Mexico’s newly-elected president: potential implications

October 2018 | EXPERT BRIEFING | FINANCE & INVESTMENT

financierworldwide.com

The leftist candidate Andrés Manuel López Obrador won Mexico’s presidential elections on 1 July despite scepticism across the financial markets and a rocky relationship between Mr López Obrador and local businessmen.

Based on his discourse throughout the electoral campaign and upon his election, Mr López Obrador is creating waves even before taking office on 1 December, thanks to his work on the nation’s biggest infrastructure project (Mexico City’s new international airport), unclear messages toward president Peña Nieto’s energy reform, a positive start with the president of the US and his team’s participation in the final arrangements of the NAFTA Agreement. This environment is causing confusion among private investors, both national and foreign, who considered president Peña Nieto’s structural reforms and foreign policy a boost to private participation across a variety of different sectors.

The public is split in its feelings about the president-elect thanks to his provocative discourse, his inexperience in politics, his social life and ongoing infrastructure developments. However, what is not in question is his ability to hit the news headlines as he approaches the start of his much anticipated presidency.

Mexico City’s new airport (NAICM)

Among the news which has caused commotion is Mr López Obrador’s indecision on whether to continue with the construction of the $13bn NAICM and the possibility of a public consultation in order to gauge the opinion of the Mexican people. He has shifted his stance since the campaign, moving from condemning the project to requesting additional technical assessments of the project.

The project is currently being built in the region of Texcoco, in the State of Mexico, approximately 20 minutes from the current airport in Mexico City. Several technical studies speak about the suitability of the former Texcoco Lake lands for this purpose, due to its proximity to the demand centre, the size of the land available to build a large capacity airport, the advantages of its orography, visibility and direction. Mr López Obrador’s alternative proposal to decongest the growing air traffic consists of expanding a military base in Santa Lucia, in the southern part of Mexico City.

According to an analysis carried out by Mr López Obrador’s team, cancelling construction of the new airport would cost approximately $5.2bn, which would have a significant impact on the federal budget for 2019 and could potentially have an adverse effect on the financial markets.

Mr López Obrador, who is being advised by businessmen Alfonso Romo and Abel Hibert, intends to consult with the public to gauge enthusiasm for the NAICM project. The referendum--type consultation is expected to occur in the last week of October, before the president-elect takes office.

Revisions to the Energy Reform of 2013

Mr López Obrador’s proposals related to the energy sector created great uncertainty during his campaign, where many of his speeches were focused on empowering the state-owned oil & power companies, Pemex and CFE, and on investments to develop the state’s infrastructure to reach self-sufficiency in energy matters. It seems clear that the president-elect did not consider in his campaign speeches all the challenges that need to be overcome in order for his promises to become a reality.

Opening the sector to foreign and national investment is based on the Mexican Constitution and supported by secondary legislation enacted in 2013. The reform was believed to be shielded from additional amendments, however Mr López Obrador’s recently created party ‘Morena’ also won the majority in the federal Congress and state legislatures required for a Constitutional amendment.

The cost of reversing the reform is practically unbearable for Mexico. Governmental investment in related infrastructure has decreased to its lowest level in decades and the country’s reliance on foreign trade requires an open market to foster competitiveness. Upon his election, Mr López Obrador explained that he would not to be seeking to reverse the energy reform and that the contracts previously executed by the state with private stakeholders will be respected. He does not want to disrupt investor confidence.

The president-elect is looking forward to working with governmental bodies, such as the National Hydrocarbons Commission, the upstream regulator which has allocated a total of 107 contracts for exploration and production of hydrocarbons, in order to ensure transparency and strict anti-corruption compliance in the awarded contracts to avoid any possible cases of fraud.

NAFTA renewed

On 27 August it was confirmed that Mexico had finalised its free-trade agreement with the US. Though the small print of the agreement is not yet known, both administrations jointly noted that the negotiations have reached a satisfactory conclusion in three main areas.

The Trump administration focused on cars manufactured in Mexico, since their intention was to move jobs in this industry and to protect regional content requirements for automotive production and highly paid workers. Mexico’s president-elect applauded the increase in the salaries of car manufacturing workers, in correlation to his team’s current talks with the Central Bank and local businessmen to increase the general minimum wage in the country.

In terms of energy, Mr López Obrado announced that the NAFTA negotiators considered his suggestion to include Mexico’s reserves to regulate in energy matters and a reinforcement of the nation’s dominion over the hydrocarbons in the subsoil and natural resources, which is already provided in the Mexican Constitution.

No further announcements were made in connection with Mexico’s increasing dependence on US energy commodities or the growing in-flows of foreign direct investment (FDI) in the energy sector. Fortune 500 companies, such as DowDuPont, ExxonMobil, Sempra, Chevron and Andeavor have already entered the Mexican market through plants, terminals, distribution channels and gas stations. Some of these investments were made prior to president Peña’s energy reform.

After a fall in in-flows of FDI into Mexico’s in 2017, the United Nations Economic Commission for Latin America and the Caribbean expects the level of investment into the country to remain stable in 2018 or to potentially grow, strengthened by a better tone in the dialogue between the new government elected on 1 July and the private sector. Although the new NAFTA agreement could suggest a mutual respect between president Trump and Mexico’s president-elect, there are certain concerns about the nature of the relationship once Mr López Obrado takes office, given the volatility in discourse of both presidents.

It is still uncertain whether Canada will reach a consensus with its NAFTA partners. On 31 August, president Trump announced to the US Congress the intention to sign a trade agreement with Mexico, in which case Canada would have 30 days to be added to the agreement. The scenario in which Canada does not participate in the trilateral deal is still uncertain.

Mexico’s president-elect has proven to be passionate. He has taken an investment-friendly stance and a keen interest in local and foreign affairs. His is still a few month away from taking office, yet he has lost no time in getting acquainted with the challenges ahead.

Diana Pineda and Jacqueline Pasquel González are lawyers at González Calvillo. Ms Pineda can be contacted on +52 (55) 5202 7622 or by email: dpineda@gcsc.com.mx. Ms Pasquel can be contacted on +52 (55) 5202 7622 or by email: jpasquel@gcsc.com.mx.

Diana Pineda and Jacqueline Pasquel González

González Calvillo