Mexico’s New President Inherits an Economy in Shambles

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(Industrial Info Resources, 6.Jun.2024) — Claudia Sheinbaum, Mexico’s president-elect, will inherit “a number of headaches” when she is inaugurated later this year, a longtime observer of Mexican affairs told Industrial Info in an interview this week. Under Sheinbaum’s predecessor, Andrés Manual López Obrador, or AMLO, Mexico’s economy deteriorated significantly. Notably, liberalization of the Electric Power, Oil and Gas and Metals and Minerals sectors stalled after AMLO was elected president in 2018. State-run enterprises have deteriorated since then, largely because foreign companies and capital have largely been shut out of Mexico.

“The electricity sector has collapsed, blackouts and brownouts are now common because there has been no investment,” said Tony Payan, Ph.D., director of the U.S.-Mexico Center at the Baker Institute of Public Policy at Rice University (Houston, Texas). “Rolling blackouts have been happening two or three times per week for several months this year.”

A decade ago, Mexico passed legislation opening its state-run energy sector to foreign investment. While AMLO, who took office in 2018, did not repeal those laws, his government made sure they were not implemented.

“After 2018, foreign companies that wanted to invest in the electricity sector were denied permits,” which kept them from making their desired investments in generation or transmission, Payan continued. At one time this year, 18 of Mexico’s 31 states were experiencing rolling blackouts, he added.

Payan has been an observer of Mexico for about 30 years.

“The situation will get worse this summer, when temperatures rise and air conditioning use shoots upwards,” he said. “That will place a strain on the grid that can only be resolved by turning off power to sections of the country in order to keep the lights on in other parts of the country.”

Payan said AMLO, who is term-limited, is a Latin American populist like Juan Peron of Argentina: “He is an authoritarian, he is polarizing and he knows how to redistribute wealth but not create it. He wants to weaken the courts and the legislative branch and eliminate regulatory agencies so all power rests in the executive branch.”

“There is no indication that the incoming president wants to change any of that,” he continued. Her party now is close to controlling a super-majority in the Congress, meaning whatever measures she seeks likely will be enacted by lawmakers.

Continuing AMLO’s policies will make Mexico poorer, more disorganized and more dangerous, with a crumbling infrastructure and an economy ever-more dependent on foreign remittances, he told Industrial Info. In short, a country nearing collapse.

The continuation of her predecessor’s policies shutting out foreign investment in prized state-run enterprises means Mexico’s country risk will continue to rise, he predicted, adding: “The financial markets sent a shot across the bow to Mexico after Sheinbaum’s election when the currency and stock market fell. The financial community knows Mexico needs to course-correct, but I see no indication that will happen until and unless a financial or fiscal crisis forces meaningful change.”

Sheinbaum, elected June 2, sees AMLO as a mentor, Payan said. She was his secretary of the environment when AMLO was the leader of Mexico City from 2000-2006. They belong to the same political party, Morena.

The incoming Mexican president, who has a Ph.D. in energy engineering, has expressed support for building renewable electric generation in Mexico. But when she was mayor of Mexico City, Payan said she supported the construction of generators that burn fuel oil, which emit pollutants that threaten public health and the environment. “How can you call yourself an environmentalist if you allow the construction of the most polluting way to generate electricity?”

Payan said that one point of view sees that Mexico is in relatively good shape. The academic said many have exited poverty and entered the middle class, and the country has free-trade agreements with over 40 countries, including the U.S., which facilitates the export of manufactured products and agricultural products to many of the world’s largest markets. About 85% of Mexico’s exports go to the U.S.

But Payan does not subscribe to that point of view. “Most of the people who exited poverty under AMLO did it because of cash transfers from the federal government. AMLO contained poverty, he didn’t eliminate it, and it was done not through economic growth but by government transfers. That is unsustainable given the weakness of the Mexican currency. They can’t just print pesos.

“The economy has only grown by 0.8% per year and is heavily dependent on overseas remittances sent by Mexicans working in other countries. The country is wracked by organized crime everywhere. Research & Development has collapsed. The energy sector has collapsed. Most state-owned ventures, such as oil company PEMEX, remain inefficient and heavily subsidized.”

During AMLO’s six-year presidency, PEMEX received about US$90bn in state subsidies, yet still carries over US$110bn of debt on its balance sheets, Payan told Industrial Info. At a time when global demand for oil continues to rise, Mexico’s oil production has been stuck at about two million barrels per day. Inefficiency, corruption and lack of investment have prevented PEMEX from drilling new wells, expanding production or deploying advanced technology in the field.

The national oil company “is running out of money,” Payan asserted, but the incoming president has given no signs that she thinks a change is needed. A financial or fiscal crisis appears to be the only thing that could cause the incoming government to reverse course and re-open state-run energy industries to foreign investment.

But Payan predicted that investors, who lost an estimated US$10bn to US$20bn in investment after Mexico stymied its liberalization laws in 2018, are likely to take a “once-bitten, twice shy” approach to investing south of the border, should that opportunity arise in the future.

“Businesses can live with stable rules and laws, even if they are bad rules and laws. What they can’t live with is too many changes that provide no certainty, because lack of certainty means businesses can’t plan. Businesses need stability, or they will invest elsewhere.”

Mexico’s electricity, oil and gas, mining, and chemical processing industries all are in desperate need of foreign capital, Payan said. “They can’t continue as wards of the state when the state is broke. I expect that businesses will continue to look to invest in other nations, as they have since the liberalization era ended with AMLO’s presidency.”

“Eventually, Sheinbaum will be forced to re-open the Mexican economy, maybe in a year or two, because the country will experience a fiscal or financial crisis,” he concluded.


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