AMLO Actions Inhibit FDI in Mexico

By Nancy J. Gonzalez

Investors are not happy with the decisions taken by the federal government in Mexico and most of them have held down their plans for new projects and expansion in this country. A recent report about the climate for investment in Mexico published by the U.S. Department of State shows investors disagree with the regulatory changes in Mexico promoted by the Andres Manuel Lopez Obrador (AMLO) administration, and this situation has diminished the flow of Foreign Direct Investment to this country in 2020.

“Investors report regulatory changes, the shaky financial health of the state oil company Pemex, and a perceived weak fiscal response to the COVID-19 economic crisis have contributed to ongoing uncertainties,” says the report published on mid-September. “Uncertainty about contract enforcement, insecurity, informality, and corruption also continue to hinder Mexican economic growth. These factors raise the cost of doing business in Mexico.”

Since AMLO took office, investors’ confidence has been down due to the cancelation of the Mexico City New International Airport (NAIM), the termination of the energy auctions and, most recently, the Constellation Brands cancellation of its newest facility in Mexicali via a doubtful referendum.

Historically, the U.S. has been one of the largest sources of Foreign Direct Investment (FDI) in Mexico. The Secretariat of Economy (SE) data shows FDI flows to Mexico from the U.S. totaled US$12.7 billion in 2019, nearly 39.7% of total flows into Mexico. The automotive, aerospace, telecommunications, financial services, and electronics sectors typically receive large amounts of FDI.

Even though the FDI in the second quarter of 2020 was almost the same than in the previous year, new investment decreased 30%, official data show. Most of the FDI was money sent to the headquarters to its Mexican subsidiaries to face the COVID-19 pandemic.

“We are discouraging investment. We are pushing people not to invest in Mexico,” said Valeria Moy, general director of the Mexican Institute for Competitiveness (IMCO). “What we are doing is changing the rules of the game; we are not doing the things that need to be done. What we are doing in the energy market is brutal.”

Moy explained Mexico has a lot of advantages such as its geographical location and young workforce, but the new rules imposed by the AMLO administration have discouraged new investment.

Furthermore, the Department of State report shows energy companies disagree the changes the AMLO administration has done in this sector.

“The Lopez Obrador administration has made some regulatory and policy changes that favor Pemex and CFE over private participants. The changes have led private companies to file lawsuits in Mexican courts and several are considering international arbitration,” reads the report.

The Mexican government has held 11 auctions allowing private companies to bid on exploration and development rights to oil and gas resources in blocks around the country. Between 2015 and 2018, Mexico auctioned more than 100 land, shallow, and deep-water blocks with significant interest from international oil companies. The administration has since postponed further auctions but committed to respecting the existing contracts awarded under the previous administration.

“Still, foreign players were discouraged when Pemex sought to take operatorship of a major shallow water oil discovery made by a U.S. company-led consortium. The private consortium had invested more than US$200 million in making the discovery and the outcome of this dispute has yet to be decided,” the report says.

The document reads investors are increasingly concerned the administration is undermining confidence in the “rules of the game,” particularly in the energy sector, by weakening the political autonomy of COFECE, CNH, and CRE.

“Analysts maintain COFECE has lost influence as the current administration enacted regulatory changes in the electricity sector that favor state-owned enterprises over maintaining competitive prices for the consumer,” the document adds.

Since Lopez Obrador took office, his government immediately suspended all new avenues for fresh private investment in the oil, gas and power sectors and has become increasingly critical of all contracts awarded. Recently, AMLO asked legislators to reverse some of parts of the energy reform in 2021.

For the Mexican Wind Energy Association (AMDEE) and the Mexican Solar Energy Association (Asolmex), the changes of environmental rights and the destructive value within renewable energy projects hit the investments made in this market.

“Our associates demand the measures carried out against the fundamental right in a healthy environment, an indispensable requirement recognized both by the Constitution and by the international treaties that Mexico has signed and ratified,” the organizations said in a joint press release when the changes in energy were made public.

The State Department document says the AMLO administration has identified increasing CFE-owned power generation as its top priority for the utility, breaking from the firm’s recent practice of contracting private firms to build, own, and operate generation facilities.

“CFE forced several foreign and domestic companies to renegotiate previously executed gas supply contracts, which raised significant concerns among investors about contract sanctity,” the document highlights.

The most recent disagreement between the AMLO administration and a private investor was the Constellation Brands case. President Lopez Obrador ordered a public consultation in which only a few people participated, and this was enough to deny some permits needed to operate.

“We are committed to positively contributing to local economic development and prosperity in Mexicali through the creation of more than 500 jobs for local residents that we hope will translate into long and prosperous careers that benefit our employees and their families,” said in a statement Michael McGrew with Constellation Brands before the public consultation. “In total, our operations in Mexicali are projected to contribute more than US$500 million in economic benefit to the Mexicali community.”

Luis Aguirre Lang, INDEX president, said investors need uncertainty and the current Mexican administration is sending the wrong signals to them.

“Mexico must send the right signals to investors to be considered a trustful commercial partner,” expressed Aguirre Lang. “Uncertainty is very harmful.”

In the last 20 years, Mexico has paid US$252 million in fines for violating trade agreements by arbitrarily obstructing foreign investment, data from the SE shows. This figure does not include the money that will be paid to Constellation Brands if the company and the government do not reach an agreement after the cancelation of the US$1.4 billion brewery in Mexicali. Currently, there are 11 active cases in arbitration, and seven more could also end in arbitration since they are at the stage called notice of intention.

Even though the AMLO administration aims to end corruption, the U.S. report says corruption is still a problem and a costly one.

“Some of the most common reports of official corruption involve government officials stealing from public coffers or demanding bribes in exchange for awarding public contracts. The current administration supported anti-corruption reforms and judicial proceedings in several high-profile corruption cases, including former governors. However, Mexican civil society asserts that the government must take more effective and frequent action to address corruption,” reads the document.

Even though FDI flow has been impacted by the decisions taken by the AMLO administration, the SE said the forecast is positive for 2020 and 2021, but the first numbers for 2020 are proving otherwise.