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How the Mexican government has undermined investor's confidence

Updated: Mar 2, 2021

Traditionally security risks in Mexico are commonly associated with organised crime, drug trafficking and other sources of violence. However, there are other aspects of the Mexican context that should be considered when making a risk analysis, such as how political change and national policies can impact mid-term and long-term investments.

By: Isabel Oriol Llonin

Political changes are usually not seen as an imminent security risk in Mexico, or in most parts of Latin America, however, they can represent a risk to mid and long-term business interests. A new government can bring a drastic change in the country’s approach to economic policy and business affairs with international companies. Such is the case of Mexico with president Andrés Manuel López Obrador who took office in late 2018.

A new era for Mexico with López Obrador

López Obrador -or AMLO as he is known- is the first left-wing president that Mexico has had in recent decades. His victory broke a cycle of governance between the two major parties that have been in power in the last years, the PAN and the PRI, the first a conservative party, and the second a self-proclaimed centrist party, both with a history of strong neoliberal economic policies.

With a society increasingly tired of the political elite and corruption scandals, AMLO ran a campaign based on the idea of being 'one of the people', with a strong preference for austerity policies and the promise to end corruption in the high political spheres. He also inherited a country with alarming rates of violence, crime, and rumours of organised crime infiltrated at all levels of government.

Therefore, it is unsurprising that his government has been characterised by efforts to appear different from the traditional political elite. One of these efforts has been transforming the Mexican economy from the conventional neoliberal economic policies that the country has held for decades to a more state-controlled economy. Since his presidential campaign, both the national and international private sectors were unsettled about the potential consequences of such changes. Two years into his government, some of those concerns have proven to be true.

Lessons learned from the Mexico City Texcoco Airport

The Mexico City Texcoco Airport was a megaproject located in the highly populated capital of the country, a city with approximately 20 million inhabitants in its metropolitan area. It was intended to replace the current airport and meet the demand for a higher air traffic capacity in the city. The ambitious USD 13 billion projects, expected to have a capacity of 125 million passengers per year at its completion, was launched in 2016 by the previous administration led by Enrique Peña Nieto.

As a presidential candidate, López Obrador took a strong stance against the project claiming it was too expensive. The Texcoco Airport project became a symbol of his discourse against 'unnecessary spending', playing into his narrative of a 'people's president' who refuses to favour the elites. The project also had some environmental concerns regarding the land in which it was being built, so AMLO then proposed the cheaper alternative of adapting the Santa Lucía military base, north of the city. However, critics pointed out several issues with this alternative: the project had severe viability concerns that would probably raise the cost of construction in the future -this was later proven to be true- and the environmental impact report had not been released to the public.

In December 2018, within less than a month of taking office, President López Obrador announced the official cancellation of the Texcoco Airport after 30% of the project had already been built. Naturally, this raised serious concerns among the business sector, undermining investor’s confidence in public projects, and added to the overall air of uncertainty in the country.

Image 2: An aerial view of the unfinished Texcoco Airport. AFP.

Uncertainty in the energy sector

In 2013 former President Enrique Peña Nieto spearheaded a comprehensive energy constitutional reform that would, among other changes, allow the private and foreign investment across the energy sector. Along with the auctioning of untapped oil and gas blocks across the country, the reform ended a 75 year-long state monopoly over oil and energy supply chains.

Fast forward to the current government; the energy sector has been a critical area in the efforts of López Obrador to counter decades of neoliberal economic policies. He has criticised the 2013 energy reform as fraudulent by pointing out the corruption and bribery scandals that have surrounded it since the beginning. Moreover, his government has been characterised by his attempts to strengthen the inefficient and indebted state-owned oil (PEMEX) and electricity (CFE) companies as key pieces to 'recover economic sovereignty'.

This has led to several controversial decisions. At the beginning of his presidency, López Obrador indefinitely postponed all auctions on oil and gas blocks to private companies, proving once again to foreign investors that previous administration's deals were at risk with the new government. In 2020, he announced a new sustainable energy policy that would impose considerable limitations and additional requirements to private renewable energy farms. The government argued it was intended to protect the reliability of the national supply of energy during the crisis. However, critics have speculated that it was an effort to protect the state-owned Federal Commission of Energy (CFE).

The new sustainable energy policy resulted in the temporary closing of 44 farms of renewable energy while putting at risk investments for USD 6 billion and almost 30,000 jobs. However, after a series of legal battles, the Supreme Court ruled that the president’s policies were unconstitutional, and most farms were allowed to carry out operations again. While the government did not win this battle, the actions it implemented certainly undermined investor’s confidence and could potentially harm the development of renewable energy soon.

It is not completely clear what direction the government will take now, especially considering the economic and health crisis caused by the coronavirus pandemic. The significant drop in oil prices is forcing national oil companies around the world to reconsider their long-term projects and investments, potentially allocating more resources to other sources of energy. While private investment into the energy sector, especially into renewable resources, could be the boost that the Mexican economy needs to revive after the crisis, it seems unlikely that López Obrador's government will take that path. With four more years left as president, chances are the business sector -especially the energy sector- will navigate a certain degree of uncertainty in Mexico. Therefore the political context should be considered in any security risk analysis.

This article is part one of a series highlighting the importance of political change in security risk analysis in the region of Latin America.

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About the Author

Isabel Oriol Llonin is a contributing analyst at Dyami. She holds a bachelor’s degree in International Relations and has a post-graduate degree in Public International Law from Utrecht University. She has expertise in the Latin American region and the public international law implications of conflict analysis.

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