Mexico: What does a López Obrador presidency mean for oil and gas

02 August 2018

Andrés Manuel López Obrador (AMLO) will become Mexican president in December 2018, having won the presidential election on 1 July 2018. Whilst AMLO’s electoral success marks a distinct break with traditional party politics in Mexico, he has taken steps to reassure investors of his commitment to fiscal responsibility. However, contracts in the energy and infrastructure sectors face a rising risk of contract cancellation.

Security Environment

During the election, AMLO capitalised on high levels of public discontent with cartel-related violence, and tackling insecurity is likely to be a policy priority. Violence is driven by a growing number of turf wars, as drug cartels splinter into smaller groups. Between January and June 2018, there were an estimated 11,241 organised crime-related killings in Mexico, a 28% increase on the same period in 2017. Drug cartels have also increasingly turned to express kidnapping and extortion as a source of revenue in recent years.

There were 1,390 cases of kidnapping reported in 2017, a 22.9% increase on 2016. AMLO is yet to specify policies to address violence, although he has expressed a desire to phase out Mexico’s militarised response to cartel violence. As a result, firms operating in the country will continue to require substantial security measures to ensure the safety of people and moveable assets in the medium term outlook.

Trading Environment

Following the presidential election, AMLO met with various private sector businesspeople, and subsequently unveiled an ‘austerity government’, pledging to cut spending by rooting out corruption and reducing benefits for former presidents and officials. At the same time, AMLO promised to respect central bank independence and the floating exchange rate system. Such measures will alleviate investor concerns of a lurch towards antibusiness policies.

However, AMLO has also pledged to raise spending on social programmes, education and infrastructure, and this will drive up government spending. As a result, Mexico’s fiscal deficit is anticipated to reach 1.9% of GDP by 2021 from an estimated 0.6% in 2018.

Economic growth in the United States (US) will support remittance inflows and demand for goods manufactured in Mexico. Along with an anticipated uptick in public spending under AMLO, this will drive real GDP growth in the coming years, with growth expected to reach 2.8% in 2019 from a forecasted 2.1% in 2018. However, renegotiation of the North American Free Trade Agreement (NAFTA) will pose notable downside risks to Mexico’s economy.

In late July 2018, US President Donald Trump expressed a desire to quickly renegotiate NAFTA, amid softening rhetoric between Mexico and the US. However, the US’s increasingly protectionist attitude elevates the risk that renegotiation will fail. The US is a sizeable export destination for Mexico, with exports to the country accounting for 12.5% of GDP in 2017. A collapse of NAFTA would therefore pose significant economic risks to Mexico.

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Investment Environment

AMLO is expected to scrutinise contracts awarded by the previous government in the infrastructure and energy sectors, given campaign pledges to tackle corruption. This will elevate the risk of contract alteration or cancellation in the medium-term outlook. For example, on 23 July 2018 AMLO announced that the future of the USD 13 billion Mexico City New International Airport project will be decided in a referendum in October 2018. Following the announcement, various scheduled tenders were suspended by the consortium running the project. This highlights growing contractual risks in the country, and controversial projects in the infrastructure or energy sector may also be subject to referendums.

Whilst AMLO and his energy minister Rocio Nahle oppose liberalisation of the energy sector, the new government will not have the two thirds majority needed in both houses to wholly reverse energy sectors reforms introduced by the previous administration. However, the government will have a simple majority in the Lower House to pass or modify secondary legislation on the energy sector, and this may result in the amendment of some liberalising measures.

There is also an elevated risk that AMLO will pressure outgoing President Enrique Peña Nieto to suspend upcoming licensing round 3 in the oil and gas sector, having already requested such action before the election.

Mexico: What does a López Obrador presidency mean for the oil and gas sector?

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Pakistan, Cameroon, Colombia and Niger all of which have been the subject of recent enquiries from JLT's client base.

World Risk Review Rating August 2018

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com.

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