Previous Quarterly Editions
Expropriation Risk: 65 62 62 62 ► Political Violence Risk: 60 60 59 60 ► Terrorism Risk: 65 65 65 65 ► Exchange Transfer and Trade Sanction Risk: 55 45 45 45 ► Sovereign Default Risk: 37 37 47 37 ▼
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
The administration of President Andrés Manuel López Obrador (AMLO) officially is committed to emissions reduction and to follow an environmentally friendly agenda. However, the utmost priority for the government is to achieve what it calls “energy sovereignty”. For AMLO, that means a much greater role in electricity generation and distribution for the state-owned Federal Electricity Commission (CFE), even if it brings about a greater usage of dirtier fuels, notably coal and fuel oil. AMLO has talked disapprovingly of wind-generated electricity, considering wind farms as blighting the landscape. His administration has argued that renewables cannot offer a reliable continuous power source and that private firms have benefitted from hidden government subsidies.
The government attempted to push through Congress a radical legal reform that would have given much greater power and market participation to CFE, practically converting private sector electricity companies into mere providers of whatever electricity that company chooses to buy from them. As constitutional amendments were required, the government needed votes from some opposition parties, which it failed to obtain.
The constitutional changes sought mark the latest government assault on electricity generation by private sector companies, after failing to arrest their activities by regulatory changes and a new Electric Industry Law. Nonetheless, private companies are fully aware that the political wind has turned against them. Moreover, AMLO has repeatedly attacked Iberdrola, along with other Spanish companies, as one that has obtained illegal and excessive profits due to corruption, though without offering any evidence on this. Fresh investments in the sector are not to be expected to be significant at least until AMLO leaves office in October 2024.
AMLO’s political party, the Movement for National Renovation (Morena), is the largest party in Congress and is subservient to his orders. The president has also cowed the Supreme Court and federal courts several times, although he failed to do so with respect to electricity generation. Altogether, AMLO follows an autocratic style, with his pet public projects receiving budgetary priority and regulatory approval regardless of environmental damage. These include, notably, destroying a mangrove area by the Gulf of Mexico in order to build an oil refinery and jungle destruction in the Yucatan Peninsula in order to open way for a tourist train.
Environmental groups are generally impotent against government actions. Officially, there is a green party in Congress with a significant presence of 43 of 500 deputies and six of 128 senators. However, it is an opportunistic grouping that usually aligns itself with whichever party is in power and it is not taken seriously by environmental organisations. The grouping is now fully behind AMLO and is expected to vote for whatever future electricity reforms he may seek.
The expropriation risk is greatly concentrated in the energy sector. However, foreign investors should expect problems associated with greater corruption in the whole of the government apparatus, at the municipal, state and federal levels (the latter being rarer in previous governments), in addition to less expertise and know-how from government bureaucrats. AMLO has appointed numerous officials due to their personal loyalty, with scant attention to their knowledge or experience.
The president has shown often he is willing to confront private investors and literally pay for the consequences, including any financial penalties and other costs. AMLO considers that sovereignty issues (as defined by him) are superior to legal stipulations or even international treaties, including the USMCA trade agreement. However, he seems unaware of the massive costs the de facto nationalisation of large parts of the electricity industry would entail. Legal battles, domestic and international, would be protracted.
Private investment has fallen due to the COVID-19 pandemic and presidential attacks against the private sector. Public investment has also fallen and centred on AMLO’s vanity projects. The restrictive fiscal policy was maintained throughout the pandemic, worsening the economic impact. As a result, gross domestic product (GDP) in 2021 stood at about the same level as that recorded in 2016, nearly 4% below the 2018 figure. While GDP contracted by 8.2% in 2020 due to COVID-19, and the lack of a countercyclical fiscal policy, the rebound of 2021 was only 4.8%.
Arguably, a failure of the AMLO administration has been violence. The policy of “hugs, not bullets” has in practice seen criminal groups, particularly drug cartels, practically control territorial enclaves and greatly influence some municipal and state governments. Apparently, several state governorships were won in 2021 by Morena candidates thanks to the support of cartels. AMLO himself has shown public sympathy towards the Sinaloa Cartel and its imprisoned (in the United States) former leader, Joaquín “El Chapo” Guzmán.
Increased activities by drug cartels and other criminal groups may cause added Mexico-US tensions. The Biden administration in the U.S. has not openly questioned the AMLO government’s actions and apparent support for criminal groups, but it cannot be unaware of them.
Although Mexico has little experience of international terrorism, many drug cartels use terrorist tactics to intimidate local communities and businesses. They have also branched out into other criminal activities, such as the selling of ‘security’ to businesses (protection rackets), which has become a widespread problem even for small and medium-sized firms, consequently depressing investments.
While AMLO has shown some preference for a strong peso, he has not attempted to alter exchange rate policy (that can be modified by the finance ministry) nor curtail the Bank of Mexico (Banxico)’s independence. However, he has tried to obtain monies from Banxico for the exchequer, including part of the profits from its operations.
However, the president showed a cavalier attitude when designating the new Banxico governor. He originally appointed his finance minister, Arturo Herrera, in an unusually early move (he resigned in July to take the post in January). In November, unexpectedly, he cancelled Herrera’s nomination and instead requested the Senate to appoint Victoria Rodríguez, undersecretary for public expenditure. She had never worked at Banxico nor had any direct experience on monetary matters, violating what was required by the central bank’s law. She was confirmed regardless, thanks to the government’s majority.
It cannot be discarded she may prove more amenable to AMLO’s financial demands. On the other hand, no deviation from monetary orthodoxy is anticipated. As was widely expected, she has voted to continue tightening monetary policy, seeking to reduce inflation, which at an annual rate above 7% is more than double the official inflation target of 3%.
TREND ▲
Pemex is the world’s most indebted oil company. The administration’s insistence on increasing oil production and refining has caused the firm’s financial losses to increase greatly. The company has needed significant capital injections by the government, which has also agreed to cover part of Pemex’s debt service from 2021. Two of the three main rating agencies classify Pemex’s bonds as junk. The most significant danger for the government is that its own debt may be downgraded, due to the need to rescue the company.
In early March, the central bank lowered its growth estimate for 2022 to 2.4%, nearly a full percentage point below the 3.2% expected at the end of 2021. The economic reverberations of the Russia-Ukraine crisis should arrest economic growth further, partly due to the impact on the U.S. economy. Higher inflation should push the autonomous central bank to tighten monetary policy further.
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