Friday, June 21, 2024

Electricity bill is 15th initiative to undermine investor confidence in MX

When President López Obrador swept to a landslide victory in July 2018, his government pledged to push public and private investment to 25% of GDP in a bid to jolt the country’s economy out of a longstanding rut.

Instead, investment has fallen as a series of investor-unfriendly moves deterred inflows. López Obrador’s step last month to push through a law that would drastically change electricity sector rules is just the latest example, investors have warned.

He has also scrapped a partially built airport and brewery, canceled electricity auctions, rewritten gas pipeline contracts, upset processed food manufacturers with new labeling requirements and pushed plans to ban subcontracting of jobs.

CEESP, a private sector think tank, said the recent decision to prioritize the state electricity company was the 15th initiative by López Obrador, his Morena party or the government to undermine investor confidence in the past 2 1/2 years.

Mexico is battling to haul itself out of its deepest recession since 1932 with only limited help from its government, which has held back from launching the kind of ambitious fiscal support measures undertaken by other major regional economies such as Brazil.

As a result growth is not expected to recover to pre-pandemic levels for another five years according to the IMF.

“They would have struggled to find a worse time to present this bill,” Carlos Salazar, head of Mexico’s biggest business lobby, the CCE, told the Financial Times. “There is no doubt that this will cause more problems. No investors will want to invest.”

López Obrador believes that playing hardball with a private sector he accuses of corruption and unfair competition gets results as part of his self-styled mission to “transform” Mexico by eradicating malpractice.

He frequently brushes off suggestions the economy is in trouble by claiming to have “other data.” He highlights record remittances — US $40.6 billion last year, some 3.8% of GDP — as a key aid to consumer spending.

López Obrador predicts the Mexican economy will grow by 5% this year — more bullish than all economists’ estimates — but even that would not make up for the 8.5% contraction in 2020.

And sustaining growth will be hard. “If anyone tells you that you can grow 5% without 25% [of GDP] total investment, they’re lying,” Carlos Urzúa, López Obrador’s first finance minister, told the FT in 2018.

With millions of jobs lost and businesses shut in Latin America’s second-biggest economy because of the pandemic, and 44% of workers unable to make ends meet on their salaries, economists say the president needs to boost investment to save millions more people from falling into poverty.

“Recovering lost ground is going to take a long time, the investment climate is very strained. The signals are not good,” said Jessica Roldán, chief economist at brokerage Finamex. “In the medium and long term, it’s impossible to grow without investment.”

Yet investment is falling further and further behind. Gross fixed investment — the sum of public and private spending on plants and machinery — was barely above 19% of GDP in the third quarter of last year. It has not fallen to such levels since 2009, during the global financial crisis.

Foreign direct investment has slumped by more than $10 billion during the pandemic and most of that is reinvestment of profits rather than greenfield projects, according to official data.

Private investment now only makes up 16.6% of GDP, down from nearly 20% in 2018, according to the Mexican Institute for Competitiveness (IMCO), a think tank.

And although López Obrador has touted a handful of major infrastructure projects, including a refinery, an airport and a train line, public investment has fallen to 2.5% of GDP — down from 2.9% when he took office, CEESP said.

“It seems like the current federal government is determined to limit investment, and as a result, economic growth,” CEESP said.

Alonso Cervera, managing director in emerging markets research at Credit Suisse, said: “Mexico doesn’t seem to have a clear model for economic growth. It looks like the model of development is to build a couple of landmark projects like the refinery, the train and the airport and hope people will be happy with cash transfers.”

López Obrador prides himself on social spending, including pensions to the elderly and educational grants.

But economists warn the lack of investment will translate into lower growth prospects in future. Mexico has failed to grow much above an average of 2% per annum for decades. Now, Cervera said potential growth was on course to reach just 1.5 to 2%.

“We’re facing a very clear fall in potential growth,” said Roldán.

The electricity bill, which has been fast-tracked and is widely expected to pass, has only deepened the gloomy outlook.

The U.S. Chamber of Commerce called it “the latest in a pattern of troubling decisions taken by the government of Mexico that have undermined the confidence of foreign investors in the country.”

And because of the pandemic, it said, now is “the precise moment enhanced foreign direct investment in Mexico is needed more than ever.”

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