Publish in Analysis - Wednesday, April 18, 2018
Andrés Manuel López Obrador wants to cancel the new Mexico City airport and revise the historic reforms that opened Mexico's energy markets to foreign investment. (Photo: Morena)
Presidential candidate raises concerns over airport, energy sector.
BY JOACHIM BAMRUD
Two recent developments in Mexico are making local and foreign investors nervous.
Leftist politician Andres Manuel Lopez Obrador (commonly known as AMLO) continues to dominate all polls ahead of Mexico’s presidential elections in July.
And his comments are not giving investors any peace when it comes to key issues such as Mexico’s historic energy reforms and a new, $13 billion international airport being built in capital Mexico City.
AMLO is threatening to cancel the new airport and instead build two runways at a military base elsewhere.
“It will be very difficult -- if not impossible -- from a practical economic point of view to walk away from the new airport at this stage,” says Michael Fitzgerald, chairman of the Latin America practice at Paul Hastings. “Many billions of dollars have already been spent on the new airport and many important international and domestic investors have lent the airport operator money through the purchase of bonds or through the new FIBRA E offering.”
Paul Hastings advised on the $1.5 billion offering of trust certificates (CBFEs) issued by a Mexican FIBRA E issuer trust to finance the construction and development of the airport last month. (See Cleary, Jones Day, Paul Hastings Advise Mexico Offers).
“We also understand that the alternative site for the new airport would face several challenges,” Fitzgerald says. “First, the alternative site would not be able to continue to be operated as a military airport because of logistical and security concerns. In addition, the alternative site would be capacity constrained from the outset, let alone not being able to accommodate the increasing passenger load anticipated at the new airport. The alternative airport location might be considered to be the equivalent of Donald Trump’s wall: the appeal it might have from a populist point of view is more than offset by practical realities.”
About 1/3 of the construction of the new Mexico City airport has been completed and the financing needed for the foreseeable future has been obtained, adds Paul Hastings attorney Arturo Carrillo.
AMLO’s plans have been widely condemned by both investors and even the International Air Transport Association (IATA), while ratings agency Moody’s warns it would weaken credit worthiness of Mexico’s airport sector.
Mexican mogul Carlos Slim made a rare foray into Mexican politics and urged AMLO to reconsider.
“Suspending the project means suspending the country’s growth,’’ Slim told reporters in Mexico City, according to Bloomberg.
Slim’s construction company Grupo Carso has won airport building contracts, while his son-in-law helped design the terminal with renowned British architect Norman Foster.
“Canceling the Mexico City airport project would have negative credit implications for the [airport] sector,” Moody’s said in a statement April 17, 2018. “The opening of the new Mexico City airport would provide Mexico City Airport Trust NAFIN F/80460 (MEXCAT, Baa1 stable) with additional available cash flow for debt service due to added capacity and expected passenger traffic growth. …The project cancellation, or material delays to its opening, would have credit negative implications not only for MEXCAT but also to the Mexican airport sector more broadly.”
Meanwhile, the Mexican airline association Canaero said any contract at the airport could be audited, but that the airport should proceed as planned, while the vice president for the Americas at IATA warns that cancelling the new Mexico City airport would hurt Mexico's economy and tourism, Milenio reports.
Meanwhile, AMLO is also threatening Mexico’s energy sector. He wants to stop future oil exploration auctions, revise existing contracts, halt all oil exports and boost production at state oil company Pemex – a notoriously inefficient company that lost a whopping $70.3 billion during the four- year period from 2013 to 2016, leading losses on the Latinvex 500 ranking of Latin America’s top companies during those years.
By comparison, Brazil’s state oil company Petrobras lost $10.8 billion – or seven times less – during the 2013-16 period, according to Latinvex data.
Investors worry that an AMLO administration could return to the old ways of siphoning off cash from Pemex, Bloomberg reports.
Such moves would represent a clear set-back from Mexico’s recent reforms aimed at making the sector more efficient and profitable by lifting the former monopoly of Pemex, letting foreign oil companies explore and even sell gasoline locally.
The energy liberalization by outgoing president Enrique Peña Nieto has brought billions of dollars in fresh investments and helped the outlook for Pemex.
A REAL THREAT
AMLO’s comments would normally be ignored, but he is increasingly seen as having a real chance at winning the elections after failing to do so twice earlier.
A brand new poll published by Mexican newspaper Reforma today, shows AMLO’s lead growing to 22 percentage points over his nearest rival.
Local and foreign investors would prefer AMLO’s top rivals, Ricardo Anaya (a former leader of the center-right National Action Party - PAN) or former finance minister Jose Antonio Meade (from the ruling PRI Party), but they both trail significantly behind and Mexico has no second round of votes in case one candidate fails to achieve more than 50 percent of the vote.
Meanwhile AMLO's party is poised to become the largest in Congress, Reuters reports.
Despite his threats against the airport and energy sector, many experts believe AMLO may end up governing more moderately, following the example of Brazilian leftist firebrand Luiz Inacio Lula da Silva, who ended up implementing pragmatic economic policies after becoming his country’s president in 2003.
“The jury is still out as to whether AMLO, if elected, will be a Brazilian “Lula type” president -- i.e., a radical leftist during his campaign but very business friendly during his presidency -- or a radical leftist during his presidency too,” Carrillo says.
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