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AMLO's "referendum" scrapping the new Constellation Brands plant in Mexicali (photo) has raised eyebrows among foreign investors. (Photo:  Constellation Brands)
Wednesday, May 13, 2020
Perspectives

Mexico: AMLO Erodes Business Confidence


No real Covid-19 stimulus, attacks local and foreign investors.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

The coronavirus pandemic is expected to hit Mexico’s economy, which was already in recession when the year began, with brutal force. President Andrés Manuel López Obrador has been criticized for doing too little to help businesses, many of which are faced with insolvency as revenues from trade, tourism, remittances and oil exports have dried up. Since taking office, López Obrador has also unnerved investors by taking actions that include scrapping plans for a new Mexico City airport and halting a $1 billion brewery project. How are López Obrador’s policies affecting Mexican companies and foreign investors’ appetite for putting money into the country’s businesses? How much confidence can foreigners have that they can seek relief through Mexican courts or arbitration if disputes arise involving their investments in Mexico? How important is investor confidence to Mexico’s economy, and what should the government do to support it?

Adrián Magallanes, partner at Von Wobeser y Sierra: Mexico’s foreign investment environment can be characterized by at least two themes. On the one hand, President López Obrador’s administration has intervened in existing public works and private construction projects. Prior to his 2018 inauguration, he pledged to hold regular plebiscites on such projects. Many have questioned the constitutionality of these plebiscites, and the number of voting participants in them has been very limited. However, these plebiscites have already led to the cancellation of the new Mexico City airport project and the halting of Constellation Brands’ $1.4 billion brewery project in Mexicali. Further, his administration has also brought claims alleging the ‘immorality’ of contracts for the construction of pipelines that the Federal Electricity Commission entered into with TransCanada and other investors, causing their renegotiation and subsequent modification. These measures will likely deter foreign investment in Mexico. However, in a converse manner, FDI in Mexico grew by 4.2 percent in 2019, and the president last year announced that his government was considering as much as $400 billion of infrastructure investment. Additionally, Mexico has historically been, and continues to be, active in agreeing and ratifying international treaties for the protection of foreign investment, which has recently included Mexico’s ratification of the ICSID Convention and the entry into force of the USMCA this coming July, including its Chapter 14. Finally, Mexico has consistently respected all arbitral awards rendered against it in the investor-state dispute settlement system, and it is important that this does not change. 

Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars: It is clear that investor relations are hardly a priority for AMLO—he has repeatedly shown that he is not concerned about companies investing their money elsewhere and is quite content to focus on his pet infrastructure and energy projects and on concentrating political power rather than trying to stabilize the economy and boost economic growth. What is stunning about the Constellation Brands debacle is that there will be a heavy price to pay in terms of legal action against the Mexican government, at exactly the time when AMLO should be focusing on attracting money into Mexico to aid with the economic crisis and recovery. The recent news on Pemex’s stunning first-quarter losses only exacerbate the feeling of impending crisis and doom. It has been said before, but it is worth repeating that AMLO does not operate according to an economic logic—questions of investment profile, country risk, certainty, profitability and efficiency come a distant second to his concerns over political matters, especially cementing his hold over the country’s politics. The irony is that, by failing to take care of the former issues, he is likely to be severely weakened in terms of governance and public opinion. The divisions within his own party are becoming painfully apparent, and his approval rating is slipping fast in the eyes of the public. A critical date will be next summer’s mid-term elections: an acid test for the president and his party. An even more crucial vote will take place in March 2022 when the president submits his own presidency to a referendum.

Salvador Fonseca, partner at Holland & Knight México: Uncertainty is bad for business, and it is difficult for a country such as Mexico to attract investment when there are so many unsettling signals from its federal government. But not all is bad news. Despite its shortcomings and missteps, Mexico is currently a party to 35 bilateral investment protection treaties (BITs), has concluded another 18 treaties with investment protection provisions (TIPs), including the CPTPP and the recently approved USMCA, and in 2018 it finally joined ICSID. All of this provides a good protection safety net for foreign investors in Mexico in case their rights under the applicable BITs or TIPs are violated. There are many things that the Mexican government could do to foster both national and foreign investment but, in my view, the most important aspects are to guarantee the rule of law and to realize that the private sector is the actual motor of the economy and, therefore, promoting and protecting it is the best bet the government can make. Interestingly enough, neither of these ideas contradict the government’s calling and interest in implementing policies and programs to protect the less privileged and to equalize the enormous differences that exist in Mexican society. Quite the contrary, the jobs created and the taxes paid by entrepreneurs of all sizes (and not oil revenues, which are hitting record lows) are the fuel that will enable the government to continue operating and bringing about its social policies. 

Leonardo Beltrán, nonresident fellow at the Institute of the Americas and former Mexican deputy secretary of energy for planning and energy transition: According to the latest Global Index of Economic Activity released in February, Mexico’s manufacturing and industrial activity contracted 3.5 percent and overall economic activity 1.6 percent in annual terms. This result feeds into a negative outlook. In February, companies in the manufacturing sector were expecting an annual decline in production (6.8 percent), domestic consumption (8.5 percent) and exports (6.9 percent), compounded by a 5.8 percent annual drop in business confidence and a fall of 10.3 percent in investment sentiment. According to the latest World Justice Project’s Rule of Law Index, Mexico has been ranked five years in a row in the lower quartile, among the countries with the weakest adherence to the rule of law. Moreover, if we take a look at subnational data, the regulatory enforcement component of the index indicates that this year most Mexican states remain in the same position. Therefore, data suggests that irrespective of the change in government, people perceived no difference in how government regulations are effectively enforced. According to the latest Kearney Foreign Direct Investment (FDI) Confidence Index, Mexico lost eight positions to rank in the top 25 among countries likely to attract the most investment in the next three years. In fact, over the last two decades, Mexico has seen $578 billion of FDI, 48.7 percent in manufacturing and more than half coming from the United States (47.2 percent) and Canada (7.1 percent). Therefore, to speed up the recovery process, with an already approved USMCA, President López Obrador can propose the creation of the North American platform for Development (NA4development) to coordinate efforts. 

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

 

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