With a transfer of government just over the horizon, Mexico's domestic political scene is in for some monumental changes. On Dec. 1, power will pass to President-elect Andres Manuel Lopez Obrador — known almost universally by his nickname "AMLO" – and his political alliance. The coalition, led by AMLO's National Regeneration Movement (Morena), has never previously held the presidency but now controls it, as well as both houses of Congress. Despite the presence of ideologues within the incoming coalition, it will first focus its considerable resources on the more mundane task of cementing its power as the foremost political force in Mexico. But such outsized domestic power will ultimately give the new government a chance to turn its attention to matters of ideological interest — and that could create difficulties for some investors, especially in the energy sector. In its quest to remake Mexico, the AMLO government may accordingly consider action that hurts the private sector as it amends parts of a relatively unpopular energy reform to suit its own priorities.
Mexico's new government under Andres Manuel Lopez Obrador will wield more political power than any other administration in the past 20 years when he assumes office in December. After winning by a landslide in July, the incoming administration's primary short-term goal will be to consolidate its political power. But the new government also includes ideologically motivated Cabinet nominees intent on correcting previous administrations' policies that, in their view, harmed the Mexican electorate. In its drive to cement power, the combination of a politically powerful president and an anti-establishment ideology may hurt some investors, especially those planning on entering the upstream energy sector.
Pursuing Three Policy Goals
For the coalition, the immediate domestic political concern is the next election. Despite winning the presidency by a landslide on July 1 and gaining clear control of Congress, the president-elect and his allies are aware that their victory stemmed in part from a deep — but possibly temporary — anti-establishment sentiment. Accordingly, Morena might not repeat its landslide unless it first consolidates power before lower-house midterm elections in 2021.
The AMLO government's drive to safeguard its political gains while it wields overwhelming political power will produce three distinct policies in 2019. First, the administration will attempt to solidify its alliances with, or exert direct control over, key political networks, such as the public sector oil and gas unions and the country's educational unions. Second, the government will strive to implement an anti-corruption policy in line with AMLO's central campaign promises. Finally, it will explore avenues to establish more permanent social spending mechanisms for Mexico's poor.
Greater influence over Mexico's key unions will assist AMLO in mobilizing voters at election time. To this end, his government plans to amend the previous administration's 2013 education reform, which proved highly unpopular among teachers' unions, such as the National Coordinator of Education Workers, because it legally imposed evaluation requirements on teachers. The AMLO administration will begin consultations to determine possible changes to the education reform and could eventually submit the evaluation requirement — or the reform itself — to a national vote. Successfully reversing the reform (or at least severely weakening it) would likely net Morena hundreds of thousands of votes in future legislative, gubernatorial and presidential races.
The incoming government also seems poised to expand its influence over Mexico's main oil and gas union, the National Union of Mexican Oil Workers (STPRM). This move is two-pronged: It would likely build political networks that could transform the union into a powerful network that brings voters out in favor of AMLO and mitigates the risk of strikes while also sidelining the Institutional Revolutionary Party (PRI) from exerting any direct control over the union. The STPRM is currently led by a PRI senator, Carlos Romero Deschamps, who has been accused of corruption and illicit enrichment during his two decades at the head of the union. Accordingly, the new government may choose to investigate such allegations more seriously if it intends to remove Deschamps and eliminate direct PRI influence over the STPRM.
Although the fight against corruption was front and center in AMLO's drive for the presidency, the new government's action on graft might not ultimately match the campaign rhetoric. The centerpiece of AMLO's reforms in 2019 will likely focus on amending legislation to increase criminal penalties for activities related to corruption, such as illicit enrichment, theft of hydrocarbons from the federal government and tax evasion. Even if the Mexican government has the will to stamp out corruption, its drive to do so could suffer because of the administration's simultaneous quest to increase public spending and cut down on waste and generous wages in the federal government, since the creation of new monitoring bodies or increased resources for existing institutions will require far greater funding. AMLO may build new anti-corruption institutions in the end — but only after most of his six-year term has finished because of the slow pace at which the administration might obtain greater funding and approve, train and pay people for such institutions.
Finally, the new administration will begin exploring ways to increase social spending, which will be a key pillar of Morena's future popularity among voters. What concerns the private sector is the extent to which AMLO intends to raise social spending. The new government has the tools at hand to impose mandatory social spending increases by earning revenue through greater federal austerity, taking on more federal debt and possibly raising private sector taxes. The question now is whether the government will push for broad spending targets or requirements that could quickly foment political controversy or whether it will only pursue a modest raise in spending to avoid a political conflict with Mexico's private sector. At present, the administration has signaled that it will raise spending by only a relatively modest amount during its first year in office in addition to doubling pension payouts to retirees — albeit while also enacting laws to increase the retirement age.
The incoming government's moves against upstream investment are more motivated by ideology — namely the notion that the Mexican government must take a more active role in managing upstream oil and gas resources.
Reversing Energy Reforms
But apart from these more electorally minded moves, AMLO could issue decrees in concert with congressional legislative action to roll back parts of the relatively unpopular 2013 energy reform whenever possible. The new government will contemplate serious changes that will dramatically alter the attractiveness of Mexican upstream oil and gas resources to foreign investors. The public is not exerting overwhelming public pressure on the incoming administration to dismantle energy reform, but polling suggests that around 40 percent of voters have an unfavorable view of the reform. Instead, the incoming government's moves against upstream investment are more motivated by ideology — namely the notion that the Mexican government must take a more active role in managing upstream oil and gas resources. To this end, the government will consider implementing far-reaching changes to make state energy company Petroleos Mexicanos (Pemex) the dominant player in the upstream sector, as well as limit avenues for private investment from abroad.
If the next government chooses to go down this route, it will likely suspend bidding rounds, allow Pemex to directly award blocks to investors, allow the company to partner with foreign investors without a bidding process and force producers operating under production-sharing agreements to sell their production to Pemex, which would then sell that production abroad. Such changes would severely reduce the influence of Mexico's National Hydrocarbons Commission (CNH), an entity formed with the specific purpose of increasing transparency and impartial oversight in the allocation of upstream resources to investors. If the CNH loses its influence, foreign companies could harbor doubts about the fairness of the allocation process, worry about an increase in corruption and develop fears that Pemex will refuse to relinquish lucrative upstream areas. As for the downstream sector, AMLO has not yet signaled his policy intentions, apart from announcing measures to limit the impact of rising fuel prices on potential voters.
For AMLO, the next six years will be his sole opportunity to enact broad changes to right what he perceives to be Mexico's historical wrongs. The coming three years will be the only period in which the next president and his alliance can implement wide-scale legislative changes without concerns about losing control in either house of Congress. Given this time frame, the incoming leader and his Cabinet are likely to roll up their sleeves to push through legislation they deem urgent between December and 2021. As AMLO embarks on the first half of his term, his administration will focus on ensuring the president and his alliance retain their popularity while also satisfying certain ideological concerns within the ranks. Not all such reforms will affect investors doing business in Mexico, but some, like energy reform and public spending, certainly might.