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TheStreet Open House

Mexico Is Achieving Its Goals

NEW YORK ( TheStreet) -- Mexico's economy is looking a lot like its football team -- down but not out.

El Tri take on the U.S. Tuesday and risk getting stuck in a play-off with New Zealand to make the World Cup field. Meanwhile, President Enrique Pena Nieto needs reform to get the Mexican economy back in the game; despite street protests, he is getting what he wants.

Mexico has three main parties, Nieto's PRI, the PAN it replaced and the leftist PRD. Between them, PRI and PAN have the votes to make these changes. The PAN by itself lacked this power. Its 12-year spell in power brought the PRI over toward its side of the debate. That's why things are moving now.

The reforms are a mixed bag for business. There are higher taxes on capital gains and dividends and higher income taxes on the middle class but a sales tax increase was cancelled. There is deregulation in the oil and telecom sectors. There is education reform aimed at breaking the hold of unions on that sector.

The biggest drag on Mexico's economy is the lack of technology needed to boost oil production. Nieto's plan is to let outside firms partner with the state-owned oil company, Pemex, and share in the gains, while changing the tax laws to give Pemex itself incentives to co-operate. Bret Jensen at RealMoney calls all this enticing.

The PAN wants to go further and the PRD is calling the plan de-nationalization but Nieto has the votes, at least on a national level. Since this is a constitutional change, 17 of the country's 32 state and district legislatures must also go along, so action won't come quickly.

As I've written beforethe first beneficiaries are likely to be smaller U.S. firms, perhaps with Mexican-American management, taking advantage of the Eagle Ford shale oil play that extends deep into eastern Mexico. It will take years to negotiate the larger contracts needed for off-shore drilling.

The Pemex moves are very sensitive. Nationalization was popular, and Pemex' control of Mexico's oil remains a point of national pride. Anything that smacks of Nieto giving the "patrimony" to "gringos" will draw heavy fire. U.S. analysts are best advised to hold their chortling over the "socialist" Pemex getting its comeuppance. Even if it's true, it's not helpful.

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