Mexico Under AMLO: Economic Austerity, Energy Quest, and Opportunities for Chinese Investors

Abstract

• The administration led by AMLO in Mexico has been characterized by economic austerity and a low budget deficit, contributing to a stable environment for investment. However, recent increases in discretionary spending have raised concerns about potential risks and instability for foreign investment.

• AMLO’s energy scheme tends to rein the power of the market in sectors including energy and mining with more state control, although his preference for traditional fossil energy has undermined Mexico’s climate commitments with regard to renewables. AMLO’s efforts to seize more control over the energy sector has imposed instability for private companies, implying potential risks Chinese investors will face in Mexico.

• During AMLO’s tenure, Mexico established a constructive relationship with the US with more economic opportunities flowing into Mexico. In 2023, Mexico replaced China and became the US's largest trading partner. The trend of nearshore outsourcing provides unique economic prospects for Chinese investors seeking to enter the North American market.

• Claudia Sheinbaum, the presidential candidate nominated by AMLO's party, is the current frontrunner for the 2024 election. If elected, she is likely to follow AMLO's path.

Introduction

Andrés Manuel López Obrador (AMLO), the President of Mexico, assumed office as a left-wing populist in 2018. As his six-year term approaches its conclusion, we are able to provide a more comprehensive assessment on his political initiatives. This article will examine AMLO’s past socio-economic policies and offer an outlook on opportunities & risks faced by Chinese investors in the aftermath of the 2024 presidential election.

Economic Austerity

During the 2018 presidential campaign, one of AMLO’s central commitments was to prioritize greater economic equality and resource redistribution to benefit the disadvantaged. Economists anticipated a significant increase in government spending on social welfare related programs to fulfill his pledges, while AMLO pursued the opposite approach: rather than embarking progressive economic reforms, he left the macroeconomic framework in Mexico mostly intact, with even decreasing spending. An analysis of Mexican federal discretionary spending reveals a consistent pattern, with expenditures hovering around 3.7 trillion pesos (figure 1), and increasing slightly in 2021 and 2022. Even during the challenging times of Covid-19, Mexico remained one of the several countries with low spending on medical protections, less than 2.5% of GDP. AMLO’s economic prudence extends to himself and civil servants. Besides reducing his salary by 60%, he cut funds for institutions, especially independent agencies responsible for democratic regulation. These actions drew criticism from some who perceived them as undermining democratic processes.

Mexican government discretionary spending, 2010 - 2022;

Source: the Economist

CitiBank characterized AMLO’s macroeconomic policy as ‘tight macro’, which is a safe card to play: despite resulting in a slower GDP growth, his fiscal prudence maintained low inflation, tax rates, and price for the general population. AMLO’s ‘tight macro’ approach further led to a small budget deficit, helped Mexico overcome some of its macroeconomic vulnerabilities, and created a more stable and attractive environment for foreign investors. Foreign Direct Investment (FDI) significantly increased during AMLO’s tenure, reaching a peak of 29 billion USD in the first half of 2023.

Mexico real GDP and inflation rate;

Source: IMF

However, as AMLO’s term nears its end, there’s been an uptick in discretionary spending and the budget deficit. Redirecting funds from institutions he dislikes to programs he favors, such as oil refineries and southern infrastructure development, has raised concerns among foreign investors about potential instability. The Mexican government's recent budget plan unveiled in September 2023 indicates the largest fiscal deficit since 1988, intensifying worries about potential risks led by AMLO’s recent policy shifts.

FDI flowing into Mexico during the first half, 2006-2023;

Source: Bloomberg

Crusade for Energy Sovereignty

In pursuit of ending energy dependence on foreign exports and realizing energy sovereignty, AMLO has displayed a strong inclination towards steering Mexico away from renewable green energy and reviving the traditional fossil industry. He leans towards exerting complete state control over the energy sector, consequently reducing the involvement of private companies in this domain. Contrary to his usual prudence, AMLO was more than generous to the heavily indebted state oil company, PEMEX. The Ministry of Finance has made substantial capital contributions to help PEMEX pay its debt interests and has also reduced its tax burden. Alongside this financial and policy support, AMLO constructed the biggest Mexican oil refinery in Dos Bocas, Tabasco, costing $20 billion, which amounts to more than 1% of the country's GDP. This refinery is set to commence operations by the end of 2023. Potential competitors in gasoline, whether domestic private ones or international entities, aren’t able to get permits to build filling stations or import supply. AMLO’s objective of nationalizing energy resources has introduced uncertainty for foreign investors. In April 2021, the Mexican government initiated mining law reforms to the granting of new lithium concessions to private partiess, ensuring exclusive rights for lithium exploration and production to the state government. In August 2023, the government announced to cancel nine lithium concessions previously issued to the Chinese firm Ganfeng Lithium. Towards the end of 2021, Ganfeng Lithium aquired the largest lithium clay deposit in Mexico and gained legal permission to exploit nine mining concessions, valid until between 2060 and 2065. However, with the revised Mexican mining law, AMLO’s ministry claimed Ganfeng Lithium failed to meet the minimum investment obligations, and therefore forfeited its concession rights. In response to such allegations, Ganfeng Lithium has filed appeals for review with the Secretariat of Economy and claimed the governmental decision is a violation of constitutional rights and treaties between China and Mexico. With AMLO’s determination to seize control over energy, Ganfeng Lithium is not the first nor the last investment firm to face contract disputes with the government. AMLO jeopardizes the confidence of foreign capital in Mexican energy investment. This sector, which AMLO aims to monopolize, might be best left undisturbed. Nevertheless, amidst the uncertainties in the energy sector, investment opportunities in other industries such as automotive, pharmaceuticals, and food remain accessible to foreign investors. No imminent regulatory changes are expected in these sectors in the near future.

Foreign Relations: Nearing-shoring, De-risking

In an unexpected turn, despite ideological and political differences, AMLO managed to maintain a constructive and stable relationship with Donald Trump, which continued to flourish under President Joe Biden. Cooperation between Mexico and the United States has encompassed critical issues like immigration, security, and economic development, contributing to a more favorable climate for trade and investment. Against the backdrop of Trump's tariffs on Chinese products, the USMCA trade agreement involving the US, Canada, and Mexico, compounded by the impact of COVID-19 and concerns over the high costs and logistical disruptions of long-distance transportation, Mexico surpassed China as the largest trading partner of the US in 2023. This shift signals an accelerated shift from offshore outsourcing towards "nearshoring," a practice where countries bring supply chains for critical goods closer, both physically and politically, to reduce risks—often referred to as 'de-risking.' Numerous American companies have already relocated manufacturing operations from East Asia to Mexico. In March 2023, Tesla announced plans to establish another assembly plant in Monterrey, Mexico. According to a Wall Street Journal report, Mexico's share of US goods has steadily increased, reaching 14.5% in April 2023, while China's share fell to its lowest level since 2006, accounting for only 15.4% in the same month.

Regional share percentage of U.S goods imports;

Source: Wall Street Journal

This shift in the production site from China to Mexico reflects a reduced dependency of the US on China, and may dissuade Chinese investors from entering the Northern American market. However, viewed from a different perspective, this shift also presents new opportunities for Chinese businesses, particularly in the context of establishing manufacturing facilities in Mexico. The automotive industry, for example, has proven to be highly attractive within Mexico, with more and more Chinese automobile companies considering relocating their manufacturing operations to Mexico. In 2017, Beiqi Foton opened its first factory in southwestern Jalisco, followed by other Chinese automotive brands including Morris Garages, JAC and Changan Automobile. Morris Garages has surpassed Ford and Honda to become the seventh-largest selling automotive brand in the Mexican market. Notably, Tesla's presence has also encouraged its Chinese suppliers to enter Mexico. In 2022, several companies collaborating with Tesla, including Dongshan Precision, Lizhong Group, and Tuopu Group, announced their entry into Mexico. This strategic shift in manufacturing location not only offers cost advantages with cheaper labor and reduced supply chain risks, but also grants Chinese businesses easier access to the Mexican, US and Canadian markets, due to favorable trade agreements. Attributed to AMLO’s robust trading relationship with the US and other environmental factors, the near-shoring trend unfolds a unique opportunity for Chinese businesses. The strategic moves made by automotive industry players can serve as a model for other industries that have a significant stake in the Mexican market, such as computer equipment.

The distribution of FDI across sectors in Mexico: automotive manufacturing, auto parts production, base metal industry are top three emerging sectors

Source: Deloitte.

Upcoming Election

Looking ahead to the upcoming election, the ruling party, Morena, nominated the current mayor of Mexico City Claudia Sheinbaum as the presidential candidate in mid-September 2023. Meanwhile, the largest opposition party, PAN, nominated Senator Xóchitl Gálvez. Sheinbaum is currently leading with a 55% approval rate in a poll conducted two weeks ago. As AMLO's protege, she indicated her commitment to continue two main policies of AMLO's administration: upholding fiscal austerity and supporting the two national energy companies, PEMEX and the CFE. She also leverages her background as a former energy expert and vows to advocate renewable energy, although this stance might appear contradictory to her support for the traditional oil industry. In a manner reminiscent of AMLO, Sheinbaum holds a critical stance toward neoliberal economic strategies and belief in adequate government involvement. In an interview, she said that the current government, unlike previous ones, created a necessary “division” between Mexico’s “economic power” – big business, for example – and “political power,” and asserted that that separation must be maintained. If Sheinbaum is elected, the public may anticipate a continuation of policies that result in a low fiscal deficit and a relatively stable investment environment. Furthermore, an increased state presence in the energy sector is probable. Sheinbaum's focus on renewable energy, in addition to her support for the traditional oil industry, suggests opportunities for foreign investors possessing patented renewable energy technologies. Yet, it's too early to draw arbitrary conclusions at this stage, as some of Sheinbaum's commitments may be driven by temporary or pragmatic considerations to gain support from her party Morena and voters. Nevertheless, one aspect that appears certain regardless of the election outcome, is the enduring trend of near-shoring. As long as the Mexico-US relationship remains robust, the relocation of manufacturers will continue to bring forth numerous investment opportunities in Mexico.

Conclusion

In summary, AMLO's presidency has been characterized by economic austerity and a quest for energy sovereignty, presenting both opportunities and risks for foreign investors. The shift towards increased discretionary spending and nationalization of energy resources raises concerns, especially for Chinese investors. The trend of nearshoring, driven by a stable relationship with the U.S., offers unique economic opportunities. As the 2024 election approaches, a certain level of policy continuity is anticipated, but the investment landscape remains dynamic, with nearshoring continuing to be a prominent trend, irrespective of the election outcome.

References:

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