Mexico: How will doing business change under Amlo?

In July 2018, Mexicans chose veteran leftist Andrés Manuel López Obrador to be their next president. While his election initially frightened the markets, announcements made since have begun to shed light on the emerging operating environment which businesses will face during his six-year term.

Mexico in transition: How will Amlo’s presidency change doing business in the country?

The victory of Andrés Manuel López Obrador in July’s presidential election marked a highly significant moment in Mexico’s recent history. López Obrador, or ‘Amlo’ as the veteran leftist from the south-eastern state of Tabasco is commonly known, had finished runner-up in the two previous presidential races. On this occasion, however, López Obrador and his recently-formed Movimiento Regeneración Nacional (Morena) party won by a landslide, with Amlo himself winning over 53 per cent of the popular vote in a four-candidate race. Morena, together with its Partido del Trabajo (PT) and Partido Encuentro Social (PES) coalition partners, secured a majority in both houses of congress. Morena’s success came at the expense of Mexico’s two established political forces: the centrist Partido Revolucionario Institucional (PRI) which has governed the country for all but 12 years since the Mexican revolution’s 1920 conclusion, and the conservative Partido Acción Nacional (PAN).

Prior to his election, many of López Obrador’s domestic critics warned that his brand of left-wing populism would see Mexico follow the path taken by Venezuela under former president Hugo Chávez. While López Obrador’s policy platform is ostensibly less pro-business than that of incumbent president Enrique Peña Nieto, both Amlo’s legislative agenda and record as mayor of Mexico City from 2000 to 2005 show that comparisons with Chávez are very wide of the mark.

Since the election on 1 July, López Obrador and his team of advisors have been formulating policy, deciding on nominees for political appointments and meeting with a wide range of domestic and international interlocutors. Although López Obrador does not take office until 1 December, given Mexico’s five-month transition period, announcements made since his election victory have begun to shed light on the operating environment which businesses will face during his six-year presidential term. To what extent the policies of the new administration will alter the business environment for companies depends on the sector in which they operate and is discussed in greater detail below.

Macroeconomic policy

On taking office on 1 December, López Obrador will inherit a mixed macroeconomic picture. The country’s economy has continued to grow in recent years, despite the election and protectionist impulses of U.S. President Donald Trump, with yearly growth of 2.7 per cent recorded in July 2018. However, other indicators point to a less healthy economy. One of the most notable of these is a weakening of the peso, which has fallen by approximately 4 per cent against the U.S. dollar in the past month alone, as well as higher food and energy costs which have pushed up inflation, which currently stands at 6.6 per cent. Furthermore, while Mexico has maintained relatively high fiscal discipline since the 1994 peso crisis, the debt-to-GDP-ratio has increased significantly under Peña Nieto, with public debt growing from 33.8 per cent of GDP in 2012 to 45.4 per cent in 2018. Moreover, the country’s budget deficit has also risen substantially, reaching 2.9 per cent of GDP in the first quarter of 2018, up from 1.6 per cent of GDP in 2017.

While Amlo has pledged to cut the deficit and has already begun enacting a programme of so-called republican austerity, which has included slashing congress’s budget and promising to sell the presidential plane, he has simultaneously committed to boosting spending on social services, and on balance a small increase in public spending is likely overall. Markets will be reassured, however, by the credentials of Amlo’s nominees for leadership roles. Carlos Urzúa, an economics professor who previously served under Amlo as Mexico City’s finance secretary between 2000 and 2003, will be finance minister, while Alfonso Romo, a prominent Nuevo León businessman who has been one of Amlo’s main economic advisors for several years, will be chief of staff. Despite a likely boost to overall public spending, these appointments should reassure markets that Mexico’s public finances will remain in check during Amlo’s mandate.

Energy policy

Since his 1 July election win, López Obrador has sent mixed signals about how his administration will approach Peña Nieto’s 2013 energy reform, which opened up Mexico’s sizeable reserves of oil and gas to foreign investment. Despite labelling the reform a ‘vile trick’ at a meeting with oil sector executives in Villahermosa, Tabasco as recently as 8 September, López Obrador’s administration has committed to continuing tenders for drilling oil wells, and appears to accept that Pemex, the state-owned oil giant, does not have the capacity to ramp up output in either the short or medium-term. Furthermore, while the president-elect’s advisors have been revising more than 100 oil contracts which were awarded to companies in the last few years, including Royal Dutch Shell and BP, for irregularities and signs of corruption, none of these have yet been revoked or modified.

Since his 1 July election win, López Obrador has sent mixed signals about how his administration will approach Peña Nieto’s 2013 energy reform, which opened up Mexico’s sizeable reserves of oil and gas to foreign investment.

While López Obrador’s fiery, nationalistic campaign rhetoric likely alarmed those with interests in Mexico’s energy sector, with the president-elect declaring in February 2018 that he would not allow the country’s oil to ‘fall back into the hands of foreigners’, announcements made during the transition period, including regarding the construction of a new refinery in Tabasco, should provide reassurance to investors. Similarly, the incoming administration has mostly nominated experienced figures for key energy policy roles, including chemical engineer Rocío Nahle as energy secretary and veteran former interior minister Manuel Bartlett as director of the Comisión Federal de Electricidad (CFE). One curious appointment, however, is that of Octavio Romero Oropeza as the new director of Pemex. The 59-year-old, who does not have a background in the energy sector, takes over the heavily indebted state giant at a time when both crude production and refined output are decreasing.

Trade policy 

On 27 August, Mexican and U.S. negotiators reached agreement on new terms for the North American Free Trade Agreement (Nafta). The updated terms mostly address U.S. concerns, including by raising the percentage of automobile content made in the North America region required to qualify for Nafta’s tariff-free access from 62.5 to 75 per cent, as well as increasing the automotive sector’s wage floor, a move which should incentivise manufacturers to base themselves in the U.S.

The recent deal, which was negotiated by Peña Nieto’s administration in consultation with the incoming government, is subject to the U.S. concluding bilateral negotiations with Canada, after which the three countries party to the agreement will have 90 days to sign off on the deal. As López Obrador will assume the presidency before this period concludes, his administration will have the chance to propose modifications to the deal or even reject it outright, although this is highly unlikely given its involvement in shaping the current agreement. With a revision of the E.U.-Mexico trade agreement signed in April and an updated Nafta deal imminent, there is likely to be little substantial change to Mexico’s open approach to trade during López Obrador’s administration.

Security policy

One area of concern shared by all firms with operations in Mexico is the country’s fragile security environment. Since 2006, Mexico has been in the midst of an ongoing battle between the state security forces, including both the army and the navy, and numerous drug cartels and organised crime groups. While the Mexican authorities have not released figures on the human cost of the so-called ‘war on drugs’, figures from the executive secretariat of the Sistema Nacional de Seguridad Pública (SNSP), Mexico’s public security agency, revealed that over 170,000 people were murdered in organised crime-related incidents in the decade from 2006 to 2016. The incoming administration takes charge as violence and crime continue to proliferate; there were over 15,000 murders in the first six months of 2018 – the highest figure since records began in 1997 and up 16 per cent on the same period last year.

Since 2006, Mexico has been in the midst of an ongoing battle between the state security forces, including both the army and the navy, and numerous drug cartels and organised crime groups.

While López Obrador has announced several important changes to Mexico’s public security apparatus, including the re-establishment of the Secretaría de Seguridad Pública (SSP), such changes have become relatively common in the past two decades and have mostly had little success in reducing crime. More significant will be López Obrador’s efforts to raise the minimum wage and reduce the number of young people in neither education nor work, known in Mexico as ninis, through social programmes. Despite these addressing many of the root causes of organised criminality in the country, such long-range solutions are unlikely to have much immediate impact. For the foreseeable future, López Obrador will continue the policy of using the army and navy in law enforcement activities, announcing on 24 August that there is currently ‘no alternative’ to employing the military to counter criminal groups.

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