Andrés Manuel López Obrador, also known as AMLO, is Mexico’s new president who’s causing a stir in Mexican politics. The former Mexico City governor created his own political party and had a landslide victory. He defeated Enrique Peña Nieto, who held astoundingly low approval levels at the end of his term while AMLO has the highest ratings on record. AMLO vows to boost social spending, reduce inequality and corruption and improve infrastructure.
The Business Market in Mexico
As one of the biggest economies in Latin America, Mexico is a popular beneficiary of foreign direct investment (FDI). Tourism, high-end manufacturing, financial services, automotive, electronics, and the energy sector are primary recipients. The country is part of the OECD, G20 and was the first country to ratify the CPTPP, which is set to boost trade among the Pacific rim countries. Its strategic geographic positioning, low-cost labour force and numerous free trade agreements make the business market an attractive place to set up a company.
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Business in Mexico after the Elections
Markets have felt the impact of the new president and the changes made within his first 100 days. The economy has slowed down, inevitably due to the uncertainty investors and companies have about the new government and its plans for the future. Some critics claimed the country would follow the fate of Venezuela due to state-centric policies. Questions have been raised about how infrastructure projects and social spending increases will be funded if taxes will not be raised. This speculation fuels the market’s unease.
Controversy surrounded the cancellation of the new Mexico City Airport. AMLO scrapped one of the city’s biggest projects, a US$13 billion airport, backed by some of the country’s wealthiest. The decision supporting the results of a “people’s poll”, where less than 1% of the population participated. This had catastrophic effects for the peso, falling to a four-month low against the U.S. dollar and it has struggled to recover strength since. The new president has tried to restore the detrimental loss of market confidence since with an offer to buy back bonds issued to fund the airport.
In December, six major gasoline pipelines were shut down due to extensive theft. Massive supply shortages and disruptions followed. Questions were raised whether sufficient planning was undertaken to prepare for this. However, these events raised awareness among the population and AMLO gained popular support. Action is being taken against corruption, an area where past governments plans have failed to produce results. The president’s upfront and honest approach continues to receive support from the Mexican people.
A sense of unease has been prevalent in the private sector. AMLO cancelled auctions for contracts in the energy sector as well a planned revision of existing contracts. The threat of nationalisation looms in the oil and gas industry. The cancellation of the airport project caused the peso to fall. A fluctuating currency affects forecasted profits and may raise debt obligations. The business environment feels the effects of these events as well as possible policy changes and its implications for the wider economy in 2019.
What is Expected to Happen in 2019?
Investors are waiting to hear the exact policies needed to get the economic growth AMLO has based his budget on. Until that occurs, many remain apprehensive. Campaign promises of social programmes may be scaled back to fit financial constraints. The ratification of USMCA, commonly termed NAFTA 2.0, faces an uncertain path through US Congress. If it is not ratified, the Mexican administration says it is happy to stick with the current NAFTA. Nonetheless, the country will remain an export-orientated economy and remains appealing for investment across its leading sectors.
El Tren Maya (The Mayan Train), is a 1500km railway designed to link rural towns and cities through five states, from Chiapas to the Yucatan Peninsula. Designed as a vehicle for tourism and economic growth, the huge infrastructure project has already garnered attention from foreign firms. Construction is planned for 2019 but the process has halted with criticism from environmentalists and local groups. Infrastructure will be an area of focus in 2019 for the new government and a potential opportunity for foreign investment.
A country where economics and politics are closely intertwined garners more interest from businesses. However now the first 100 days of the new president has passed, the Mexican business community is feeling more optimistic. Following the presidential report given to the Mexican Business Council, Carlos Slim, Mexico’s most powerful businessman, expressed confidence in the government. His advice to AMLO? Increase public and private investment. Furthermore, his support for government plans to tackle corruption and oil theft indicates that the president’s actions may have redeemed themselves. Such support and optimism from such a high level in Mexico’s business world is a good start to 2019.
What Are the Implications for Foreign Investment in Mexico?
Uncertainty is a keyword floating around the business world right now, as the new government settles in and begins making changes. Lowered growth predictions, as well as a downgraded sovereign credit rating, may cause firms to remain cautious while considering strategies for investment and expansion. Due diligence will be imperative while making major decisions. The closure of ProMexico, a government organisation focused on facilitating trade, will make the market more complex to navigate for foreign businesses.
ProMexico’s closure means more companies need to reach out to local firms to get support setting up business in Mexico. Firms that have expertise in legal legalisation, local tax requirements and visa processing will help foreign companies manage a challenging market. Entering an environment experiencing political change can be challenging to navigate. A local firm may provide the best chance to enter a market with the practice, procedures and planning and help to mitigate risk.
The energy and mining industries suffered a turbulent start to 2019 involving security, political and environmental risks which have lowered market confidence. Security will be a major issue for AMLO’s administration as it continues to threaten foreign business activity, particularly in the mining sector. Last year, a Canadian mining company reduced its operations due to security concerns. Effects are far ranging from local workers and communities to management and head offices. The formation of the National Guard will address the security issue and look to combat and prevent crime. Its effectiveness will be determined in time to come.
As new reforms will be made and existing ones changed, it will be important that foreign firms stay up to date with legislation and requirements. Increased wages and higher consumer confidence creates opportunities for business within the internal market. This may garner the attention of FDI flows, as well as those interested in exporting from Mexico.
Are You Interested in Doing Business in Mexico?
Mexico remains a competitive and lucrative business market, rife with opportunities. Biz Latin Hub is a trusted market-entry and back-office provider with a commercial presence across all key Latin America. Get in touch with us today.
Keen to expand your commercial operations to Mexico? Check out the video below to learn the key steps involved in the company formation process.