CEO’s Executive Summary: October news was dominated by cabinet changes and progress on the 2017 budget. Senator Raul Cervantes replaced Arely Gomez as attorney general, reflecting renewed efforts to stem crime and corruption in Mexico. Gomez moved to the federal comptroller’s office, where she will head up the administration’s anticorruption efforts. Congress approved the revenue estimate for the 2017 budget that is 1.1% higher than the President’s proposal. This raised questions about the government’s ability to meet its deficit targets, but any conclusions in this regard must wait for the lower house to approve the spending side of the budget later this month. Overall, the economy grew in the third quarter after a second quarter contraction. The peso held steady for most of October until Donald Trump’s late-month recovery in the polls revived concerns about U.S.-Mexico relations. Still, foreign investment in Mexico remains fairly strong, especially in the energy sector, where reform implementation continues apace.
Cabinet Changes
President Peña Nieto announced two cabinet changes on October 25. He named Attorney General Arely Gomez to lead the federal auditor’s office and Senator Raul Cervantes to replace Gomez as Attorney General. Both were quickly confirmed by the Senate. The reshuffle was intended to strengthen the team that will be responsible for implementing the new National Anti-Corruption System, and cracking down on criminal activity.
Three factors seem to have motivated the replacement of the incumbent Attorney General. First, a lack of progress in a series of high-profile criminal cases and a deteriorating security situation called for stronger, more experienced leadership at the top. Second, the prosecutor’s office (PGR) will soon become the fully independent Fiscalia General Autónoma led by an Attorney General whose nine-year term will extend into the next presidential administration. Opposition senators, whose votes will be needed to confirm the new Fiscal General in 2018, did not believe a career bureaucrat like Gomez possessed the stature required of Mexico’s first independent Attorney General. Raul Cervantes, on the other hand, is an experienced lawyer who had a successful private practice before turning to politics.
Third, some believe that Cervantes’ close relationship with the President suggests he will enforce a nearly century-old tradition in Mexican politics that protects outgoing presidents from prosecution for actions taken while in office. In this respect, his personal connection to the President, and having a cousin who is the President’s lawyer, has raised concerns that these ties might compromise the independence of the new Fiscalia General.
Arely Gomez leaves the Attorney General’s office after doing what analysts consider a satisfactory job in difficult circumstances. Honest, independent and hardworking, Gomez’s efforts to bring corrupt governors to justice should prepare her to head an office that will lead Mexico’s new Anti-Corruption System. On the corruption front, embattled Veracruz governor Javier Duarte requested a leave of absence on October 12, 48 days before his term ended and 10 days before the federal attorney general issued a warrant for his arrest.
Mexican Budget and Economy
Congress approved a Mex $4.9 trillion revenue estimate for the 2017 budget (US $263 billion or 24.1% of GDP), 1.1% more than the President’s request. These additional revenues derive from marginally higher estimates for petroleum production and tax revenues, and a weaker peso (18.6 rather than 18.2). There were no significant changes to the government’s estimates for growth (2%-3%) and inflation (3%). While the higher estimate is considered realistic by most analysts, there are concerns these less conservative estimates could be overtaken by events and force either a midyear budget cut or a delay in eliminating a budget deficit estimated to reach 3.2% of GDP this year. However, we cannot draw firm conclusions until the Chamber of Deputies approves the spending portion of the 2017 budget later this month (the Senate does not vote on this bill).
Congress also approved several tax changes, including further liberalization of gasoline and diesel prices, and making individual contributions to group retirement plans deductible (although employer contributions remain nondeductible).
Weaknesses in Mexico’s fiscal profile, meanwhile, motivated the IMF to restate its suggestion that Mexico establish an Independent Fiscal Council, a recommendation civil society organizations have echoed. The council would increase fiscal transparency and link Mexico’s need for short-term deficit flexibility with a sustainable long-term debt profile.
It is noteworthy that revenues from gasoline taxes almost equaled those from petroleum during the first eight months of this year. Tax revenues have also increased more than anticipated due to rate increases in the 2013 reform, including a 13% increase in tax payments by high-income Mexicans and a 60% increase in business income tax payments.
Beyond the Budget
Fitch Ratings echoed the IMF’s semiannual update on global growth, which slightly lowered its forecast for Mexico (down 0.4% to 2.1% for 2016 and down 0.3% to 2.3% for 2017). The October release of the September consumer confidence numbers showed a sharp fall, to its lowest level in seven years, closely tracking the beating the peso took that month in the foreign exchange markets. And yet the Mexican economy returned to growth in the third quarter, expanding 1.9% over the same period in 2015.
The peso strengthened in early October following a surge in oil prices, caused by OPEC’s first production cut agreement since 2008, and troubles in the Trump campaign. The peso stabilized around 18.5 for seven days ending October 25, but weakened to 19.1 by early November after Trump’s recovery in the polls following news of the FBI’s possible reopening of the Clinton email investigation.
Company News
Four corporate announcements drew our attention this month. Altos Hornos de México (AHMSA) announced a Mex $14 billion investment (US $750 million) over the next 18 months to enter the specialty steel and automotive sectors. Nestle announced a US $245 million investment in a child nutrition facility in Jalisco state, its largest investment in 86 years of operating in Mexico. And DHL announced a US $100 million investment on top of a previously announced US $160 million to expand its Mexico infrastructure. Meanwhile, the Mexican construction firm ICA won the contract to lay the cement slabs for the new Mexico City airport project.
Energy
In the first week of October electricity undersecretary, Cesar Hernandez, released the new rules governing small-scale solar generation systems. These will reduce the time needed to obtain permits to a maximum of 18 days and allow users to install their own connections rather than requiring them to use the Electricity Commission’s (CFE) equipment. Ten days later, energy minister Pedro Joaquin Coldwell announced a Mex $100 million Guaranty Fund to promote rooftop solar energy generation in Mexico City. Mexico is also considering joining the California-Berkshire Hathaway electrical market, which would allow small amounts of energy to be traded across the border.
In natural gas news, the Los Ramones pipeline from Texas to Mexico’s Bajio region should be finished by the end of the year. It is expected to increase Mexican gas imports by 3.8 billion cubic feet per day, 40% more than in 2015. The National Center for Control of Natural Gas (CENEGAS) announced the first tenders to reserve pipeline capacity in the 60% of Mexico’s network that will be opened to private actors.
Turning to petroleum, the National Hydrocarbons Commission (CNH) announced 11 new tenders over four years for oil exploration and production. The Chamber of Deputies, reacting to increased competition among oil-producing countries for foreign investment, agreed to increase tax deductions for private exploration and production companies operating in Mexico. This measure would also apply to the winners of Mexico’s first deepwater tract auction that will be announced December 5. With the same deadline in mind, Pemex sweetened the terms for the Trion field farm-out by reducing its stake from 45% to 40% of the field and easing terms for consortia formation. In other news, Pemex reported a 29% drop in its third quarter loss and will move forward with plans for a shale project and its second farm-out. And it announced its 2016-2021 business plan, which calls for steep spending cuts and accelerated farm-outs to reach financial equilibrium in 2019 or 2020 while making long-postponed investments.
U.S.-Mexico Relations
The peso depreciation has placed Mexico on course to surpass Canada as the second-largest exporter to the United States. On a lighter note, the Mexican architect who designed Mexico City’s new International Airport drew up plans for a futuristic city that blurs the U.S.-Mexico border—no sign of a wall. It’s worth a look.
As this alert goes to print, the United States heads into national elections. While the outcome is far from certain, Hillary Clinton appears to be headed toward a victory, which bodes very well for improved ties between the United States and Mexico in the coming years.
Upcoming Events
The annual Mexico Business Summit (Cumbre de Negocios) will be held in Puebla on November 13-15. The theme for the event will be “Embarking on the New Technology Era.” MJGS President & CEO Michael Camuñez will be moderating the session on the Mexico/China business relationship on November 14.
Mr. Camuñez then travels to Dallas to attend the North America Working Group, of which he is a member, for the unveiling of the group’s recommendations with President George W. Bush on November 15 at the Bush Presidential Library.
On November 18, Camuñez will be speaking on the final day of the 43rd annual Index National Convention in Tijuana, Mexico, offering a keynote address on the future of U.S.-Mexico Trade Relations after the U.S. 2016 elections.
