Mexico’s next move

Mexico is experiencing a sea change in its political landscape. Frustrated by years of inaction on corruption, voters rejected the ruling PRI and established PAN parties. Last July 1 they elected the populist Andres Manuel Lopez Obrador, commonly referred to as AMLO, by a landslide. The new administration took office on December 1, old news now – but what is news is the lingering question of what the administration is going to do. I was in Mexico last week, and there were some surprising learnings.

Business is in a state of general uncertainty. Confidence is down since the inauguration, reflecting the ill ease of the commercial world. Key to this sentiment are the statements that AMLO has made over the course of his drawn-out, 15-year campaign. He has often taken aim at corruption and concentration of wealth, and favours a broader distribution of income. He has set high expectations among his vast following, and will be expected to deliver – but now that he has the power, it is unclear how he will execute on these promises. Unsure of the way forward, businesses I spoke with are generally holding back on large investments, waiting to see what the government will do.

One of the clearest policy actions to date is the cancellation of the new Mexico City airport project – which was already one-third complete. This is a massive and needed undertaking, as the current airport is insufficient to handle current, let alone future, travel activity. However, to the new administration this was a symbol of corruption, and they took action. Currently, the reasons given for the cancellation were muddled, and while there is an alternative project, its relative merits are unclear. Foreign holders of the airport project bonds were thrown into confusion until a plan was set to make them whole. Clearly, the AMLO administration has demonstrated its willingness to make changes to ongoing business arrangements, which is causing key investors to hold back their plans.

The energy sector is also on edge. One of the hallmarks of the previous Pena Nieto government was deregulation in the energy sector that allowed foreign players to inject badly needed capital into areas that were previously domestic-only. The cancellation of tenders has sent a clear message that the government is reevaluating the policy. Much foreign money seems to be sitting on the side until there is greater clarity on the go-forward plan.

Canada’s auto sector has been through the wringer, between CUSMA negotiations, key OEM investment decisions, market conditions and now the change in Mexican leadership. For the moment, there seems to be a sense that the AMLO government will respect the investments that are in place, but the future has become a bit more cloudy. The cancellation of ProMéxico, the agency responsible for attracting investments into Mexico, and the accompanying announcement of the termination of financial assistance for inbound foreign auto sector OEMs suggests that investments are welcome, but will not get the same red-carpet treatment. As these have been significant to overall Mexican performance in recent years, this, together with the late stage of the North American auto cycle is not likely to bode well for big, new auto sector market entry or expansion projects. 

Mexico’s own brand of populist reactionism is having the same effect as elsewhere on the planet: at the very moment in the economic cycle that business investment should be ramping up – to address capacity constraints and significant pent-up demand – policy changes, whether rumoured or actual, are causing businesses to freeze up. Mexican operations, like those in the rest of the world, are quite busy processing current orders, and we expect this to continue. But longer-term commitments are clearly on hold until more is known about the rules of the game.

One further concern goes beyond policy announcements, to policy execution. The salary cap on public workers poses a risk to retention of talent: there are fears that the machinery needed to implement policy changes may be compromised.

At first blush, this is a scary list of proposed and actual changes to Mexican policy. But these are early days, and the new government is for the most part treading carefully. There are clues that a measured approach is being taken to broader business issues, and there is clearly a desire to avoid a sharply negative financial market reaction. For the time being, there is uncertainty, but cautious optimism about final outcomes. Unlike a certain other Latin American economy this one has been compared to, in Mexico’s case, there’s not a lot of spare cash lying around to bankroll a radical regime-shift.