Publish in Analysis - Wednesday, December 5, 2018
Andres Manuel Lopez Obrador at his inauguration as Mexico's president December 1. (Photo: Mexican Government)
Mexico sees increased investor risk as business pessimism jumps.
BY JOACHIM BAMRUD
Mexico’s new president Andres Manuel Lopez Obrador, who assumed office on December 1 for a six year period, continues to scare local and foreign investors, already suffering from nearly two years of questions about the North American Free Trade Agreement (NAFTA).
While NAFTA now appears to be largely in place through the newly signed (but not yet ratified) US-Mexico-Canada Agreement (USMCA), business now has to deal with a seemingly investor-hostile president in Mexico.
In contrast to his conciliatory victory speech in July, the inauguration speech by Lopez Obrador (popularly known as AMLO) was full of attacks against Mexico’s historic energy reform as well as economic liberalization, while advocating increased state role in the economy.
“Instead of softening his tone and seeking conciliation and unity, the message from AMLO’s inauguration hardens and radicalizes his anti-liberal position,” Mexican businessman Claudio X Gonzalez wrote on Twitter. “As a result he causes more doubts, uncertainty and anxiety. The message [is] of a statist, not a statesman.”
The latest monthly poll from Mexico's central bank shows that a whopping 63 percent of market analysts and economists now believe the business environment will worsen, up from 26 percent a month earlier, El Universal reports. Meanwhile, 59 percent of respondents say now is a bad time to invest, versus 19 percent that said so a month earlier.
However, it’s not the rhetoric alone investors are concerned about, but a series of events the past two months.
AIRPORT FIASCO: AMLO's MEXIT
In October, AMLO shocked the local and foreign business community when he first held a highly questionable (some would say fraudulent) “referendum” on the future of Mexico City’s $13 billion international airport and then using the outcome as a pretext proceeded to cancel it, despite the fact that it was a third finished and experts saying it was needed to meet current and future air traffic demand.
“The motivations for cancelling the project were not strong and the way it was carried out without the supervision of a neutral entity showed that this was a politically motivated decision,” Alberto Ramos of Goldman Sachs told the Financial Times.
The airport project was the largest ever infrastructure project in Mexico and the cancellation and the manner that it was done was widely criticized. (See Mexico Airport: Default, Investor Confidence Loss).
The move – much akin to the United Kingdom’s exit from the European Union known as Brexit – is turning out be a Mexit: a completely unnecessary and self-caused massive shot in the leg of historical proportions. The news led to the peso plunging and stocks falling $22.5 billion in a few days. As Bloomberg’s Eric Martin pointed out, that would have been enough to finance almost two new Mexico City airports.
Meanwhile Fitch Ratings downgraded its outlook for Mexico’s sovereign debt from stable to negative.
This week, AMLO’s new government announced it would seek to repurchase $1.8 billion of the $6 billion bonds tied to the airport. However, Moody’s extended the review for downgrade of the Baa3 ratings on the $6 billion Senior Secured Notes issued by Mexico City Airport Trust NAFIN.
Last month, markets plunged when the key senator for the ruling party Morena announced plans to cut banking commissions. Meanwhile, a party allied with Morena announced plans to cut or limit private pension funds. Both moves led Banorte, Mexico’s largest bank, to lose a whopping 105.2 billion pesos (US$5.2 billion) in market capitalization as a result, according to Milenio.
While there was some cautious optimism that AMLO would not threaten energy liberalization – the crown jewel of the previous administration of Enrique Peña Nieto – there is now widespread fear that the sector will be next. Peña Nieto opened up the energy sector by ending the monopoly Pemex had held since the oil sector was nationalized in 1938. He also allowed competition in the distribution of gasoline, leading to a rush in foreign oil companies operating in upstream and downstream business.
“AMLO is highly likely to revise contracts awarded by the previous administration on corruption or ideological grounds, particularly in the energy and infrastructure sectors, warns Carlos Cardenas, Head of Latin America Country Risk Analysis and Forecasting at IHS.
Mining could also be hurt, he cautions. “AMLO also is likely to support the staging of informal referendums, without the support of electoral authorities, to determine the viability of mining, hydropower, or other projects facing local community opposition, increasing project delay/cancellation risks,” Cardenas says in an analysis.
AMLO’s timing couldn’t be worse. Brazil, Latin America’s largest economy, is scheduled to see a new administration on January 1. While incoming President Jair Bolsonaro was not the original business favorite, many of his statements and appointments since winning the second round in October have positively surprised local and foreign investors, who are now fleeing Mexico in favor of Brazil.
The $7.4 billion iShares MSCI Brazil ETF, or EWZ, took in $561 million last month, the most since February 2017, amid Bolsonaro’s pledge to adopt a pro-business agenda, including an overhaul in the nation’s pension system and privatization plans, Bloomberg reports. Meanwhile in early November assets in the largest exchange-traded fund tracking Mexican stocks slumped to just under $720 million, the lowest in more than nine years, driven by an outflow on Nov. 8 that was the biggest since 2011 before gaining $183 million at the end of the month.
While AMLO’s economy minister Carlos Manuel Urzua has pledged fiscal discipline, the catastrophic airport decision as well AMLO’s plans to build a new Pemex refinery and a $6 billion train are raising plenty of doubts.
The International Monetary Fund (IMF) last month called for an improvement in Pemex’s financial position before it invests in building new refineries. “Further improvements of Pemex’s financial situation are a prerequisite before new investments in refining can be contemplated,” the fund said in its latest country consultation report.
Pemex suffers from a heavy debt burden and also is the worst performer on the Latinvex 500 thanks to 2017 losses of $16.8 billion.
Even a decision to symbolically sell off the presidential plane will likely result in a loss of $137 million, according to El Financiero.
THE CHAVEZ STRATEGY
AMLO’s referendums are causing concern as that was one of the ways the late Hugo Chavez managed to ruin Venezuela’s once-prosperous economy.
Even worse: Congress could grant AMLO a constitutional change so he can hold a referendum to continue beyond his one term and thus again follow in the footsteps of Chavez, who ruled Venezuela for 14 years until he died in March 2013. (He, in turn, inspired Evo Morales in Bolivia (in his 12th year in power with plans for more) and Rafael Correa in Ecuador to do the same, although Correa left after ten years of weakening his country’s economy).
Unlike his recent predecessors, AMLO has full control of both Mexico’s Lower House and Senate -- unprecedented for a Mexican president over the past 20 years and he plans to create of state superdelegates to grant the executive greater political control over Mexico's 32 governors, Cardenas points out.
NO “DREAM TEAM”
And in contrast to previous governments that were largely dominated by well-respected technocrats, AMLO’s cabinet and key posts lack star power.
Economy minister Urzua, for example, is seen as acceptable and moderate, but clearly too weak to counter the massive selloff of the pesos and Mexican related stocks following the airport decision.
The transport and communication minister Javier Jimenez Espriu -- former head of the engineering school at the National Autonomous University of Mexico -- was widely criticized for his handling of the Mexico airport controversy.
As head of state oil company Pemex, Mexico’s new president named Octavio Romero, an agricultural engineer who was involved in several corruption and nepotism scandals when he served in AMLO’s mayoral government in Mexico City, according to Excelsior.
And at state electricity company CFE, AMLO named Manuel Bartlett, an 82-year old veteran politician known for his nationalist views.
"This is not the dream team seen in other Mexican cabinets," noted Raymundo Riva Palacio, the well-respected columnist in business daily El Financiero. "Instead it's more like a nightmare team."
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