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How to tap Mexico's potential
Jorge Castaneda and Nathan Gardels
Financial Times
07/03/2005

How to tap Mexico's potential

 

 

By Jorge Castaneda and Nathan Gardels

Published: March 7 2005 20:08 | Last updated: March 7 2005 20:08

At their North American summit on March 23 in Crawford, Texas, the leaders of the US, Mexico and Canada should take decisive steps towards the creation of a North American Economic Community, thereby enhancing energy security and economic prosperity for the three nations.

When George W. Bush, US president, and Vicente Fox, the Mexican president, met in Guanajuato, Mexico in February 2001, they issued a joint statement that called for "a North American approach to the important issue of energy resources". That communiqué also committed the two presidents "to consolidate a North American economic community whose benefits reach the lesser-developed areas of the region and extend to the most vulnerable social groups in our countries".

There is a way this initiative can still be fulfilled that would reduce America's energy dependency on the Middle East while boosting development in Mexico, thus also tackling the issue of massive cross-border immigration. Mexico has become the top source of oil imported by the US and 90 per cent of its oil exports go to the US. That level could be doubled over the next five years.

Per capita gross domestic product in Mexico will not grow over the long term without structural change to boost productivity. This requires investment in infrastructure, human resources and technology to create jobs and alleviate poverty. The Mexican government needs to take the lead while eliminating obstacles to private investment. Given Mexico's weak public revenues, financing such projects can come only from leveraging its large hydrocarbon resources.

Mexico has the largest proved oil reserves in North America. According to José Alberro, a former negotiator from Pemex, the Mexican state oil company, who advises Mr Castaneda and helped develop this proposal, there are indications that unexplored reserves in the Gulf of Mexico are as large as the ones currently identified. However, developing this resource has stalled because Mexico's constitution prohibits private investment in the sector.

To surmount this obstacle, a North American Energy Security Fund, overseen by an independent and transparent board, could be established to issue $75bn of securities backed by oil revenues (not the oil itself) to finance the rapid expansion of Mexico's oil production, leading to the doubling of exports by 2010.

Mr Alberro estimates that as long as the price of Mexican oil does not fall below $25 a barrel, profits from these expanded future oil sales would yield $12bn a year in revenues. That could be invested in the justice system, education, infrastructure and technology in Mexico, which could in turn lift the country's productivity and create jobs - ultimately, the only route out of poverty. Prosperity will promote further stability and reliability of supply.

The long-term, capital-intensive nature of this project means that it could provide the safe long-term returns sought by the main institutional investors in the US - public and private pension funds. Public pension funds alone have $2,000bn in assets in the US.When they move, markets follow. Because pension funds have billions in assets searching for long-term returns, they are the best match for capital-intensive projects which pay out over 10, 20 or 30 years.

For the US, this project would lessen the dependency on Middle Eastern oil and provide a "shock absorber" of reliable supplies as China soaks up ever more of the world's energy supplies. For Mexico it would mean being able to finance investment to accelerate development, thereby helping to stem emigration.

Collateralising financing with future oil revenues does not break new ground: Mexico did it to finance the construction of the Cactus Reynosa 1,000 mile pipeline in 1977; after the 1982 debt moratorium; in 1986 when oil prices collapsed by more than 50 per cent and again in 1995 after the Tequila crisis. Using the same mechanism to be proactive instead of reactive would be ground-breaking.

For the pension funds, it would mean solid and safe returns guaranteed by oil revenues comparable to the mortgage-backed securities they now hold in massive quantities. China, which has recently started buying up mortgage-backed securities in the US, would, no doubt, also be attracted to such an investment opportunity. Ideally, a US government guarantee could stand behind the securities.

If Mr Bush backs this idea, he will find partners in Mexico who understand, as he does, that the way to address large-scale undocumented immigration to the US in the short term is through an immigration agreement and, in the long term, to create jobs in Mexico. If North America can secure reliable energy supplies from outside the Middle East at the same time, we are better off on both sides of the border.

Jorge Castaneda, an independent candidate for the 2006 Mexican presidential election, was Mexican foreign minister between 2000 and 2003; Nathan Gardels was director of the State of California Pension Investment Unit from 1979-1983

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