Strategic intelligence in Latin America

Mexico

Mid-term elections loom for AMLO who must work to boost private investment.

Mexico arrives to the end of 2020 having been heavily hit by the ongoing COVID-19 pandemic. With a second wave of infections starting to bite, budget restrictions are hurting and there are confrontations between the public and private sectors on all fronts.

In 2021, the federal government will be forced to accelerate its emblematic infrastructure plan and this will need private sector support. The private sector will have to adapt to new regulatory conditions, while seeking to contain increasing financial pressures derived from the pandemic.

Most importantly, Mexico must start sending better signals that it is an attractive destination for investment and is willing to comply with its obligations under the United States-Mexico-Canada agreement (USMCA).

Politics

The mid-term elections in June 2021 will be one of the largest in Mexican history, the entire Chamber of Deputies and 15 local governments will be renewed. These elections will be the main challenge to President Andrés Manuel López Obrador (AMLO)’s ambitions.

Early polls show that MORENA, (AMLO’s party), could retain its current advantage and consolidate its presence at a local level, as long as the opposition fails to build a competitive alliance.

The elections are likely to result in serious confrontation between the ruling party and the opposition, centred on corruption scandals. There is a risk that MORENA may abuse the legislative majority to impose the presidential agenda.

International relations

Mexico has yet to make important reforms in the labour regulatory framework to fulfil its commitments under the USMCA. It is expected that the Democratic party in the United States will begin to exert pressure on this. Mexico has begun to make minimum wage increases, (from USD 6.21 / day to USD 7.14 / day) but this is insufficient to achieve the goals outlined in the UMSCA.

The main pending issues are: union transparency, greater capacity to inspect the labour secretariat of working conditions and, above all, guaranteed labour rights.

Additionally, environmental issues raised in the USMCA will impact the agriculture and energy sectors. Special attention will be paid to the fish and shellfish trade before an imminent embargo on Mexican products by the United States, the main recipient of Mexican products.

Energy

If 2020 was the year of “capture” by the regulators of hydrocarbons and telecommunications sectors, 2021 could be the year of their disappearance. AMLO has announced his intentions to reform the powers of those in charge of monitoring competition in those sectors.

Currently, the Energy Regulatory Commission and the National Hydrocarbons Commission have been in tune with the federal government to reinforce the predominant role of state companies such as CFE and PEMEX, by issuing guidelines that limit competition and reduce permits granted to the private sector, particularly in the field of renewable energies. However, others such as the Federal Commission for Economic Competition have maintained and defended their autonomy.

These changes require a profound constitutional reform and completely reverse changes that were promoted within the framework of the then North American Free Trade Agreement. This contributes to a climate of mistrust and uncertainty for private investments. Therefore, intense lobbying from both the federal government and the private sector is expected, as well as tensions with commercial partners.

It will also be a year of confrontation in courts where the private sector demands the government to respect its contractual obligations, particularly in the energy sector. This strategy has contained AMLO’s attempts to limit competition as the courts have strongly supported the arguments of private parties, so far.

Infrastructure

The outlook for private investment is divided across the country: Yucatán remains attractive, followed by Baja California. The rest of the country could see stagnation given the uncertainty that exists on Mexico’s commitment to comply with current regulations and contracts with the private sector.

Yucatán’s growth will be boosted by the Fincantieri shipyard at the Port of Progreso, with an initial investment estimated at USD 150 million, in addition to the new Amazon hub in the municipality of Umán. The real estate sector will continue to view this state as an important area for housing, due to its favourable security conditions, with an estimated investment of more than USD 800 million.

For its part, the Ensenada area in Baja California will get a significant boost from the Costa Azul liquefied natural gas plant and port project.

In contrast, during the first half of 2021, the federal government is expected to maintain its position of preventing public-private partnerships (PPPs) for the execution of infrastructure works. Without this contracting mechanism, the current administration will not be able to deliver its infrastructure priorities, so a relaxation may be expected in the second half of the year, after the mid-term elections.

“There will be greater confrontation between the public and private sectors in the first half of the year. However, once the June elections are over, we expect a more favourable environment where we could even see an expansion of the infrastructure programme presented this year.”

Infrastructure analyst, Mexico

E-commerce

The Mexican consumer has a preference for traditional shopping channels. Contrary to what is happening in North America, where consumers for years were increasingly turning to e-commerce and forcing physical stores to close, in Mexico, the construction and operation of large stores and shopping malls has continued.

However, the pandemic had a significant impact on the purchasing habits of Mexicans, putting pressure on the retail sector to accelerate its foray into online sales. Although the disappearance of physical stores is not expected in Mexico, purchasing channels will diversify.

This is a great opportunity for an already overwhelmed e-commerce market, especially by large companies such as Palacio de Hierro and Liverpool, but also by smaller retailers and especially the food sector.

Tourism

As in the rest of the world, the pandemic has caused the tourism economy to stagnate, with a profound impact on the service sector, especially tourism. In Mexico, before the pandemic started, tourism contributed approximately 8.7% of the annual GDP and around 6% of total jobs.

It is estimated that the COVID crisis has caused the collapse of foreign exchange earnings by more than 50%, causing losses of over USD 10.5 billion. The extension of the restriction measures during 2021 will only deepen the crisis in a sector that is fundamental for economic recovery.

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