturing sector, according to the report.

"However, the magnitude of the impact will depend on the prudent and timely implementation of the reform, as well as the extent to which the private sector takes advantage of the new opportunities provided by the energy sector's liberalization," Shetty said.

The reform should be broadly neutral for fiscal accounts as, while the reform sets out a gradual reduction in Pemex's tax burden, the government would have some leeway to adjust dividends to mitigate pressures on public finances, Fitch noted.

The report also cites the establishment of a sovereign oil fund as positive, although the government shouldering of Pemex and state utility CFE's pension liabilities could increase its debt.

"The opening of a sector that has traditionally been dominated by public entities is promising and could lead to the greater economic dynamism much needed to reduce Mexico's income gap with higher rated sovereigns, and facilitate a faster reduction in the government debt burden," the report states.

BNamericas will host its 11th Southern Cone Energy Summit in Lima, Peru, on November 12-13. Click here to download the agenda.