The new AMLO administration looks to implement change in Mexico

Winning the 2018 presidential elections on a populist, anti-corruption ticket, the administration of President Andrés Manuel López Obrador, commonly known as AMLO, has proved controversial in the first months of its six-year term. As homicide rates continue their upward trajectory, national polls show dissatisfaction, with some segments of the electorate impatient to see promised changes materialise. Meanwhile, a migrant crisis at Mexico’s northern and southern borders looks to put pressure on an already sluggish economic forecast. Still, it is early into the current administration’s term, and a reversal of course regarding demographic and economic challenges is certainly still on the cards.

Referenda

One point of contention for the new administration has been the use of referenda to decide public policy. In February 2019, for example, a referendum resulted in majority support for a controversial thermoelectric power project in Huexca, in central Morelos state. The decision came despite widespread objection to the project from the local inhabitants, who claim the plant will divert water supply away from their agricultural lands.

Another referendum held in October 2018 resulted in a majority vote to cancel the $14bn airport project for Mexico City. Work on the facility had already begun under the administration of then-President Enrique Peña Nieto and was over 30% complete, but voters chose instead to convert an existing military airbase in Santa Lucía into a new international air terminal – a plan championed by AMLO. However, the legality of the referendum and President López Obrador’s decision to cancel the partly built airport in December 2018 were called into question, and in August of 2019 a federal judge ordered work on the Santa Lucía airport to be halted pending further studies. The injunction is expected to last for up to a year, meaning a new airport for Mexico City is still a long way off, and may not be completed until well after the current administration has left office. Furthermore, the cancellation of the airport caused uncertainty among lenders, but threats of litigation were quelled by the government’s offer to buy back debt taken on by investors.

Investment 

This is not the only time decisions made by the AMLO government have made investors question support for large-scale infrastructure projects in Mexico. In January 2019 a planned electric power auction was cancelled. The event would have marked the country’s fourth bidding event since 2014 energy reforms opened up the sector to foreign investment. The cancellation was widely interpreted as a rejection of further private investment in the sector. This is despite the three previous auctions bringing in $8.6bn of crucial funding, which contributed to achieving the previous government’s goal of having 25% renewable energy generation by 2025. This decision also led to the resignation in July 2019 of AMLO’s minister of economy, Carlos Urzúa, who expressed his disagreement with the president’s economic policies. A handful of business organisations, including the Confederation of Employers of the Mexican Republic, also expressed concern over the sudden changes in state policy.

Historical Context 

As part of the National Renovation Movement party, AMLO’s victory is only the third time in almost a century that Mexico has been ruled by a party other than the Institutional Revolutionary Party (Partido de la Revolución Institucional, PRI). The PRI was founded in 1929 by Plutarco Elías Calles, who served as president from 1924 to 1928. Calles is credited with acting as a stabilising force following the decade-long revolution that began in 1910, with an uprising led by Pancho Villa and Emiliano Zapata against the 35-year rule of Porfirio Díaz. However, by 1915 wealthy landowner Venustiano Carranza had gained the support of the peasants, and he drew up the 1917 constitution that is still in force today. Zapata was assassinated by Carranza loyalists in 1919 and Villa surrendered the following year. The PRI remained in power until 2000, when Vicente Fox, running under the “Alliance for Change” coalition between the National Action Party (Partido de Acción Nacional, PAN) and the Green Party, won by securing 42.5% of the vote.

Fox was succeeded by fellow PAN candidate Felipe Calderón in 2006, who defeated López Obrador in a tight race, with the latter contesting the result and demanding a vote recount, resulting in months of protests. Calderón launched a military offensive against organised crime in an attempt to impose the rule of law. However, while the police and military were successful in apprehending a number of cartel leaders, the offensive is seen as having caused criminal groups to splinter and create new factions. This then resulted in a surge in violence, and thousands of deaths and disappearances were recorded by the end of former president’s term.

Modern Violence 

Since then, Mexico has frequently made headlines around the world for violence, and the first half of 2019 saw a record number of homicides, with 14,603 reported between January and June. Furthermore, Mexico has become one of the world’s most dangerous countries for journalists, with 10 journalists murdered in the first six months of the AMLO government. During the administration of former President Peña Nieto, 47 journalists were killed, according to Artículo 19, an NGO that defends freedom of expression in Mexico and Central America. Insecurity is therefore a major concern in Mexico, and the US State Department has issued travel advisories warning its citizens against travelling to the states of Colima, Guerrero, Michoacán, Sinaloa, Tamaulipas and parts of Chihuahua.

Reformation

In 2012 López Obrador stood as the Democratic Revolutionary Party presidential candidate again but lost to Peña Nieto, which marked the PRI’s return to power. Then-President Peña Nieto ushered in a series of important reforms in the telecommunications, tax, energy and education sectors. Telecoms reform allowed for greater foreign participation in telecoms and television broadcasting, although the legislation is perceived as having fallen short in coaxing investment into the former segment. The current government is seeking investors to provide the much-anticipated national internet coverage service for public spaces, including parks and schools. Meanwhile, the tax reform has been lauded as having brought more workers into the formal employment sector, which, in turn, has resulted in more people opening bank accounts and having access to credit.

Energy

Energy sector reform has allowed for greater investment in the oil, gas and electric power sectors, with a series of auctions putting oil and gas blocks out to tender, some of which were in partnership with state-owned oil company Petroléos Mexicanos (Pemex) and were aimed at ramping up production. Energy reforms included the liberalisation of the downstream sector, ending Pemex’s monopoly on fuel imports and sales, and allowing for the entry of private players to the retail fuel market. However, as part of the market liberalisation, the removal of fuel subsidies spurred a spike in petrol prices, which has proved hugely unpopular with the transport sector, and has had the knock-on effect of raising the prices of foods and other goods.

Since taking office, President López Obrador’s minister of energy, Rocío Nahle, has unveiled plans to build two new oil refineries aimed at reducing the country’s dependency on fuel imports from the US and bringing down prices for consumers. Nahle has pledged that a new refinery could be completed and operational within three years, though observers say that estimate is overly optimistic.

The reform has also brought more private investment into the midstream sector, as Mexico expands its natural gas pipeline network to take advantage of the natural gas glut in the US to feed power stations and petrochemical plants. In the electric power sector, three long-term power auctions were held during then-President Peña Nieto’s term, awarding contracts for the construction of power stations and transmission lines. These were aimed at increasing the country’s renewable generation capacity and were widely viewed as successful in achieving a world-record low price for solar power.

Education

Then-President Peña Nieto’s education reform, which ushered in successful modifications to teacher recruitment practices and assessment programmes, has remained largely unpopular with the country’s powerful teachers’ unions. In April 2019 the current government introduced a new reform for the sector, which created the National Centre for the Revaluation of Teaching and the Continuous Improvement of Education to oversee standards among teachers and schools. The reform also mandates the teaching of a cultural curriculum, which includes courses in civics, values, art, music, sports and respect for the environment; and guarantees free universal education at all levels, including higher education. To this end, the government has pledged to build 100 new public universities.

Anti-corruption Drive 

As one of the main focuses of his campaign, President López Obrador has pledged to tackle corruption, as well as implement austerity measures within the government to reduce costs and curb excessive expenditures. One of his first actions was to discontinue use of the presidential jet, a Boeing 787 Dreamliner, which was acquired by his predecessor in 2016 for $350m. The aircraft was put up for sale, for which the government hopes to receive an estimated $150m. President López Obrador has instead pledged to use commercial flights and public transport, dedicating the proceeds from the sale of the jet to financing his plan to stem the flow of and to provide assistance to Central American migrants. As of September 2019 the aircraft had yet to find a buyer and was parked in a hangar in California, for which the Mexican government is reportedly paying $60,000 per month.

Additionally, AMLO has refused to live in Los Pinos, the traditional residence of the president and first family since 1934, instead residing in an apartment in the downtown Palacio Nacional, located in Zócalo, the central square of Mexico City. Los Pinos now functions as a museum and is open to the public.

In August 2019 the new government’s anti-corruption drive secured the preventive detention of former Cabinet member Rosario Robles, who served as head of the Ministry of Social Development (Secretaría del Desarrollo Social, SEDESOL) and the minister for agrarian, territorial and urban development during the government of then-President Peña Nieto. Robles will serve a two-month sentence while investigations continue looking into her failure to report the disappearance of MXN5.1bn ($263.7m). Observers believe that this trial will lead to investigations into other former Cabinet members, such as José Antonio Meade, who was Robles’ successor at SEDESOL and the PRI’s presidential candidate in the 2018 elections, as well as former President Peña Nieto himself. The investigation into Robles’ suspected embezzlement of the funds is part of the so-called estafa maestra (master scam), a larger deviation of government money totalling approximately $400m that supposedly took place during the previous administration.

In a separate case of alleged corruption, Emilio Lozoya Austin, the former director-general of Pemex, is under investigation regarding his role in the diversion of funds from the state oil company as well as the receipt of bribes from Brazilian conglomerate Odebrecht. In 2016 Odebrecht admitted in a US federal court to having paid bribes to dozens of companies across Latin America to secure lucrative large-scale infrastructure contracts.

Fuel Theft 

One of AMLO’s first battles at the start of his administration was his bid to put an end to the thriving black market for petrol. Fuel theft is rampant in Mexico, and the illegal tapping of pipelines and hijacking of tanker trucks reportedly cost Pemex around $1.7bn in 2018. In many cases the fuel is sold back to gas stations, which buy the cheaper fuel to boost profits, prompting accusations of collusion by Pemex employees.

The 600-km Minatitlan-Mexico pipeline, which crosses five states, from the refinery at Minatitlán in southern Veracruz state to Mexico City, reportedly lost 81,000 barrels per day in 2018, according to Pemex. In response, AMLO ordered the shutdown of pipelines in January 2019 to staunch supply to black market fuel cartels, a measure that caused petrol shortages in some states. To transport fuel, a fleet of 571 tanker trucks were employed at a cost of $85m. The following April, the government announced that the volume of daily fuel theft had been reduced to 5000 barrels per day. Although Pemex maintains that while the volume of fuel stolen has been reduced, the number of attacks has stayed the same, with the first seven months of 2019 registering 8655 incidents, compared 8706 in the same period the previous year.

Labour Reform 

Another victory for the AMLO administration came in April 2019 with the approval of labour reform in the Congress and Senate. The package brings Mexico’s labour laws more in line with those of the US, granting workers the freedom to unionise, while prohibiting firms from intervening in union activities. The reform also provided guidelines for electing union leaders, while creating independent labour courts and the Federal Centre for Conciliation and Labour Registration, an autonomous federal labour agency. The approval of reforms by Mexico’s bicameral legislature was seen as a prerequisite for the US Senate’s ratification of the US-Mexico-Canada (USMCA) free trade agreement, which replaces the 1994 North American Free Trade Agreement (NAFTA). Speaker of the US House of Representatives Nancy Pelosi had said previously that the USMCA would not be ratified by the US Congress until Mexico implemented the reform.

The new legislation is expected to put an end to overbearing practices by unions, including obligatory union membership, which has in the past made them a powerful force but not always in pursuance of workers’ best interests. The reform will also prevent foreign companies from dictating labour laws, giving trade unions more say in contract negotiation. Employees also gained the right to engage in collective bargaining in the drawing up of work contracts, as well as protections against workplace discrimination. President López Obrador described the reform as “a huge advance for Mexico’s workers”.

USMCA

Following the approval of labour reforms, the USMCA was ratified by Mexico’s Senate on June 19, 2019, just hours ahead of its passage through the US Senate. The new free trade agreement was the result of months of negotiations between the US, Mexico and Canada, instigated by US President Donald Trump, who had expressed his dissatisfaction with NAFTA upon entering the White House. The new agreement, more commonly referred to as NAFTA 2.0, was described by the Office of the US Trade Representative in November 2018 as “a mutually beneficial win for North American workers, farmers, ranchers and businesses”.

Among the USMCA’s main pillars are its country-of-origin rules, under which cars are required to have 75% of their components manufactured in Mexico, the US or Canada to qualify for zero tariffs, up from the 62.5% requirement under NAFTA. In addition, at least 40% of those parts must be made by workers earning a minimum of $16 per hour by 2023. In an industry where lower wages have attracted many foreign carmakers to the country, this is seen as beneficial for Mexican workers. The USMCA also extends copyright to 70 years beyond the life of an author, up from 50 years under NAFTA, and prohibits duties on music and e-books. Regarding health care, the period a pharmaceutical drug is protected from generic competition has been extended from eight to 10 years; however, this has been widely criticised by opponents of US President Trump, claiming that this would further increase the cost of medicine. Another controversial theme included in the final agreement is the so-called “sunset clause”, which gives USMCA a 16-year lifespan, after which the terms of the agreement expire, opening terms back up to renegotiation. In addition, the trade agreement will be subject to a review by all three countries every six years, at which time they can agree to extend it. Nevertheless, the USMCA was signed in November 2018 in Buenos Aires during the G20 Summit, and is expected to be amended and ratified by US Congress and Canadian Parliament.

Economy 

Multiple economic forecasts point to slower than anticipated growth in Mexico in 2019. The IMF predicted the economy would expand by 0.9%, while in July 2019 the National Bank of Mexico predicted growth of just 0.2% for the full year. In line with sober outlooks, GDP shrank by 0.2% in the first quarter of 2019, and with an expected recovery in the second quarter having failed to materialise, forecasts are not positive. According to Reuters, the second quarter experienced 0% growth due to declining investment, among other reasons.

The country is unlikely to recoup the loss in investment anytime soon, as financiers are cautious following the cancellation of the Mexico City airport project and the slow pace with which the alternative airport is being completed. President López Obrador’s decision to shut down ProMéxico, the country’s investment promotion agency, could also reduce the flow of investment into various sectors, at least in the short term. The decision to close the agency was made as part of austerity and anti-corruption measures within government. The AMLO administration maintains that ProMéxico employees were travelling abroad and wasting money, with a total of 60 offices worldwide. The country’s potential as an investment destination will now be promoted by its embassies and consulates.

Looking Ahead

The president has tabled the idea of holding a referendum on whether or not to open investigations into alleged corruption by former presidents during previous administrations, saying that he would personally vote against such a move. However, it seems likely that the case against Rosario Robles could extend to some of her former colleagues, including former President Peña Nieto. In the meantime, the government’s priorities are focused on reducing the violence that continues unabated in a number of states, as well as stemming the flow of Central American migrants and asylum seekers on their way to the US. The bright spot on the horizon remains the country’s tourism sector, which attracts millions of global travellers per year.