While the election of Lopez-Obrador's anointed candidate, Claudia Sheinbaum, in the elections June 2 was no surprise in itself, her margin of more than 30 points over the principal opposition candidate Xochitl Galvez (and over 58% of the total vote) was a surprise to many observers. Similarly, few were shocked when Morena achieved a supermajority in the Chamber of Deputies (372 out of 500). However, most pollsters and observers did not predict that Morena would come within a few votes of a supermajority in the Mexican senate (83 out of 128), so that AMLO would only have to persuade three opposition deputies to cross over to achieve the necessary 86 votes in the senate.[1]
Proposed Legislative and Constitutional Changes
Why is this important? Because AMLO and his supporters have promised that at the beginning of September, when the new congress is installed, but before Sheinbaum takes office on October 1, AMLO will seek to take full advantage of Morena’s congressional super-majorities. AMLO reiterated his intent in mid-June to enact legislation which will permit the firing of the current (more or less independent) Supreme Court as well as other federal courts with elected judges—approximately 1600 judges in total—to be replaced by judges effectively chosen by AMLO and Morena. [2] He and Morena would also enact other major changes that would threaten the rule of law and further weaken Mexico's negative investment climate, plagued by turbulence in the government and administrative agencies.
This conclusion assumes that the loose Morena coalition will hold together after October 1, when AMLO is no longer president. If even a few of the legislators who are currently part of the Morena coalition—perhaps if any do not want Mexico to return to pre-2000 single party government in the Hungary/India/Iran mold—any major legislative changes that are not made prior to October 1 could be deferred or abandoned. Whether that possibility is a realistic one or pie in the sky remains to be seen.
In February 2024, President Lopez Obrador submitted to the Chamber of Deputies a package of 18 constitutional amendments and two legal reform initiatives that aim, among other aspects, to modify the functioning of the Legislative and Executive and judicial branches and the electoral system. If all the legal and constitutional reforms were to be enacted, they would, inter alia, eliminate various autonomous constitutional bodies and regulatory organisms, as well as simplify the structure of the federal public administration sector. Significantly, the changes would further strengthen the Federal Electricity Commission ("CFE") near monopoly and further modify the power sector, in part by establishing constitutional prohibitions on various matters such as fracking, open-pit mining, and the use of vaping systems and fentanyl.[3] Many of these proposals were originally made earlier in AMLO’s term but failed either because of adverse Mexican court decisions or because Morena lacked a supermajority in the upper house. At that time, the opposition parties united to defeat the measures.[4]
Mexico’s Adverse Investment Climate
In a country where foreign direct investment has been discouraged inter alia by nearly six years of AMLO's efforts to roll-back the 2013 energy sector reforms to re-establish the virtually complete Pemex and CFE state monopolies by curtailing private investment in the power sectors, the result has been investor uncertainty and looming electric power shortages.[5] Such uncertainty would be further exacerbated, and most aspects of the rule of law eroded, if the judicial reforms noted above are implemented. Added to serious water shortages in some parts of the country, uncertain access to natural gas, continued rampant corruption, strengthened drug cartels, reduced personal security, generally low productivity, and expanded government military control in customs, transportation and other sectors, FDI is likely to remain stagnant or decline from its current levels. FDI has been essentially unchanged since 2018 at around $33 billion annually, despite enormous nearshoring investment opportunities resulting from US attempts to de-link production and supply chains from China. For the first half of 2023, one bank estimates that of the $29 billion dollars of direct investment that had occurred, 78% corresponded to the reinvestment of profits, 15% to transactions between companies, and only 7% to new investments.[6]
Addressing the Electric Power Crisis
Although it is reasonable to hope that Ms. Sheinbaum becomes her own person after she becomes president on October 1, such independence is likely be very difficult for her to achieve, particularly in the short to medium-term. She has the advantage of being a PhD in environmental science, and a reputation that suggests a level of interest in green energy which has escaped AMLO and most Morena members of congress, who remain totally enamored with Pemex and oil.[7] Yet she lacks AMLO's charisma and his overwhelming influence over Morena party officials, not only in the congress but also in state and local offices. For example, Morena now will control 23 of 32 governorships, and those governors effectively owe their positions to AMLO.[8]
Mexico faces an energy crisis in large part because of AMLO's dislike of FDI in the green power sector, which has resulted in the effective expropriation of a series of US, Spanish and Italian-owned windmill and solar panel projects in order to strengthen the CFE's near-monopoly. The government under AMLO also pressured one of Mexico’s largest foreign investors in clean energy, Iberdola, to give up on the Mexican market and sell its assets to CFE.[9] The lack of CFE's funds or technology to expand Mexico's electricity production, or power transmission capabilities, has resulted in a series of short-term brownouts in some parts of the country, and continued dependence on fossil fuels including natural gas (around 55%), coal (about 6%) and dirty Pemex fuel oil (about 14%). Less than 10% is solar and wind generated. [10] Mexican authorities, such as the energy regulator CRE, have also largely ceased authorizing independent power projects (IPPs), whereby a large factory could arrange for its own energy supplier, independent of CFE.[11] While "distributive generative" projects are allowed without CRE authorization, the paltry 0.5 megawatt limitation (contrasted with the US cap of 5.1 MW) means their use is limited, “presenting a significant hurdle for companies whose energy consumption often exceeds this limit,” with some experts calling for an increase in the 0.5 MW cap.[12] The Mexican Supreme Court ruled in January 2024 that an electricity law favoring state-owned utilities over private firms violates constitutional guarantees of free competition in the power sector,[13] but with Morena’s supermajorities in the congress and likely soon in the Supreme Court, whether this decision will survive remains unclear.
In my view any new investor in Mexico that believes they will have a 24/7 dependable, reasonably priced supply of even partially clean electric power for the medium or long term, or access to a functioning judiciary, is naive. Any multinational enterprise that has made commitments toward achieving carbon neutrality in 2040 or 2050 should understand that establishing facilities in Mexico will challenge their global commitments, perhaps for several decades.
Dependance on US Natural Gas
To some extent it has been feasible for manufacturing enterprises in the Mexican border states to purchase electricity in small quantities from the United Stares, principally Texas but also Sonora. [14] Enterprises in the border states and CFE are heavily dependent on natural gas imported from the US, primarily from Texas, in part because Pemex’s production of natural gas has declined by 30% between 2009 and 2023.[15] In 2022, Mexico imported about 5.7 billion cubic feet of US natural gas per day per day, about 69% of Mexico's natural gas consumption by some estimates.[16] Fortunately, the US for the foreseeable future is likely to have excess natural gas to sell to buyers in Mexico. However, much of Mexico beyond the northern border states does not have natural gas pipelines available to transport imported gas.
Other Disincentive to FDI
In addition to energy, other AMLO reforms are expected to further increase the arbitrariness and unpredictability of investing in Mexico. AMLO's administrative initiative, if approved, would allow the executive branch to act arbitrarily, revoke and modify administrative licenses or certifications at any time, including after they are issued, only subject to the interpretation the government will make of vague concepts, such as "public interest", "national security" or "to protect individuals’ fundamental rights".[17] Such vagueness is also in my view tailor-made for increased corruption. Moreover, court review could become useless under the new system of elected judges..
At a time when the likelihood of arbitrary government action is increasing, the protection for foreign investors is less comprehensive under the USMCA than it was under NAFTA, meaning that in many cases a US or Canadian investor's only recourse is to the Mexican courts or administrative tribunals--which are less likely to be independent of the government than before the planned reforms leading to the election of judges (undoubtedly chosen by AMLO or Sheinbaum or other Morena politicians). Canadian investors no longer have any recourse to independent third-party investor-state dispute settlement (ISDS). US investors in government contracts relating to petroleum, electric power, transportation, telecommunications and certain infrastructure projects enjoy NAFTA-like protections. All others must exhaust local court or administrative remedies before becoming eligible for ISDS. The scope of challenging regulatory actions is significantly decreased, as an international arbitral tribunal appointed under USMCA authority has no jurisdiction to review arbitrary actions ("fair and equitable treatment") or indirect or creeping expropriation.[18]
Probable Return to Single-Party Government
No one really knows in mid-2024 whether AMLO and Morena, with at least tacit concurrence by Sheinbaum, will be able in September to make the major changes in Mexico's laws and constitution that if enacted would make Mexico's investment climate even weaker than it is today. But there is also a strong possibility that whatever is not accomplished in September will take place under Sheinbaum soon thereafter, if she feels obligated to do so and the Morena coalition holds. AMLO, Sheinbaum and Morena appear to have sufficient power to return Mexico to single-party government, as was the situation in Mexico for more than 70 years prior to 2000, where the Institutional Revolutionary Party (PRI) exercised during most of that period near complete control over the presidency, the congress, the judiciary and the administrative agencies, once termed the “perfect dictatorship.”[19] One might have hoped that fewer Mexican voters wished to risk return to autocratic government, but that was not evidenced on June 2.
A key post-election question is the extent to which if any President Sheinbaum will be able to act independently of AMLO in the future on such vital issues as increasing Mexico's supply of electric power, clean or otherwise. Many potential investors may take a wait and see attitude, at least until the end of 2024 to judge whether the Sheinbaum presidency is likely to become more, less (with the attempted AMLO September "reforms"), or similarly neglectful of Mexico's investment climate. Sheinbaum's background as a climate scientist may give hope to some. For others, the knowledge that AMLO will effectively control the Congress long after October 1, retain his charismatic hold on public opinion, and may find it difficult to refrain from looking over Sheinbaum's shoulder well into her "sestenio” may well cause a high level of skepticism that will be translated into less new investment in 2024 and the future.
Conclusion
As noted earlier, no one will really know until after October 1 whether the rollback of many elements of Mexico’s current mostly democratic system by the legal and constitutional changes backed by AMLO and the congress will become effective. It is clear, however, that virtually none of them will repair Mexico’s poor investment climate. Even initial action on energy, such as increasing the current limit on distributive generative projects from 0.5 megawatts to 5, 10 or even 25 megawatts, would be helpful, but in itself such improvements would not convince many potential investors to make long term investment commitments given the high risk of arbitrary government interference.
[1] Michael Oboyle and Maya Averbuch, “ Mexico Ruling Party Coalition Just Shy of Supermajority,” June 9, 2024, Bloomberg, https://www.bloomberg.com/news/articles/2024-06-09/morena-party-just-shy-of-supermajority-in-senate-delgado-says.
[2] See Christine Murray, “Mexico’s outgoing president pushes ahead with plan to fire 1,600 judges,” June 13, 2024, Financial Times, https://www.ft.com/content/3319d056-7522-4e36-8210-f908346c9f41?shareType=nongift (confirming plans to make such changes in September).
[3] See Francisco de Rosenzweig et al, “Constitutional and Legal Reform Initiatives proposed by President Andrés Manuel López Obrador,” February 12, 2024, White and Case, https://www.whitecase.com/insight-alert/constitutional-and-legal-reform-initiatives-proposed-president-andres-manuel-lopez (providing a detailed and comprehensive summary of AMLO’s proposed reforms).
[4] See, e.g., Juan Montes, “Mexico’s Congress Defeats President’s Bill to Overhaul Election Agency,” December 6, 2022, Wall Street Journal, https://www.wsj.com/articles/mexicos-congress-defeats-presidents-bill-to-overhaul-election-agency-11670376590.
[5] See, e.g., David A. Gantz, “AMLO’s Energy and Investment Policies Will Make Mexico Poor Again,” August 4, 2022, Baker Institute for Public Policy, https://www.bakerinstitute.org/research/amlos-energy-and-investment-policies-will-make-mexico-poor-again.
[6] “Mexico | Foreign Direct Investment: positive performance,” September 4, 2023, BBVA Research, https://www.bbvaresearch.com/en/publicaciones/mexico-foreign-direct-investment-positive-performance/ .
[7] See Gavin Maguire, “Mexico's energy transition hits reverse in 2023, February 13, 2023, Reuters, https://www.reuters.com/markets/commodities/mexicos-energy-transition-hits-reverse-2023-2024-02-13/ ; Cassandra Garrison, “Can Mexico's Sheinbaum, a climate scientist, shake Lopez Obrador's oil legacy?,” June 6, 2024, Reuters, https://www.reuters.com/world/americas/can-mexicos-sheinbaum-climate-scientist-shake-lopez-obradors-oil-legacy-2024-06-04/.
[8] Carin Ziss and Chase Harrison, “Mexico Elects: Ongoing Coverage of the 2024 Race—The Results Are in,” June 3, 2024, AS/COA, https://www.as-coa.org/articles/mexico-elects-ongoing-coverage-2024-vote.
[9] Belén Carreño and Adriana Barrera, “Mexico Snares Iberdrola Power Plants for $6 biln in ‘New Nationalization,’” April 4, 2023, Reuters, https://www.reuters.com/markets/deals/mexico-buy-13-power-plants-spains-iberdrola-6-billion-2023-04-04/.
[10] “Distribution of electricity generation in Mexico in 2022, by source,” May 14, 2024, Statista, https://www.statista.com/statistics/1237496/mexico-distribution-of-electricity-production-by-source/.
[11] “Mexico's 'door is still closed' to private energy investment,” August 30, 2023, Bnamericas, https://www.bnamericas.com/en/features/mexicos-door-is-still-closed-to-private-energy-investment.
[12] Ian de la Garza, “A Brief Study of Distributed Generation: Mexico vs. the World,” June 16, 2023, Mexico Business News, https://mexicobusiness.news/energy/news/brief-study-distributed-generation-mexico-vs-world.
[13] “Mexico’s Supreme Court rules against electricity law favoring state-owned utility over private firms,” January 31, 2024, Associated Press, https://apnews.com/article/mexico-power-sales-unconstitutional-060ab7b4918d6af511a610088f167655#.
[14] In the past, Arizona Public Service, based in Phoenix exported electricity from Yuma, southwest of Phoenix, across the international border to two large industrial users (Bose and Daewoo Electronics) located in San Luis del Rio Colorado. At the time CFE did not have the generating capacity to supply the plants, which employed more than 4,000 workers at their peak. (Based on the author’s personal recollections as counsel for one of the firms.)
[15] “Pemex’s Natural Gas Production from 2008to 2023,” May 22, 2024, Statista Research Department, https://www.statista.com/statistics/543608/natural-gas-production-of-pemex/.
[16] “Energy trade between Mexico and the United States reached a record $81.9 billion in 2022,” June 28, 2023, U.S. Energy Information Administration, https://www.eia.gov/todayinenergy/detail.php?id=56960; Ira Joseph and Diego Rivera Rivota, “Lucrative Reward or Mounting Risk? Mexico’s Growing Reliance on US Gas,” October 24, 2023, Columbia SIPA, https://www.energypolicy.columbia.edu/publications/lucrative-reward-or-mounting-risk-mexicos-growing-reliance-on-us-gas/.
[17] See Alejandro Lopez Ortiz et al, “Proposed Mexican Legislative Reform Threatens Private Sector Interests,” April 3, 2023, Mayer Brown, https://www.mayerbrown.com/en/insights/publications/2023/04/proposed-mexican-legislative-reform-threatens-private-sector-interests.
[18] USMCA, Chapter 14.
[19] See, Jo Tuckman, “Mexican Democracy’s Lost Years,” June 23, 2012, New York Times, https://www.nytimes.com/2012/06/24/opinion/sunday/mexican-democracys-lost-years.html?pagewanted=all (quoting Peruvian novelist Mario Vargas Llosa because of the PRI’s “tight control of public life without resort to military juntas and their everyday brutalities”).
David A. Gantz
Will Clayton Fellow, Baker Institute for Public Policy, Mexico Center
