Mexico Power Report Q1 2014 - New Report Available

We have largely maintained our forecasts for Mexico's power sector this quarter, and continue to hold the view that numerous industry-specific and macroeconomic fundamentals will converge to drive long-term growth in the power sector - particularly the country's efforts to access greater volumes of cheap US gas.

To this end, ambitious plans to ramp up gas-fired generation capacity could help Mexico benefit from cheaper electricity prices and position the country as a manufacturing hub over a longer timeframe. That said, we have grown more cautious with regards to the country's near-term economic trajectory, and also reiterate that the main risks to our forecasts stem from delays to bringing critical midstream infrastructure online, as well as uncertainty with regards to energy sector reform - although we have adopted an optimistic view with regards to electricity market liberalisation which could create upside to our forecasts.

Despite the fact our Country Risk team has revised its real GDP growth forecasts for Mexico to 2.3% and 3.5% for 2013 and 2014 respectively (from 3.0% and 3.9%) we have largely maintained our positive forecasts for Mexico's power sector this quarter.

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The recent slowdown has been attributed to weaker-than-anticipated growth in the country's manufacturing sector, and delays to public spending (brought about by the arrival of President Pena Nieto's administration in December 2012, which disrupted the execution of budget matters in H113). However, we reiterate that Mexico's still-relatively strong manufacturing sector, increasingly strong private consumption and favourable demographics will continue to drive power sector growth - as will efforts to access and utilise cheap US gas.

As such, while we will remain cognisant of the risks such a slowdown poses to our near-term outlook for electricity generation and consumption, we still expect power generation to grow at an annual average of 4.5% between 2014 and 2022 to reach 416TWh - based on the country's ambitious capacity expansion plans and strong demand growth. We also continue to forecast that gas-fired electricity generation will grow at an annual average rate of just under 6.4% between 2013 and 2022, accounting for over 60% of generation capacity at the end of our forecast period and driving our forecasts for growth in electricity generation.

That said, we also highlight that the future health of the power sector will depend on the Mexico's ability to establish the mid-stream infrastructure necessary to source a stable gas supply from the US. It will also rely on the government's willingness to tackle the thorny issue of energy sector reform, which could have huge implications for private sector involvement in the electricity market - and ultimately domestic electricity prices - if it proves successful.

Key developments this quarter include:

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