Think tank urges Mexico to ditch its ‘energy paradox’

Claudia De La Rosa

29-Sep-2022

HOUSTON (ICIS)–Mexico City based think tank Mexico Evalua said Mexico should abandon what it calls an energy paradox before it is too late for it to take advantage of a historic opportunity for nearshoring and economic growth.

The think tank said in research reports published in August and September that Mexico is at a critical juncture to be able to abandon its current ideologically-motivated approach to energy policy.

The country has been plagued by slow economic growth for many years for a variety of reasons, despite out-performing most of its Latin America peers.

Mexico Evalua says that Mexico has the opportunity to break the current inertia in attracting foreign direct investment to catapult investment and employment to levels rarely seen in the country before.

It cites Inter-American Development Bank (IADB) data indicating that Mexico could benefit from nearshoring so much that it could translate into additional GDP growth of 2.60%.

Nearshoring describes activity that brings supply chains into closer geographic proximity, and it is an idea that has become more popular as investors have struggled with certain aspects of doing business in China.

Mexico Evalua said Mexico can take advantage of sentiment in the business sector that has been documented in recent decreases in confidence among investors working in China. Lower confidence stems from what one survey from the European business chamber in Beijing called over-regulation and the country’s ‘zero covid’ policies.

ENERGY OBSTACLES

Mexico has distinguished itself as a manufacturing hub and has become twelfth in the world for goods exports, fifth in automotive exports, seventh in vehicle production and the main auto parts provider to the US.

Mexico Evalua highlights the role that Mexico’s competitive industrial parks have played in the development of these sectors but warns that competitively-priced, clean, reliable energy supply is one of the most important concerns investors in Mexico have.

It says the only way to improve competitiveness in this area is to increase power generation capacity and invest in transmission and distribution infrastructure for medium and high tensions.

The think tank said achieving these goals is facilitated by processing permits efficiently and authorising public and private projects in renewables.

Many of these basic processes have been politicised in Mexico since the start of the current federal administration.

Mexico Evalua cites Mexico government data that indicates that investment in the electricity sector has plunged by 88% between 2018 and 2021.

It says that if foreign direct investment enjoyed better conditions in Mexico, the electricity sector could benefit and provide a boost to the entire economy by improving its productive capacity. This systematic type of thinking could help the country understand that increasing investment through public and private investment is urgent.

Mexico Evalua recognises the difficulty of achieving this level of understanding given the current administration’s  consistent commitment to nationalist energy rhetoric but highlights several recommendations including:

  • Uphold the rule of law, which includes the 2013-2014 energy reform
  • Compensate affected parties if it changes existing energy policies
  • Gather information to quantify the results of the 2013 energy reform, North American economic integration
  • Decrease CFE residential power subsidies by allowing efficient markets
  • Allow the national electric system to be governed by efficiency mechanisms
  • Focus on efficiency at state-run companies, which would reflect well on the government
  • Integrate regulatory requirements in the USMCA including those related to energy, rule of law

The think tank also acknowledges there is some risk the current administration will not take seriously the risks posed by the US-Mexico-Canada trade agreement (USMCA) consultations called in late July.

But it highlights that the repercussions of a failure to comply would be extremely costly for the country as a whole.

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