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Must-know: Mexico proposes an influential energy reform

Must-know: Mexico proposes an influential energy reform (Part 1 of 4)

Proposed energy reforms: Implications for investors in Mexico

Proposed energy reforms

The three main political parties have proposed energy reforms, and it’s now likely that something will finally come through in Congress. In terms of timeline, the energy reform could pass as early as September.

The energy reforms would have a significant impact in the Mexican markets and investors interest in the country should pay close attention to the developments and how their investments may be affected.

Mexico - MSCI Mexico ETF (EWW) 2013-09-05Enlarge Graph

There have been several attempts at passing the reforms, but disagreements between parties have delayed the process significantly. However, if this time something meaningful does happen, the rating agencies could upgrade Mexico.

This series will explore what the reforms include, the likelihood of an upgrade, and the implications for investors in Mexico.

Likely reforms

While still there are several details lacking about the reforms, there are a few points that are very likely to be included.

The main change would be allowing the participation of private capital in oil, as currently, Pemex holds the oil monopoly in the country. For this purpose, the reforms will require changes to the Constitution, which is partly why the process has been delayed so much.

Another likely outcome is the opening of downstream oil activities—which include refining, transportation, distribution, and other oil-related derivatives. This will reduce Mexico’s dependence on oil derivative imports. However, it’s unlikely that foreign investment will be allowed to participate in the production and exploration.

It’s also highly speculated that the reforms will allow private firms to generate and sell electricity, which should lower prices overall. This should bring about significant development in the sector and attract investments.

Overall, Mexico’s oil production would increase, as increased investment allows faster development on the sector, though the increase will take time and may not be massive. Nonetheless, the country will enhance the exploitation of its oil reserves and reduce its dependence on imports, making it more competitive and benefiting the local economy.

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