Mexico’s Encoded Energy Endurance Marker
Mexican shares teetered on the positive cusp as President Pena Nieto proposed the PRI party’s long awaited constitutional revisions for oil monopoly Pemex’s private joint ventures calling for profit but not production-sharing following the opposition PAN’s tabling of more ambitious departures. Bills will soon be presented and debated in the Congress after July offshore exploration blocks received few bidders with crude output down to 2.5 million barrels/day on near exhaustion of the current biggest field. Gas is also promising but transport pipelines must be built for internal and external use. The amendments to three articles uphold the historic principle of official control while aiming to boost paltry FDI in the sector at 1 percent of GDP to compensate for budget revenue loss. Fiscal reforms to alter the relationship between the central and state governments in terms of taxing power and automatic transfers have been introduced at the same time which could pare gas subsidies and invite a subnational bond wave. The leftist PRD may break with the post-election multi-party pact to challenge both intentions, as the under 50 PMI reflects lower growth expectations reverting the peso to the 12.5/dollar bound. It also insists on a wealth tax to address income inequality, which was a prominent issue during the presidential campaign along with unemployment now formally at 5 percent. Inflation in contrast has improved despite currency depreciation and is within target range but after a minor rate cut the central bank’s room is cramped by likely incremental tightening by the Fed in the coming months as reaffirmed in recent pronouncements. Foreign investors have kept their 50 percent ownership position in long-term local bonds with the exchange rate and monetary stability compared with neighbors.
Argentina’s hyperinflation and capital controls mark the opposite extreme, but President Fernandez exhibited a pragmatic streak in signing a $1 billion deal with Chevron on the anniversary of YPF’s expropriation of Repsol’s stake. Currency and tax privileges unavailable to other multinationals were granted on the eve of provincial elections where her coalition was battered with only 25 percent support and lost in Buenos Aires against a likely 2015 presidential candidate. The equity market is up over 10 percent on the MSCI frontier index outpacing core rivals, and sovereign bond spreads above 1000 basis points have begun to tempt underweight fund managers despite the lingering holdout judicial battle which may be considered by the Supreme Court after a New York appeals tribunal verdict. The US and IMF demurred but France has submitted a brief to the highest Washington panel seeking interpretation of the near 40-year old Sovereign Immunities Act in the dispute. The administration continues to earmark reserves which are off 20 percent for external debt repayment, and GDP warrants are also on track to trigger this year with reported growth above 3.2 percent in the face of Fund censure for slippery statistics.
